INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics. I'm joined by my two colleagues, Ryan Sweet. Ryan's Director of Real-time Economics, and Cris deRitis. Cris is the Deputy Chief Economist. Hi guys. How are you guys doing?

Cris deRitis:                       Doing all right. How are you, Mark?

Mark Zandi:                      Good. I'm good. This podcast is one of our special podcasts. We did one, I guess, a week or two ago on inflation, the history of inflation. We did that for the Thanksgiving week, and I got rave reviews for that. Did you hear a lot of people love that podcast around the history of inflation?

Cris deRitis:                       Yeah. Same here. People are reaching out on LinkedIn and...

Mark Zandi:                      Really? Interesting.

Cris deRitis:                       Yeah.

Mark Zandi:                      That is interesting. We need to digest that and can continue on with that. That's what we're going to do here, a similar podcast for the... This is for Christmas week because we're not going to tape live, so we're not going to do any statistics in this podcast. We're just going to focus on the topic at hand, and what we decided to do, I think it's apropos, given it's the last week of the year, is to consider 2022... We could provide a little bit of context, what we think the most likely scenario is for the economy, the baseline economic outlook in the middle of the distribution of possible outcomes.

Mark Zandi:                      Then we're going to really focus on the risks and downside, maybe upside. We'll see where people's minds are on this one, but that's the plan here for this particular podcast. Who wants to lay out the baseline case? What's the most likely scenario. Cris, you want to do that? Or Ryan? You want me to do it? Who wants to do that? Anybody?

Cris deRitis:                       You should do it.

Mark Zandi:                      I should? Okay.

Cris deRitis:                       Yeah.

Ryan Sweet:                      You just did the forecast. It's all fresh in your mind.

Mark Zandi:                      Did I just do the forecast? What are you talking about? Oh, this weekend? This past weekend. Yeah. I guess I did. Yeah.

Ryan Sweet:                      But you might tweak it.

Cris deRitis:                       Well, the caveat is...

Mark Zandi:                      Because Omicron... yeah. Has the forecast changed is the question.

Cris deRitis:                       Yeah.

Mark Zandi:                      I shouldn't be laughing. It's so depressing.

Cris deRitis:                       We are recording this... I guess we should disclose. This is prior to the Jobs Friday. This is before November's report is coming out.

Mark Zandi:                      Yeah, and also because this is going to air in a couple weeks, maybe now three weeks, what we know about Omicron will be hopefully well advanced compared to what we know today, which isn't very much actually. All right, here's the baseline as we know it. Just quickly, a couple numbers. GDP growth calendar year 2021, that was going to be coming up about 5.5% for 2022. We're expecting 4% to 4.5%, so another solid year. That means a lot of jobs. We're going to average monthly job growth between now and the end of next year, probably close to 500,000 per month.

Mark Zandi:                      Maybe a little less than that because unemployment's going to come in pretty fast. The unemployment rate is 4/6, and I would expect the unemployment rate to be well below four, maybe closing in on 3.5%, which would be consistent with full employment by the end of next year, going into 2023. Inflation, consumer price inflation right now, obviously very high, over 6% year over year. I expect it to be about half that the end of 2022. Of course, Fed's target would be something around 2½%. The Fed will be normalizing monetary policy, so they'll end their taper sometime next spring, early summer, begin raising short term rates soon thereafter, probably two, three rate hikes next year.

Mark Zandi:                      I think we have two in the forecast. We might have to put three in, depending on how things go here. For the Fed to normalize short-term rates by mid-decade, that would be around a 2.5% federal funds rate target. 10 year treasury yield, our favorite forecasted debate, right now we're sitting at 1.5% that down because of this Omicron scare. We expect it to end the year about one and three quarters. Well, the end of the year is a few weeks from now. I don't know if that's going to happen given what's going on with the virus.

Ryan Sweet:                      See, Cris, that's an admission.

Mark Zandi:                      Well, to this. Okay. Then I'd say by this time next year, at least two and a quarter, maybe a little bit north of that. That's the numbers, and the idea is that... or the basis for that is that, well, here's the key assumption, the pandemic. We are assuming, or I'm assuming we are assuming that the pandemic will more or less continue to wind down. That doesn't mean there won't be more waves of the virus. There will be. Omicron is... I keep saying... it's Omicron, right? Omicron?

Cris deRitis:                       Omicron.

Ryan Sweet:                      Omicron.

Mark Zandi:                      Omicron. Sorry. Omicron, seems like that's going to be a wave that we're going to have to deal with. Not that there won't be future waves. That would be Pollyannaish to think not, but that each wave that we suffer will do less damage to the healthcare system, and to the economy than the previous wave, that vaccinations continue to improve, boosters, antiviral drugs, other mitigation efforts limit the impact, and that we adjust economically. Supply chains, we figure out where the worst bottlenecks are. We work on those, fix those, or at least navigate around them more gracefully.

Mark Zandi:                      Labor markets repair themselves. We don't have to shut down. We're just better at navigating through. That's a key assumption. Also, assuming we're going to get another fiscal package through Congress and the administration here, we'll probably know that also by the time this airs. We're assuming $1.75 trillion in additional support. That's the package that's before Congress now on increased social spending and tax credits on social programs. That's roughly paid for with the tax increases mostly on businesses. That's the other key assumption that goes into the forecast. A lot of growth from consumers. There's a lot of pent up demand still, and there's a lot of excess savings, so that should help support things.

Mark Zandi:                      If the pandemic does wind down to script, that means supply chain should iron out and we should see some inventory rebuilding. You add it all up, it makes, I'd say, a good year. 2022, we're looking for a relatively good year. We'll be back to full employment, if not by the end of the year, certainly by early 2023 and debate what that means, but roughly speaking. I'd say that's a pretty... how would you characterize that? I'd characterize it as a pretty optimistic forecast. What do you say?

Ryan Sweet:                      Optimistic but realistic.

Mark Zandi:                      Okay. All right. You feel pretty good about that forecast right now, sitting here today, even with the, geez, Omicron? Omicron. I got to get that in my mind. Omicron-

Cris deRitis:                       Variant.

Mark Zandi:                      ... variant, you still feel pretty good about this?

Ryan Sweet:                      Yeah.

Mark Zandi:                      Okay.

Ryan Sweet:                      I mean, the end of the year might not... end of this year may not end on a great note. Maybe we get off to a slow start next year, but once we get through this wave, we'll be off and running.

Mark Zandi:                      Yeah. Okay. Cris?

Cris deRitis:                       Yeah. I think it's a good forecast. I think it's certainly faster than the average, so it's still a very strong year by historical standards.

Mark Zandi:                      Yeah. I guess the other point to make is we really have not... that's been our forecast for a while. I mean, really our forecast for 2021 and 2022 has been pretty much unchanged since the start of 2021, I think. More or less. Maybe took a little steam out of 2021. We didn't count on Delta wave doing this much damage. Maybe a little stronger for 2022, because we would expect some catch up, but really, broadly speaking, the contours of the forecast have been, I think, largely unchanged for a while here. Yeah. Okay. Anything else about the baseline you think we should point out? Any other numbers, any other aspects of the outlook that we should point out to people? No?

Ryan Sweet:                      No, I think you covered it all.

Cris deRitis:                       Yeah. I think it's moderation in prices, so inflation, and then also some moderation in asset values as well, so [inaudible 00:09:02] house prices and stock prices, that's also baked into the baseline as well. Kind of a glide path towards an equilibrium. That's a key assumption, I would say.

Mark Zandi:                      Yeah, that's a good point. Stock prices, housing values, credit spreads in the bond market. Asset markets feel pretty juiced and we're assuming that as interest rates slowly rise as the Fed takes its foot off the accelerator, that essentially these markets go flat for a while and let everything catch up. Corporate earnings catch up with stock prices, incomes and rents catch up with housing values, but we don't see any... There might be a correction, but it's not going to last in the stock market.

Mark Zandi:                      It's not going to last very long. And there might be some price to decline in some of the really juiced up markets, like a Boise or a Phoenix where prices have risen by a third over the past year. We might see some price declines as work from anywhere unwinds a little bit here. Yeah. Okay. That's a really good point.

Ryan Sweet:                      You want to know where we are relative to consensus?

Mark Zandi:                      Yeah. Where are we relative to consensus?

Ryan Sweet:                      2022, the consensus is 3.9% per GDP growth.

Mark Zandi:                      Oh, okay. We're about half a point above that probably?

Ryan Sweet:                      Correct.

Mark Zandi:                      Yeah. Any other consensus? What about inflation? What's the inflation consensus? Do you know?

Ryan Sweet:                      3.7% on the headline CPI.

Mark Zandi:                      3.7%. That would be pretty consistent, I think. We're at six and I said it's going to be at three by the end of the year.

Cris deRitis:                       Yeah.

Mark Zandi:                      Yeah, maybe we're a little on the high side relative to consensus.

Ryan Sweet:                      Unemployment rate 4%, average and monthly job growth, 314,000.

Mark Zandi:                      Okay.

Cris deRitis:                       Oh, well that's a little less optimistic. Yeah.

Mark Zandi:                      [crosstalk 00:11:02] Yeah, a little less optimistic on jobs. Unemployment sounds about the same, but maybe a little less optimistic.

Ryan Sweet:                      A little less. Yep.

Mark Zandi:                      Yeah. Okay. It feels like, I guess broadly speaking, you'd say we're a little more optimistic on growth than the consensus view, but really-

Cris deRitis:                       But not much more.

Ryan Sweet:                      Yeah.

Mark Zandi:                      ... not much more. Yeah. Not materially anymore. Okay. Good. All right. Okay. That's the baseline. That's the most likely scenario and of course, boatload of risk around all of that. I think the way I'd like to do this is just might one of us go and identify... I think we should... Before we do this, let me ask you the question. Are the risks to that baseline symmetric? Meaning are the downside risks...

Ryan Sweet:                      No.

Mark Zandi:                      Okay. What are they? Downside risks are greater

Ryan Sweet:                      I don't know if we have enough time for this.

Mark Zandi:                      Oh, really?

Ryan Sweet:                      We're going to need a long time.

Mark Zandi:                      Really? Why?

Ryan Sweet:                      No, because I can just... we can just... between the three of us, we could probably rattle off five, 10 key downside risks.

Mark Zandi:                      Oh, I see. You're saying the risks are... you're saying that the downside risk predominate-

Ryan Sweet:                      Correct.

Mark Zandi:                      ... compared to the upside risk?

Ryan Sweet:                      Yeah.

Mark Zandi:                      Okay. The reason being the pandemic fundamentally?

Ryan Sweet:                      Yeah, and all the downstream effects of the pandemic. You can go pandemic to supply chain, to inflation, to fed policy errors. There's lots of downside risk.

Cris deRitis:                       And four, 4.5% growth under the baseline is already quite optimistic.

Mark Zandi:                      That's correct.

Cris deRitis:                       Can it really get much better than that? Possibly, but...

Mark Zandi:                      That's a great point. Because we're assuming we get back to full employment. It can't beat that. It's pretty hard to beat that actually right?

Cris deRitis:                       Yeah.

Mark Zandi:                      Almost by definition, you can't beat that. I mean you could, but that means then you got higher inflation-

Cris deRitis:                       Exactly.

Mark Zandi:                      ... and over [crosstalk 00:13:01] economy, so-

Cris deRitis:                       That's the downside.

Mark Zandi:                      ... you're limited. You're limited on the upside here.

Cris deRitis:                       Yeah. That's right.

Mark Zandi:                      Okay. Well, think a little longer term. Then the risks become more symmetric?

Ryan Sweet:                      Well, I think there are some upside risks to next year that we can talk about.

Cris deRitis:                       Certainly.

Mark Zandi:                      Okay, I can see that.

Cris deRitis:                       You can come up with a lot more downside.

Ryan Sweet:                      Oh, yeah, exactly.

Mark Zandi:                      You can come up with more downsides. Yeah. Right. By the way, with this pretty cool, what I call risk matrix, because it's so hard to keep, at least in my mind, all the downside risks and of course, a lot of the folks that we work with, they're primarily focused on the downside. They don't really participate on the upside. They want to know more about the downside, and this matrix shows in the horizontal axis, the expected severity of the risk, which I think, in my mind, is like a present value of the economic loss if that risk were to come to fruition, or shock would occur.

Mark Zandi:                      The vertical axis, the Y axis is the probability of that shock. You can see all the different risks that are there. I have that in my mind's eye. Maybe we can provide that on the YouTube or something with this video. People might appreciate that. Okay.

Cris deRitis:                       That's on the Economic View website, too.

Mark Zandi:                      Oh, is it? Do we have it up there?

Ryan Sweet:                      Yeah.

Mark Zandi:                      Not my version, I bet.

Ryan Sweet:                      Not your version. I was going to say, I was a little nervous about this podcast because your risk matrix differs a little bit from mine. Not a lot, but I think I just have a lot more on there.

Mark Zandi:                      I spent a lot of time on that matrix. It really helps me think about what these risks are and where they land in terms of probability of happening and what would the macro consequences be if they do happen?

Ryan Sweet:                      Yeah. We update it every month. It's very helpful to think how these risks are evolving. You'll see how they move on our website. Cris and I will go back and forth, and recently, this is not what... I guess it could be [crosstalk 00:14:53]

Mark Zandi:                      You and Cris go back and forth... You don't include me in this conversation.

Ryan Sweet:                      You're busy.

Cris deRitis:                       I don't want to bug you.

Mark Zandi:                      Is that what's going on?

Ryan Sweet:                      No.

Mark Zandi:                      All right.

Ryan Sweet:                      We added cyber-attacks recently.

Mark Zandi:                      Oh, good one.

Ryan Sweet:                      Cris came up with that one. I thought that was an excellent one.

Mark Zandi:                      Yeah. I would've come up with it if you had invited me. I mean, definitely contributed that. Yeah but...

Ryan Sweet:                      You're more than welcome. It's just an email. It's not like we were having coffee in his office.

Mark Zandi:                      Okay. All right. I hear you. I feel like I'm being left out. I'm just saying.

Cris deRitis:                       No, not at all. Not at all. Welcome to the party.

Mark Zandi:                      No, don't worry. I'm good with you guys doing it and I'll go down my own path, and we'll come together every once in a while and see, because that might not be a bad thing to do anyway.

Ryan Sweet:                      I really don't think they're going to be that different.

Mark Zandi:                      I don't think so either. Yeah. All right. Well, since risks are R&D'd for 2022 skewed to the downside, let's begin with that. Cris, why don't you go first? What's your downside risk? I want you to lay out for that risk your baseline view and then what the risk is, and how you're thinking about it.

Cris deRitis:                       I'll give you a meta risk first-

Mark Zandi:                      Nice.

Cris deRitis:                       ... like a conceptual risk that I think of, which is just the fear. Nothing to fear but fear itself. That's under the broader grouping of psychology. Consumer psychology, we could talk ourselves into more inflation. We could certain, if that were to take hold, overreact to another wave of the pandemic. There's a big psychological component I can see here. If we did start to see stock market corrections or house prices, you could have some feedback effects kick in. Even though we're calling for mild corrections in these markets or at least they're going flat, there could be some over action that takes over.

Cris deRitis:                       I see that as a substantial risk to the outlook. More of that psychological feeling of the economy going forward. If energy prices were to take off, once again, you could see that having a life of its own. That was my overarching theme, but if you want a more specific risk...

Mark Zandi:                      Before we move on though, that's a really cool one. That's a really cool one.

Ryan Sweet:                      Yeah, we know.

Mark Zandi:                      I mean, because I find it perplexing, somewhat perplexing, how just seemingly pessimistic people are. I mean, if you look at the economy's performance, it's actually been quite impressive. If you look at the numbers, job growth has been impressive. The decline in unemployment has been impressive. The recovery in output and GDP, the value of all the things that we produce, that's been incredibly impressive. Inflation's been a bit of a disappointment, but that's been very recent and we're going to talk about that, I'm sure, in terms of the risks, but stock prices are at record highs, housing values are at record highs, debt loads are... In terms of debt service, the percent of income going to servicing debt, on interest in principle points on that debt, I think that's at a record low. I mean-

Cris deRitis:                       Very close. Yeah.

Mark Zandi:                      ... very close. People have locked in these low rates. They've refinanced and locked in 3%, 3.5% mortgage rates. Then yet, still, people are like, "No, the economy stinks."

Ryan Sweet:                      Well, you still have a pandemic going on. That's clearly weighing on people's psychology.

Mark Zandi:                      Is it...

Ryan Sweet:                      Consumers hate inflation. If you look at the really nitty-gritty of the University of Michigan survey, more people are pessimistic that their incomes are going to exceed inflation over the next 12, or one to three years. I mean, that is really butting into people's psychology.

Mark Zandi:                      Yeah. It's got to be that. It's got to be the pandemic, which it wears on you. I mean, just, gee whiz. Are we ever going to shake this damn thing? Because it messes with people's lives. We can see that just in our personal lives, we can see it. I think you're right. I think inflation... particularly gas prices. I think gasoline just kills people. I mean, even though you think about it, like I just filled out my car, I needed 10 gallons of gas and I had a choice to go to Wawa, which is three buck, whatever, 45. I know Ryan's too highfalutin to go to Wawa.

Ryan Sweet:                      I was told not to go to Wawa because of road ranger. I think I'm being lied to.

Mark Zandi:                      I think you've been-

Cris deRitis:                       Absolutely.

Ryan Sweet:                      I'm being duped, duped. I told you and Cris, I think the car dealership and the gas stations are in cahoots.

Mark Zandi:                      Those are fighting words, Ryan.

Cris deRitis:                       Oh boy, we're going to get some comments now.

Mark Zandi:                      I can see it. Now the FTC is going to be knocking on your door. "What do you know that we don't know, Ryan?" Yeah. I think they're investigating that kind of stuff, but there's a local gas station here in Melbourne, this is my hometown, that is very convenient. But it's two tanks or three tanks, and they charge me $3.75. That's 25 cent... I'm rounding, so that's 25 cent difference. 10 gallons, that's two buck 50, and the grains... and I'm not driving that much. It's not like I'm filling my gas tank once a week. It may be once a month. I don't know. I go, that was depressing. I had to pay two buck 50 more to fill my gas, which is silly when you think about it, but that goes to the psychological impact of it. For low income households, that does matter. I don't mean to drizzle.

Ryan Sweet:                      It matters a lot.

Cris deRitis:                       Absolutely.

Mark Zandi:                      It matters a lot. Particularly if you're driving a lot, if you're commuting, then that can really be a problem. But for me, why would that... it shouldn't bother me really, but that...

Cris deRitis:                       But it's very visible. You see it. It's one of those prices that you are exposed to regularly. I think that's why people experience the shock.

Mark Zandi:                      Well, we're going to get test of that pretty soon, because have you noticed oil prices are back down a lot. They peaked at $85 a barrel, I think, on WTI, West Texas Intermediate a couple months ago. We're down to... I think I was looking today, it's 70, maybe lower than 70. I'm not sure.

Ryan Sweet:                      It's lower than 70.

Cris deRitis:                       It's 70.

Mark Zandi:                      It's 70.

Ryan Sweet:                      When I checked yesterday, it was less than 70.

Cris deRitis:                       60s, right?

Mark Zandi:                      Less than 70? That means...

Ryan Sweet:                      Yeah. I think it was 68.

Mark Zandi:                      It should come in. I mean, gas prices should start to come in, because of the way...

Cris deRitis:                       According to your forecast. That's right. Yeah.

Ryan Sweet:                      Yeah. Your forecast.

Cris deRitis:                       Well, we have a bet right? On one of these...

Mark Zandi:                      We do have a bet.

Cris deRitis:                       I think on one of the podcasts, we have a bet on that oil price.

Mark Zandi:                      I can't keep track of all these bets.

Ryan Sweet:                      No, I know.

Mark Zandi:                      Hopefully someone is. Ben better be taking notes here.

Ryan Sweet:                      For where gas prices are headed, the wholesale gas prices lead retail by roughly two weeks. I don't have the exact... where the retail price is going because I haven't checked recently, but it's pointing down.

Mark Zandi:                      It is. It's pointing down. Okay.

Ryan Sweet:                      We'll get some relief at the pump soon.

Mark Zandi:                      Okay. We'll see what impact that has on the collective psyche here, but yeah, that's a good one, Cris. That's a meta risk. It's just the psychology of all this. Are people just going to get... Have you also noticed, people are just... Maybe it's just me, but I've noticed people are really... they're just not quite as nice. Have you noticed that? I mean, everyone's a little on-

Cris deRitis:                       Edge. Yeah.

Mark Zandi:                      ... slightly nasty. I don't know.

Ryan Sweet:                      No comment.

Mark Zandi:                      No comment? Okay.

Ryan Sweet:                      It's Philadelphia. We live around Philadelphia.

Mark Zandi:                      Yeah. It's got to be maybe...

Ryan Sweet:                      We have a reputation.

Mark Zandi:                      Yeah, but it's worse. Maybe I'm just imagining things.

Ryan Sweet:                      I think you're imagining things.

Mark Zandi:                      Okay. All right. What do you think, Cris?

Cris deRitis:                       I was going to say that the concern about fear and psychology also translates into other risks that we'll talk... I am worried about, say, the election. I think there's some tribalism going on here as well, so that worries me, that we get into the midterms next year. What's that going to look like?

Ryan Sweet:                      Listen, Mark, on your risk matrix, do you have social unrest?

Mark Zandi:                      I do not. Do you have it on yours?

Cris deRitis:                       [crosstalk 00:23:18]-

Ryan Sweet:                      Very low probability, but high economic costs.

Mark Zandi:                      I think that's a good one.

Ryan Sweet:                      That's why I'm worried about the election.

Mark Zandi:                      The social unrest in the context of next year's election?

Ryan Sweet:                      Correct.

Mark Zandi:                      Wow. Okay. That's interesting. Yeah.

Cris deRitis:                       But that even feeds into the sentiment indicator. If you look at the U. Mich... I don't know if you've seen the U. Mich, the University of Michigan confidence numbers, they actually break it out by political party as well. It's a very telling statistic. Right now Republicans are-

Mark Zandi:                      Depressed.

Cris deRitis:                       ... depressed and Democrats are pretty optimistic. Under the Trump administration, exactly the opposite. Not terribly... I have a trouble seeing a lot of objective information coming from that confidence survey. I think you need to take that with grain of salt, too.

Mark Zandi:                      That's a very good point. Oh, so you're saying the sentiment in general is maybe not as useful because it's colored by our own political, social, cultural prism?

Ryan Sweet:                      Yeah. Some economists have done work on this where they look at, is there political bias in consumer confidence surveys and they found some evidence of it.

Mark Zandi:                      Yeah. I have noticed that the Ds versus the Rs versus the... I guess it makes sense to look at the independents and how they're thinking about things. Maybe that's a group we should be focused on.

Ryan Sweet:                      The line that they drew was a, who's more likely to respond to a survey is who's more optimistic. If a Democrat's in office, then Democrats are going to respond. If a Republican, then Republicans are going to respond.

Mark Zandi:                      Yeah. Right. That makes-

Ryan Sweet:                      It was interesting.

Mark Zandi:                      ... total sense. That makes total sense. Okay. Cris, you had another downside risk though. The meta was just an appetizer. That wasn't your real risk.

Cris deRitis:                       Yeah. That's right. I've got plenty of other ones, but no, my second one is housing and we touched on that-

Ryan Sweet:                      Of course.

Cris deRitis:                       ... some type of housing correction. Of course, I'm going to go there.

Ryan Sweet:                      Yeah.

Mark Zandi:                      Okay. Just explain that. By the way, I'm writing an op-ed for the Post on housing bubbles. I need to send it to you so you can...

Cris deRitis:                       Oh, okay. Yeah. I'm writing the Housing Outlook for us, so we should coordinate.

Mark Zandi:                      [crosstalk 00:25:31] We see what we're saying. Yeah. That'd be good. What's the deal on house prices? What are you saying? What's the baseline and what's the risk?

Cris deRitis:                       The deal is that house prices are way up, 20% year over year. They've been decelerating a little bit over the last few months, but still we've got very strong year over year house price growth, much stronger than the 5% average that we have historically. That alone is cause for concern about overvaluation or bubble... Anytime you see prices rising quickly, just as we are concerned about inflation, it brings up a bubble concern, so some type of correction concern. In terms of the outlook, we have moderation. Higher interest rates should take out some of the demand. It's going to increase the cost of borrowing, and that should take away some of the upper pressure on prices going forward.

Cris deRitis:                       Our baseline has prices coming back down to that 5%, actually a little bit lower than 5% going forward, giving the market time to adjust, allowing incomes to adjust upward and match the house prices. That's baseline. The downside risk though is psychology again. I think if we do start to see those prices moderating, and in some markets, you actually see price declines, like a Boise, like a Idaho, then you could see psychology take over. People get spooked and they drive prices further. That's what I see as a risk. I'm not terribly... I don't have a lot of conviction in that risk, because I think we do have strong demographic tailwinds still. We have a lot of millennials entering those prime home buying years, so that's going to provide a lot of support, but I think in terms of a 2022 risk, you can't discount it.

Mark Zandi:                      Yeah. I mean, on the list of downside risks, would a more serious decline in house prices be at the top of the list or in the middle of the list, or at the bottom of list? I mean, did you pick this because this is really at the top of your list, or you picked this because you thought this was something we should be focused on because this is an important risk, but not necessarily one of the big macroeconomic threats?

Cris deRitis:                       Yeah. In terms of macro, I'd say it's a medium.

Mark Zandi:                      Medium.

Cris deRitis:                       Middle of road, but it is a significant risk for a lot of households, obviously homeowners. This is really important to them. I think there would be consequences if we actually did, and certainly a large correction would have large consequences on the economy, but in terms of probability, I put it in the middle.

Mark Zandi:                      Just to push back, excuse me, a little bit... Sorry. I drank some Wawa coffee, went down the wrong pipe, so I apologize for that. To push back, because obviously you're going to compare what's going on now with the house prices, with what happened in the previous house price bubble back in the mid-2000s, prior to the financial crisis. That was obviously a bubble that burst. Prices dropped very sharply. There's a couple big differences between now and then. One is that today we have a very severe shortage of homes, the affordable housing shortage, just a physical...

Mark Zandi:                      Vacancy rates are at record lows for single family housing. Back then, we had a surfeit of homes. Vacancy rates were at record levels. Just way too many homes have been put up. Couldn't figure out how to fill them. Second big difference is, today mortgage underwriting standards are tight if you want to get a loan. By the way, the loans are plain vanilla, 30 year, 15 year fixed rate prepayable, right down the fairway mortgage, nothing fancy. Income is well documented, credit score appraisal well documented, nothing fancy here, but back in the bubble over a decade ago, you had a lot of adjustable rate mortgages. You remember the ubiquitous two year subprime arm loan that exploded on people.

Cris deRitis:                       The 228.

Mark Zandi:                      Yeah, the 228. Of course, there's a lot of fraud in terms of the underwriting. People just lied about their income and appraised values. Does that mitigate the risk? You're not saying bubble like bubble circa 2006?

Cris deRitis:                       No. If we had correction, I don't expect... Well, first of all, I don't expect it's in the baseline, a national correction. I do expect to see some markets certainly have small corrections, but yeah, there are a lot of positives certainly to continue to support prices. I don't see that type of radical adjustment to equilibrium that we had last time around. There's a lot less leverage in the system as well. That's perhaps the key point. People don't have to sell in the event of a decline, like they did during the housing bubble, but you do have affordability issues. That's still going to weigh on demand going forward. I think it's still a risk that's out there and, again, it could feed into psychology that spills over into other markets as well.

Mark Zandi:                      Yeah. Good point. I guess the other thing that is coming to the four more recently, in the last, actually, few months, that raises some concern is the increase in share of home sales that are to investors. I saw some data from Redfin. 18% of those transactions, I believe in the month of September, were to investors. It's defined by buyers that have a corporate name, an LLC or some other corporate entity that made the purchase. That's deemed to be an investor. That's up quite a bit from where it was just a few months ago. I don't know how many of those are flippers, people coming in, just thinking they're going to sell for a quick profit, or these are longer term buy to rent institutional investors. I'm less worried about that. I'm not sure if we know that, but I guess that's another reason to be... and also mortgage debt.

Cris deRitis:                       That's correct.

Mark Zandi:                      The growth in mortgage debt is accelerating pretty rapidly. I think it's close to double digit year over year through October, according to the Equifax credit file based data. I guess there are some reasons to feed into your concern.

Cris deRitis:                       Yeah. I'm more concerned actually longer term, because I think the demographics actually are less favorable five, 10 years from now, but...

Mark Zandi:                      Yeah. You mean just because the aging of the population, millennials are already in, immigration is slower. Just underlying demand is going to be weaker because of the [crosstalk 00:32:38].

Cris deRitis:                       Yeah. Falling birth rate.

Mark Zandi:                      Yeah, falling birth rate is down the road, yeah.

Cris deRitis:                       The generation after the millennials are smaller so-

Mark Zandi:                      Yeah, good point.

Cris deRitis:                       ... demands going to go down.

Mark Zandi:                      Okay. That's a good one. Ryan, what is your downside risk?

Ryan Sweet:                      The tops on my list?

Mark Zandi:                      Yeah. [inaudible 00:32:57]-

Ryan Sweet:                      I mean, everyone is the pandemic, but by extension, go in supply chains. I mean, this is the biggest downside risk probably with the most uncertainty because we have a very difficult time gauging exactly when these are going to start to ease. I think the baseline assumption, correct me if I'm wrong, is by midyear, we start to see some improvement, or they're starting to ease noticeably. That helps ring out some of the inflation pressures, that that leads to this inventory build that's going to add a boatload to GDP growth next year. If we don't get that improvement in supply chains, inflation's going to be higher, GDP growth is going to be lower and we're going to see a Fed that's tightening rates more aggressively than we're anticipating.

Mark Zandi:                      Yeah. I think there's some evidence, and you correct me if I'm wrong, that the supply chain problems that became paramount when Delta was hitting its apex back a few weeks ago, a couple months ago, are past us. I mean, we are starting to see, well, factories have reopened in Southeast Asia, so some of the shortages of chips and other materials, that's abated to some degree. We're seeing shipping rates from China to the U.S., China to Europe. They're still very high, but they're coming in. The number of ships that are sitting in L.A. long beach port, obviously pretty bad traffic jam, but that traffic jam is not quite as bad as it was a few weeks ago. Anecdotally at least, it feels like we're moving in the right direction, which would be consistent with the idea that it's the pandemic and the Delta that's driving a lot of this.

Ryan Sweet:                      Right. I mean, the supplier deliveries index and the ISM manufacturing survey, that was released and ready for November. It's still elevated, but it's moving tentatively in the right direction.

Mark Zandi:                      Oh, good. But what you're saying is even with the pandemic playing out the way we think it will, receding, it could end up being the case that getting these supply chains back in a more reasonable place is going to be more difficult. We still are plagued with shortages of product and high rates of inflation for those products as a result.

Ryan Sweet:                      Yeah. Because I agree with you that the economic cost of each wave in the U.S., from the pandemic, will be smaller, but it's the policy response in APAC that's going to be really, really important. If you get another wave in Singapore or Thailand, Australia, these countries have shown evidence that they'll tighten restrictions pretty quickly and that would exacerbate these supply chain problems. I think China's another example.

Cris deRitis:                       Yeah.

Mark Zandi:                      Good point. If Omicron nails... and of course, everywhere in the world, everyone seems to have their own way of dealing with the pandemic. In Asia, they tend to shut things down. I mean, China shuts everything down. There's a no COVID policy. Even in Southeast Asia, they feel like they're... it's relatively quick to, to curtail things, shut things down.

Ryan Sweet:                      Yeah. New Zealand and Australia were really quick during the Delta variant. This time around, they seem like they're going to take it a little bit more cautious, but they're not as lax as we are in the U.S.

Mark Zandi:                      Right. You're saying if Omicron shows up in Asia, China, and those countries respond in the way they have been so far during the pandemic, which is just very restrictive, shutting down travel, shutting down trade, closing ports, closing factories, that's just going to rescramble everything on this?

Ryan Sweet:                      It just kicks the can down the road further until we get that improvement in supply chains.

Mark Zandi:                      Yeah. That's a good point. That's a really good point. You guys are depressing me a little bit.

Ryan Sweet:                      I got an upside one.

Mark Zandi:                      Yeah. Okay, because we're going to definitely come back.

Ryan Sweet:                      We always end on a positive note.

Mark Zandi:                      Yeah. Okay. All right. Those are all really good. I think with my risk matrix in my mind's eye, they all are in that Northeast part of the matrix where probabilities are relatively high and the expected loss, the loss given that risk are pretty high as well. I'll point out another risk, and that is that... that worries me, is China slows down more than anticipated. In our baseline worldview, again, relatively optimistic, we're expecting China growth rates to slow. They already have. If you go back, I'm going to pick a date, five years ago, the underlying growth rate in the Chinese economy in terms of GDP was probably 7%, 8%, probably closer to 8% per annum. I'd say it's now down to about 5%.

Mark Zandi:                      We are expecting over the next few years for it to glide a bit lower to about 4%. Still strong by our standards, the developed world standards, but significant moderation. But I'd say the risks there feel like they could come in a lot good than that. I mean, got a lot of things going on. One, we talked about COVID and their COVID policy, they just shut things down. If they get hit again, they'll shut things down quite dramatically. There is the fact that they're working to address some of the more structural longer term problems they have, including very high leverage. They've been borrowing a lot of money, households and in the corporate sector in particular, and debt loads are now high. I think there's reasonable concern.

Mark Zandi:                      You can see that with the collapse of the Chinese real estate company, Evergrande. They defaulted on all their debt. I think it was some $300 billion. That de-leveraging process, or at least that slowing in leveraging, that slowing growth. Then they're increasingly focused on pollution and climate change issues. They've been willing to shut down utility plants that coal-fired and produce a lot of CO2, if it's producing a lot of pollution, and that's caused them disruptions in the economy. Production has stopped. Factories have had to stop because they can't get electricity. Then you've got President Xi who seems to go... Well, he is going in a direction very different than his predecessors.

Mark Zandi:                      His predecessors worked to liberalize the economy to embrace the rest of the world, the rest of the developed world, the U.S. and Europe, and engage, and open up politically. That's not what Xi's doing. He's going in the opposite direction. I can't imagine that's good for growth. Then probably most fundamentally, the fact that the U.S. and many other developed economies that are now confronting China on a lot of their policies that people just don't... I think appropriately say, they're just not fair. Cyber issues and intellectual property issues, and ownership rights and those kinds of things.

Mark Zandi:                      China, which has benefited enormously from the globalization that's occurred since it entered into the World Trade Organization back in 2001, isn't going to benefit nearly as much. In fact, it could be a headwind because we're going the other direction on globalization, on trade, on investment, on capital flows. I can go on. Actually, we had a podcast on this I highly recommend. We talked to a fellow named Dan Rosen, who's head of Rhodium Group who knows a China bearer, but he did a pretty good job of making a case here. I think there's real good arguments that growth is going to slow, but it could slow much more than we're anticipating, particularly if tensions between the U.S. and China.

Mark Zandi:                      Which seem to be quite significant around a lot of different issues, from Taiwan to the South China Sea, to lots of different points of tension, could boil over. I think this could be a problem. Of course, China is a key source of global growth. It's the second largest economy on the planet. The relationship between the U.S. and China on trade is fundamentally the most important economic relationship on the planet. If that gets disrupted, that could really slow growth and reverberate in many different ways across the globe, commodity markets, emerging markets, and ultimately back on us. I see that as a significant risk. What do you guys think? Did I nail that?

Ryan Sweet:                      Yeah, I think so. I mean, are you arguing that there's a increased risk that China suffers a growth recession next year?

Mark Zandi:                      Yeah.

Ryan Sweet:                      A growth recession is like when the economy is not growing quickly enough to prevent unemployment from going up and inflation from decelerating.

Mark Zandi:                      Yeah. I think growth could slow to such a degree that you see layoffs, people lose jobs. Then I guess you can throw into the mix, if that's the case, what kind of social implications does that have? Because I don't think the Chinese population, I think they've not experienced that for a couple generations now. That's been one direction and what does that mean, if things go in the other direction? Not from an economic perspective, but from a political and social perspective, what does that mean? Yeah, I think there's a reasonable probability of that. I think I worry about that. Of course, then you can keep connecting, keep creating the storyline. I mean, if the economy starts to weaken, what does that mean with regard to how Xi approaches the rest of the world? Does that mean...

Cris deRitis:                       Exactly.

Ryan Sweet:                      That's a good point.

Mark Zandi:                      I mean, he's going to blame somebody. It stands to reason... All right. Now I'm getting really depressed.

Cris deRitis:                       Yeah.

Mark Zandi:                      Getting really depressed. Yeah. Anything else on the China? Did I miss anything? Any other reasons? Any pushback there?

Cris deRitis:                       No pushback. I would say on top of that, they also have-

Ryan Sweet:                      On top of that...

Cris deRitis:                       ... even poorer demographics than we thought. We see that the fertility rate was even lower than what we projected. They're likely in decline already in terms of population or soon will be.

Mark Zandi:                      I didn't catch that. Where did you see that?

Cris deRitis:                       That came out within the last week at the estimates.

Mark Zandi:                      Oh, really?

Cris deRitis:                       No, they're all estimates, but I think the original estimate for...

Mark Zandi:                      By whom? Where are they coming from? Do you know?

Cris deRitis:                       No, I don't know.

Mark Zandi:                      UN? Are these UN estimates?

Cris deRitis:                       No, I think they're-

Mark Zandi:                      Chinese estimates?

Cris deRitis:                       I believe so.

Mark Zandi:                      Oh, okay. I missed that. I didn't see that. That's interesting. Okay.

Cris deRitis:                       Assuming that's correct, that makes it even worse. Again, Ryan's going to tease me, but I worry about the property markets in China as a consequence. I think households are...

Ryan Sweet:                      Why would I tease you on that? Oh, because you went back to housing.

Cris deRitis:                       Any time I bring up housing?

Ryan Sweet:                      Okay. No, yeah. It's not domestic housing. It's international housing.

Cris deRitis:                       Yeah. It's international house. If the household starts to see their property values actually fall, I think that that will create great social unrest. That is more of a problem.

Mark Zandi:                      Okay, I've had enough. This is enough. Too much.

Cris deRitis:                       All right. Let's turn positive.

Mark Zandi:                      This is now Christmas week, going into 2022. We're going to each of us come up with an upside risk to the outlook. We can broaden it a little bit. It doesn't have to be exactly 2022, but we can broaden it out a little bit, but what are the reasons to be optimistic, that maybe things turn out better than we we're saying?

Ryan Sweet:                      Since it's the...

Mark Zandi:                      Let's put the pandemic aside. The pandemic has its own dynamic. Who knows? Maybe it could end up being less... Omicron could be a nothing burger and we're fine, and there are no more waves. I know you're smiling. You're smiling because I used the nothing burger?

Ryan Sweet:                      Yeah. I never thought Mark Zandi would use the nothing burger.

Mark Zandi:                      I couldn't think of a better way of describing it, but let's put that aside. You can't have that as your upside risk. That's not fair. Okay. Given that, I'm going to go with you, Ryan, first, give you the first shot at this. What's your upside risk?

Ryan Sweet:                      All right. Since this is the week leading up to Christmas, it's the consumer, the U.S. consumer. You mentioned household balance sheets are in pristine shape. The job market is going to be booming next year, and throw on top of that, as of October, $2.6 trillion in excess savings. If they treat that more like extra cash just floating around in their pocket and their couch cushions, that's a lot of economic juice that could come out over the course of a year or two.

Mark Zandi:                      That's a good one. Right, Cris? I mean, I think that's reasonable.

Cris deRitis:                       Absolutely. Yeah.

Mark Zandi:                      Yeah. I mean, gee whiz. I mean, $2.6 trillion.

Cris deRitis:                       Don't bet against them.

Ryan Sweet:                      Exactly. Never been against the consumer.

Mark Zandi:                      I always said don't underestimate the hedonism of the American consumer. Does that sound right? I think it does. Yeah. At least, that's definitely my household. Yeah.

Ryan Sweet:                      I have a quick question for you. Mark, Paul one time saw me quoted in a newspaper saying "the American consumer", and he said, "It's she." Is that correct? He described the American as "she".

Mark Zandi:                      As opposed to "he"?

Ryan Sweet:                      Yeah.

Mark Zandi:                      Oh, god. We're getting in a place I don't know...

Cris deRitis:                       Oh, boy.

Mark Zandi:                      I'm treading on very thin ice here. I don't know.

Ryan Sweet:                      I'll never forget this. He walked my cube...

Mark Zandi:                      Paul, so anyone knows, was help... Paul, I and my brother founded economy.com that we sold to Moody's Analytics. Paul has since retired, but he was an excellent economist in his own right. He had very strong views on things like this. Yeah.

Ryan Sweet:                      Very strong.

Mark Zandi:                      You said the American consumer, "he", and he was saying, "No, it's she."

Ryan Sweet:                      "She", and he put the paper where I was quoted and he was like, "Nice quote, but next time use "she"."

Mark Zandi:                      Really?

Ryan Sweet:                      Then he just walked away. I mean, Paul, he was great. I mean, he is fantastic to talk to, but he's intimidating. I just remember, I was like, oh-

Cris deRitis:                       Did he have the Rottweilers with him?

Ryan Sweet:                      They were around somewhere.

Mark Zandi:                      Yeah. Paul would bring his dogs to work and at one point there were three Rottweiler's, I believe. Yeah. Now talk about intimidating. They're the silliest dogs on the planet, but if you didn't know them, that wasn't necessarily the case.

Ryan Sweet:                      Well, and I know we're a little bit off topic, but when I interviewed with him, there was three of them and they were all surrounding me. One was in my lap. His head was in my lab. I'm trying to talk to Paul, who is a very, very smart economist and I'm distracted by these three Rottweiler's.

Mark Zandi:                      They're slobbering all over your [crosstalk 00:47:40].

Cris deRitis:                       I had the same experience.

Mark Zandi:                      You did. [crosstalk 00:47:44].

Cris deRitis:                       Yeah. I let an ambulance pass by and they started howling. It was a mess.

Mark Zandi:                      You passed.

Cris deRitis:                       I think I'm hired.

Mark Zandi:                      Well, that's a good one. I like that. That's a good one. The American consumer could turn out to be more of a source of growth, power things along here. $2.6 trillion, that's 10% of... more. That's higher.

Ryan Sweet:                      It's more.

Mark Zandi:                      That's 12% of GDP.

Cris deRitis:                       That's a lot of cash.

Mark Zandi:                      That's a lot of cash. There's a fair amount of pent up demand. Not for outdoor heaters or I want to say... not blow dryers. Well, I keep... how come I can't...

Cris deRitis:                       Power washers.

Mark Zandi:                      Power washers. I can't remember. Yeah, but not for power washers. In fact, I got one for sale, if anybody's interested.

Ryan Sweet:                      Is that buyer's remorse? You have two power washers and countless heaters on your deck?

Mark Zandi:                      I was shamed by you. In one of these podcasts, you said... so, I think you or Cris asked-

Ryan Sweet:                      Cris.

Mark Zandi:                      ... "Why would you have two power washers?" and you said, "For one to wash the other." I thought, he's got a point. You know what? What the hell do I have two power washers for? That's funny. All right, Cris, you're up. What's your positive risk?

Cris deRitis:                       Well, I'll go with the American entrepreneur then.

Ryan Sweet:                      No, that's a great one.

Cris deRitis:                       Small business, strong, lots of applications out there to start new businesses. That's a lot of innovation, productivity gains potentially. I think that's a source of strength that we could see some growth to the upside, stronger growth, if folks really do execute on these plans and we get a lot more innovation, a lot more companies getting started and that leads to more hiring, and lots of good things.

Mark Zandi:                      Yeah. Do you think... because you're looking at the tax payer identification numbers, the applications-

Cris deRitis:                       Yes.

Mark Zandi:                      ... by people who are starting businesses for so-called EIN numbers, you need that because you have to pay taxes if you start a company, and they're through the roof this year. They've been sky loaded-

Cris deRitis:                       Yes.

Mark Zandi:                      ... and that's real. I mean, if you look across industry, across region, it's up everywhere, across everything. A lot of businesses are forming.

Cris deRitis:                       Yeah. There are some regions, certainly are growing fast, like south. The south has more applications, and retail actually has a startling number of applications as well. There are some pockets, but I think it is fairly broad based. No industry, no region is lagging.

Mark Zandi:                      Do you think that's also remote work? I mean, the fact that people, they feel untethered now. You don't need an office building with employees sitting at their desks. You can do it just with Zoom basically, and an idea, a little bit of capital. You think that's also playing a role in here in all these business formations?

Cris deRitis:                       Yeah. I think it's all the above.

Ryan Sweet:                      Yeah, all the above.

Cris deRitis:                       I think it's the technology, the fact that people do have a little bit more cash perhaps on their balance sheet. I think the pandemic gives you time to think, reflect, I want to start a business and I'll give it a shot. A strong labor market, too. If the business doesn't work out, I can always find a job. I think the risks are favorable to starting a business, trying it out, seeing what happens.

Mark Zandi:                      Now I'm feeling really good. I'm feeling a lot better.

Ryan Sweet:                      Right. What's yours?

Cris deRitis:                       Yeah.

Mark Zandi:                      Now, I've got a bunch actually. There's the potential for stronger productivity growth. That is a corollary with the business formation, but it goes well beyond that, because business investment's up very strongly and that's going to improving productivity, addressing supply chains. I'm optimistic about policy. Maybe people would disagree with me, but I give a lot of credit to the Federal Reserve and lawmakers, both under the Trump administration and under the Biden administration, for coming up with support. No hesitation. Really, no, I would have debate over some of the ways they use the money, but I think everybody would. But probably speaking, you've got to give them a lot of credit for what they've done and that augers well going forward, that policymakers are going to step up.

Mark Zandi:                      If they need to up, they're going to step up and they're going to figure out how to thread the needle for this economy and get it through, and navigate around the waves of the pandemic and the impacts that's going to have. But I'd say... and I'm going to end... because you ended on... You started with a meta negative, a meta downside. I'm going to end with a meta positive, upside risk, and that is, our economy is goddamn amazing. It adjusts to anything that you throw at it because people, let them have at it. Let them have at it. You can make money. You can innovate and benefit from that innovation. We respond to the marketplace and signals that we get from pricing. If the price of lumber goes up, we buy less lumber.

Mark Zandi:                      We do something else. We wait a little bit, buy something else. We adjust and we're adjusting. Think about what we're doing now with this Zoom technology. I mean, it's just amazing how quickly we adapted and adjusted to the pandemic, and I think it's going to reap enormous benefit in the long run. We're only in version one of the Zoom technology and what it means. Future rounds of innovation are going to be, I think, just take us to a whole nother level. Then a meta positive, just confidence in ourselves that we overcome. We really do. We've got a problem, we figure it out because we have the incentive to do that and we have the smart people that are willing and able to do it, and they have the freedom to do it.

Mark Zandi:                      Think about things, debate things, hit each other over the head proverbially speaking, but ultimately, coming up with a pretty good answer at the end of the day. Even in the legislative process, I feel the same way. I mean, we hit each other, hit each other, bam, bam, bam, bam. Think about every possible way of doing something. Look at it from every single angle, and then when it's all said and done, we come to something and it's pretty good. It's a pretty good product. I actually feel pretty good about things. I think we're in a pretty good spot. I'm a buyer. You guys sell, I'm buying. That's all I'm saying. That's how I'm ending this podcast.

Cris deRitis:                       You convinced me. You convinced me.

Mark Zandi:                      I convinced you. Okay.

Cris deRitis:                       Yeah. Resilience.

Mark Zandi:                      All right. Ryan, how you feeling?

Ryan Sweet:                      You convinced me. Now it's going to be a good holiday.

Mark Zandi:                      It's a good holiday. Damn right it is. Okay. All right. Well, very good. I think we covered a lot of ground here. This is the holiday week, so we don't want to keep it too long, but hopefully you found this instructive and we'll talk to you in the New Year. Take care now. Bye everyone.