INSIDE ECONOMICS

Mark Zandi:                       Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by a few of my colleagues and friends. I see Cris deRitis. Hey Cris. How are you?

Cris deRitis:                        Doing well. It's good to see you this week, Mark.

Mark Zandi:                       Yeah, I shook your hand for first time in quite some time.

Cris deRitis:                        Months at least. Yeah.

Mark Zandi:                       Right, we were in Chicago together. We had our conference there, and I thought it went really well. Very well-attended. Lots of engagement, lots of questions. I got a text though the next day, I went home, I was tired the next day. You must've gone off to another conference, because I was getting a couple texts, screenshots of a speech. Where were you? Where'd you go?

Cris deRitis:                        I was in Nashville, at a Raymond James conference. We have a great partnership with Raymond James, so I spoke at their event.

Mark Zandi:                       Fantastic. Great. Well, people are ... you have paparazzi. They're following you around, Cris. Well, anyway-

Cris deRitis:                        Glad to hear it.

Mark Zandi:                       It was a good week. It was a good week. This podcast is a little bit different. We typically record on a Friday, so we get a week's worth of economic data, but today's a Thursday, and the reason we're doing this is because this is the day before a potential UAW strike, and that's the subject of the podcast or a big part of the podcast. And to help us have that conversation, we've got our colleague Mike Bisson. Hey Mike.

Michael Brisson:              Hey, how's it going, Mark?

Mark Zandi:                       I'm good. I'm always good. You doing okay? You must be very busy. You're busy?

Michael Brisson:              Very busy today.

Mark Zandi:                       UAW strike.

Michael Brisson:              Yes.

Mark Zandi:                       Also to help out here, we've got our really good friend, Jonathan Smoke from Cox. Good to see you, Jonathan.

Jonathan Smoke:             It's good to be back, 

Mark Zandi:                       And you said you're hailing from where, where are you today?

Jonathan Smoke:             Apparently, I followed you to Chicago just a few days late. I'm in Chicago speaking at a dealer conference, so I can even share what was going on this morning.

Mark Zandi:                       I'd love to hear that. We'll come back to that in just a second, because I also want to introduce Bernard Yaros. Bernard, how are you?

Bernard Yaros Jr:              Good. I'm doing well. Happy to be here.

Mark Zandi:                       We are going to talk about inflation as well a little later in the podcast, and Bernard is obviously our expert, and I do want to take this time to say that, Bernard ... This is Bernard's last podcast or maybe not. I don't know. I say that.

Bernard Yaros Jr:              That's why you invite me.

Mark Zandi:                       Yeah, maybe not. Better said, Bernard is leaving us. He's taking another job. And just want to say, Bernard, we're going to miss you. Can you hear it in my voice? I'm about ready to cry. It's like, this is awful. This is really awful. You're our renaissance man. You're sucking the wind out of me. Bernard, what's that all about?

Bernard Yaros Jr:              It's been a great 90 years here at Moody's. It's been a great journey and I've really loved my time here. And I will say Moody's has changed my life, because I met my wife here, so it's been ... Moody's will always be a very, very important part of me.

Mark Zandi:                       Yeah. Well, you are a very important part of Moody's, so best of luck. And all I have to say, Bernard, is when you are treasury secretary, could you just remember the old guy, invite me over? I would appreciate that.

Bernard Yaros Jr:              Sure.

Mark Zandi:                       So thank you, but let's talk about what's top of mind here, and that's the UAW strike. And Jonathan, would you mind ... because you're in the milieu here. You're listening to all this stuff going on. You do this for a living. Tell us what's going on. I mean, it sounds like we're going to have a strike.

Jonathan Smoke:             Yeah, we've had this date circled on the calendar for quite a while, and it is definitely looking like not only are we going to have a strike, we potentially are going to have a much more disruptive strike than what was even expected a few weeks ago, because I would argue what we've been saying all year was that ... well, traditionally, the UAW focuses on one of the big three, so-called Detroit three, the original domestic brands, formerly what was Chrysler Dodge is Stellantis today, GM and Ford. And up until recent days, the perspective was that there was highly likely to be a strike. We've certainly seen what the UAW was asking for, was very far away from what the manufacturers were offering in response in terms of a long list of benefits, compensation.

                                                Rules, having to do with tiered layers of employees, the length of the work week, vacation time, just a lot of different things. Some of it is addressing major concessions that were made during the Great Recession. A lot of it has to do with, I would argue, things that are really uncertain and important to both sides, regarding the shift to electrification of vehicles because electric vehicles take less labor to manufacturer, and most of the plants in the world that produce electric vehicles are not unionized. So it's a bit of an existential threat to the labor unions. Then, on the side of the manufacturers, they're dealing with competition.

                                                And they need a lot of flexibility in terms of what is not yet a profitable enterprise to make electric vehicles or certainly at scale, that the larger manufacturers see. What we thought would likely be the case would be that the UAW would target one manufacturer. That has traditionally been what happens, they so-called take the lead. The results of that negotiation, if there's a disruption, ultimately end up with something that the other manufacturers then follow. So it means that historically we've had disruption for a specific brand and clearly, it comes with an economic cost of being disrupted plus the costs that they end up having to absorb into the future. This time, what the union is saying, and in fact, just about an hour ago, they started announcing the specific plants.

                                                Well, they haven't formally announced, but it's been leaked what plants are going to be targeted. And it's a so-called standup strike, which basically means they're not going to be out in force picketing every factory. They are deliberately choosing specific factories to cripple all three of the manufacturers and actually, likely force them to have to preemptively just shut down all their operations. So it is more disruptive than what we normally see, and that's sort of a big change that we're looking at. So I think the questions quickly become, how long does this last? Because it's really the duration of the strike that will matter. And there are differences in the brands that we can get into, what those potential implications are.

                                                It definitely looks like when midnight rolls around tonight, we will be in a position where a substantial chunk of production in the US is going to be disruptive. We don't produce detailed production side numbers. We rely on other firms and companies that produce that, but the best number that I've seen is that this is likely disruption of about 150,000 vehicles a week, that will no longer be able to be delivered to the market. Now, it's in the context of a market that is still supply constrained, but thankfully, we have seen very strong recovery and the Domestic 3 have been well ahead of everyone else. They started recovering more than a year ago.

                                                So have been in a much better supply situation so far this year, but there's a spectrum where some vehicles are almost immediately going to be a challenge, and then others could likely endure a couple of months of a strike before you really see visible evidence of that. So it's a very complicated picture and clearly one that's fluid. I can say it feels a lot like pulling out the COVID playbook of we're just going to have to monitor this and see what happens, but I think this is very different than the COVID situation where you had 100% of every factory in the world shut down. That then led to cascading supply chain issues.

                                                This is over the last ... so far this year, the Domestic 3 brands, all of their sub-brands, which is basically nine brands of significance, represent 40% of the US sales so far this year. So it is not 100%, it's not even 50%, but 40% is meaningful, and when you get into the segments, it is disproportionately combustion engine vehicles. It is absolutely disproportionately trucks and SUVs.

Mark Zandi:                       So just to remind everyone, this is a little after 1:00 PM Eastern time on Thursday, September 14th. So when you say midnight, so September 15th is when we think this is going to happen. So just stepping back a little bit, when I heard that the strike might be a ... you called it a standup strike. I'm not going to pick at every factory, I'm going to shut down certain factories. Each of the three automakers will suffer some shutdown, but not a complete shutdown. It sounds like you're saying that doesn't matter. The way this probably will play out, they're going to shut down factories that are so important to the rest of the supply chain that everything is going to shut down. I'm going to lose all production.

Jonathan Smoke:             That's right. Well, two parts of that as I'm interpreting what is being reported. One is yes, they're not going after just final assembly plants. They're actually going after ... for example, transmission plants, which have a broader sort of spillover, but they've also communicated that they will change their targets over time without any warning. So effectively, it makes the manufacturers, if they were trying to keep production going by hiring temporary workers, it would be impossible to orchestrate because it could be different tomorrow compared to what they're doing today. And the read that I'm hearing from folks in the industry is that it's likely to force a preemptive closure of most operations.

                                                And we also heard earlier today that the teamsters has said they will not transport any vehicles from the manufacturers who the UAW are actively striking. So again, 40% of the market is no longer ... if it's produced, is no longer going to be moved.

Mark Zandi:                       And you threw out the statistic 150,000 vehicles per week. So is that total production for all three automakers during the week?

Jonathan Smoke:             Yeah, I think that was a really good current number that Evercore ISI put out this morning, representing what they think is the most recent cadence of production pace for all three.

Mark Zandi:                       Okay. The other key statistic is the number of vehicles that are on dealer lots or in the inventory. Can you give us a sense of that? I follow your data and I apologize, I didn't even really introduce you or I just don't-

Jonathan Smoke:             I'm a three timer now, so yeah.

Mark Zandi:                       A number of times, maybe you want to take a minute just to introduce Cox and the work you do, but the question goes ... I follow your data very carefully, and I know Mike works with you very carefully and we have a joint relationship and do joint research on affordability for vehicles and lots of other things, but I watch your inventory data very carefully. You put out really cool data every month, and the last release, I think it was for the month of August was 58 days of inventory, which isn't too far off of what I guess the industry considers typical, although I guess there's some debate on what typical means, 60 days. So that sounds ... At face value, that sounds like, "Okay, we're sitting in an okay place," but I'll turn it to you.

Jonathan Smoke:             Yeah, we're certainly in a better place than we were a year ago. Inventory numbers have been right at two million units, that are actively advertised. Yeah, back to the, who am I, I'm the chief economist for Cox Automotive. Cox is the largest service provider in the auto market. So we are in the wholesale retail software supporting dealers and consumer-facing through brands like Kelley Blue Book and Autotrader. So we're the home of the Manheim Index, which has been the poster child for inflation discussions, which we'll get into. So I was attracted to come here after spending over 20 years in housing, and that's how I originally got to know you because of this just immense amount of data that we would have.

                                                And boy has it been interesting since I've been here. I've been here for six and a half years and most of those years have had something interesting going on. The last four have been absolutely crazy. So yeah, we have basically have been trending in the right direction. This year has been a year of recovery for the new vehicle market. Year to date. We've had a 15.4 million SAR up from 13 eight last year. It's all because of finally seeing recovering new vehicle production that's resulting in increased deliveries and recovery of some level of inventory that yes is up. The total amount of inventory is up over 60%, year over year in the latest numbers, but you're still looking at a day supply number that's less than 60.

                                                And it's funny, 60, I was told originally that's normal for the industry, but we were clocking 90 on a regular basis back in 2019. And that's a fundamental nature of this industry. This is a high fixed cost capital intensive industry where it takes on average five years for each new vehicle to be planned out. From a production standpoint, you can't reduce capacity easily. You've got players from multiple regions of the world, all with different ownership and different sort of strategic interests. So it's been a classic industry that constantly overproduces, and I would say would always have a tendency over time to get back to an overproduction situation.

                                                You had this unique situation of COVID shutting down every factory in the world that created then this cascading problems because of semiconductors that really caused this recovery to take this long to get this far. So this I think is clearly going to be a disruption, in that recovery we had been seeing, but that's why I focused on, the key question is how long does this last and where are we going to see the pain first?

Mark Zandi:                       Right. Right, I do want to get to that and kind of how do you think this is all going to play out? And then obviously, we're going to talk about the macroeconomic consequences, but before we go there, maybe I'll turn to Mike. Mike, is there anything you want to add to what Jonathan said about what's going on here leading up to this strike?

Michael Brisson:              I think an important point is how it's changed just in the past couple of days from us thinking it's going to be old pattern of one company then going to, "Oh, it's going to be all three companies." That's what we talked about a month ago when we brought this up and now it's going to the standup strike. The standup strike is in reference to the 1930s where they had the sit down strikes of GM. So it's a reference back to that and how far apart the two sides are right now I think is another important piece. There's really no confidence that it's going to be a quick fix. I think that's another part that needs to be stressed. And we'll get into that when we talk about our thoughts on duration of how long it lasts.

                                                I think just the past couple of days has really ... it stretched out how long I thought it was going to take to resolve all this.

Mark Zandi:                       Interesting. I mean, when we've been thinking about it, Mike, the work you've been doing, you had assumed all three automakers would be affected and that all production would be impacted. It sounds like you're saying this feels darker to me what you're saying right now, because it's duration, I guess, you're thinking the duration is going to be longer.

Michael Brisson:              The impact could be larger because of the duration and how Jonathan said that these very precise standup strikes are going to hit key pieces of the supply chain, which makes the companies have to shut down all their production. What that means is the people that get shut down, they can go onto unemployment rules instead of having to dip into the strike fund, which means that the duration of the strike can go ... I put them max, I think it's 77 days, the strike fund would be run out at current levels. They have 825 million in the strike fund. So that was about 77 days for all the employees at the three companies.

                                                If they don't have to pay out all the employees, they're only doing pointed strikes and then the other factories get shut down at the discretion of the organization. Then they had to play out unemployment because they're the ones that made the decision to shut down rather than the union walking out and having to strike.

Mark Zandi:                       That's interesting. I didn't realize that. That's very interesting. So just to reiterate right now, the UAW has funds that could pay their workers for 75, 80 days, but that's assuming that they're not collecting any UI. So if they start collecting unemployment insurance, that would extend out the length of time that the UAW could pay their workers if they were on strike.

Michael Brisson:              And they're not paying them full, they have a $500 per week fund, but that's double of what it was in 2019. So it's not insignificant, but it's not everything.

Mark Zandi:                       Got it. Okay. Okay. So duration here is really key. Jonathan, so what do you think? How's this going to all play out? I mean, what's the most ... you're an economist. There are people who are, I'm sure, asking this question. What's your baseline forecast? Of course, we got to put pen to paper, we got to produce a forecast. So we have to make an assumption here, and I've been assuming six weeks, mid-September, end of October, how do you think this is going to play out?

Jonathan Smoke:             I think the consensus view from the folks that I've talked to, I think it borderlines on a hopeful view, is 30 days. 30 days, we're likely looking at a month, and if you assess actually the position of some of the manufacturers, essentially you have a continuum of these three brands and the sort of sub-brands they represent. So you've got a really different story across the three in terms of how they've performed this year, because you've basically had a year where GM has seen strong growth in their sales. They're up 17% with very strong growth in their sub-brands. Sorry, that's their share of the marketplace is 17%, they're up 19% for the year.

                                                Ford is up 9%, but Stellantis is actually down 1%, and part of what we've been observing in their growing inventory numbers was the assumption, well, Stellantis must think they are going to be a target, and they have been maybe perhaps a little less aggressive in their discounting or incentives or their marketing because they wanted to be well-prepared for potential disruption. So on paper, when you look at the amount of inventory they have, it's quite a contrast across these brands because for example, we think Chevrolet currently has right at 50 days of supply. So it is less than the industry overall. At the other end of the spectrum, there's 100 days of supply of Ram trucks.

                                                There's 127 days of supply of Dodge cars. You've got a Jeep at 85 and Ford in the middle at 81. So GM and specifically with their Chevrolet brand, I think is likely to start having issues after two weeks. And Stellantis could probably last six weeks or longer without seeing a lot of material change. Now, the nature of the vehicle market means the devil is always in the details, and every single one of them have a model that I could suggest is a canary in the coal mine for us to pay attention to, because if you're trying to extrapolate, well, what is this going to mean to sales? Well, you want to look at the high volume vehicles and what's going to happen as supply tightens.

                                                That directly relates to the inflation discussion with Bernard because that's precisely ... those canary vehicles are exactly the vehicles that are likely to see a turnaround in what has been a return to discounting this year and ever-increasing incentives as supply has started to increase, and particularly more for the Detroit brands than others, but these vehicles are more expensive than the average new vehicle because again, they're heavy in trucks and SUVs. So it is not like an average brand. And this does traditionally ... usually, you don't see a strike. One is because it's much more targeted and isn't as disruptive as going after 40% of the market. And by the way, back in 2016, the three brands were 45% of the market.

                                                So it would've been even more disruptive, had something like this happen historically, but they've lost share to new EV entrants and to brands that continue to produce Sedans that they have not. Traditionally, this creates opportunities for other brands to step in. And ironically, the timing is very interesting because the Detroit 3 have outperformed with the exception of Stellantis, took share from other brands over the last year precisely because they were further along in production recovery. So Toyota last year lost share, Toyota has lost more share this year. Honda lost share last year. Honda is starting to recover, but now every single brand is in a much better position.

                                                And in particular, if you're trying to pick who could benefit the most, Toyota is at the top of the list. I had breakfast with a group of dealers this morning at this conference, and the people representing Toyota stores were giddy and happy. So they're looking forward to what this means on the retail side.

Mark Zandi:                       Can they get cars done?

Jonathan Smoke:             Toyota? Absolutely.

Mark Zandi:                       They can. Okay. They can pick up production here in the US and globally.

Jonathan Smoke:             Yes. They have non-unionized plants in the US and this doesn't disrupt their global. Maybe they'll have some issues, but the teamsters have said that they're only going to stand against the brands that their UAW brethren are striking against. So no, I don't think it's going to negatively impact those other brands.

Mark Zandi:                       Okay. So I'm going to press you a little bit because going back to duration, because that seems like the key variable here, in terms of broader macroeconomic consequence. The way you answered the question was, "Well, people are saying consensus is 30 days," and that's optimistic. That's how you answered it.

Jonathan Smoke:             Yes.

Mark Zandi:                       What do you believe? What is it? I know-

Jonathan Smoke:             Going back to Mark-

Mark Zandi:                       I'm not going to answer that question because-

Jonathan Smoke:             No, I mean I think it's fair. That's the nature of-

Mark Zandi:                       Then, I'm going to turn to Mike Bisson. He's going to have to answer the question, but go ahead. Yeah.

Jonathan Smoke:             I am troubled by exactly the language Mike used, that how far apart the parties are and how the situation seems to have gotten worse this week rather than sort of seeing progress. So I think it's likely to be at least a two-month affair, and there could be ramifications that essentially create issues that persist. So I'm thinking, do we need to rethink fourth quarter new vehicle sales because of the disruption and the lack of vehicles? You basically do the math and we probably can move along for about four weeks without much of a change, but I think beyond then, we're going to start seeing real challenges.

Mark Zandi:                       Okay, so a couple months, it sounds like. We should plan for ... you think we should plan for around a couple of months. Mike, what do you think? What's your view on this in terms of duration?

Michael Brisson:              The baseline that I had before this week was a month. I think I was one of those people that Jonathan might've heard that from.

Mark Zandi:                       They're the consensus?

Michael Brisson:              I'm in consensus there, but after this week, I am more pessimistic, not as pessimistic as Jonathan. So I don't think it goes the full two months, I'll say 59 days, I guess.

Mark Zandi:                       Okay. Okay. Exactly the amount of inventory we got. Yeah. Yeah, exactly. Okay, so let me ask, Jonathan, you did a great job of laying out all the things UAW is asking to be addressed from pay to benefits to hours. It feels like almost everything is on the table here. Is there one thing that is kind of at the top of the list, do you think in terms of what the UAW is trying to accomplish here? Is it simply just they want a big pay increase or is there something else going on here?

Jonathan Smoke:             It is hard to really understand what's truly most important to them because it seems like every element would be important to certain groups. To me, what strikes me is a return to defined benefit plans. Obviously, some substantial change in compensation, and that's actually where there has been a little bit of progress this week that UAW has come off of their 40%, I think we're now down to 36%, and the manufacturers are in the high teens in their latest offers, but the tiered rules that keep new people from reaching the same level of compensation and how long that is, seems to be one that if you're sort of looking at as a shuttle diplomat between the sides, it's like, "Oh, they're not communicating the same language on that topic."

                                                And it's not being talked about as much in the press but again, I think this issue of electrification and the opportunity for ... or a commitment from the manufacturers that future plants will be unionized is something that ... I think that's a really difficult one for the Detroit 3 to agree to.

Mark Zandi:                       Mike, do you have a view on that question? What's primarily motivating the UAW. What do they care about the most?

Michael Brisson:              The most interesting from my side is the 32-hour work week. That's something that hasn't been proposed before, but what's most important to them, I don't have a good sense based on basically what Jonathan said. You're looking for these PayWay raises, but you also want to protect the number of employees that you have, that you're representing and I think it's strange that it hasn't been talked about in the press, but as they open up the new EV factories, are they going to be able to unionize those at the same level that they unionize the non-EV factories, and the fact that EV factories use less labor than non-EV assembly plants is another issue, if we switch over to all EVs, you're going to have less workers.

                                                And having less workers in the union, what does that mean for the pay? Because are you having the same level of productivity? Are we going to increase pay because the same number of workers are producing the same level of units? Those sort of discussions, which aren't really being talked about.

Mark Zandi:                       Okay. Well, let's move on and talk about the economic consequences. And Mike, maybe I'll turn to you. Maybe you could kind of lay out all the different channels through which a strike like this could impact the economy. Then we can talk about the numbers, or you can do both at the same time, but just provide a framework for folks to understand how this impacts the economy.

Michael Brisson:              Sure. The first channel we think about is the lost income from the workers. So the workers come off the lions, and this is going to be lost income that goes into their pockets. We do say that there's a strike fund that gives a $500 per week, but that doesn't meet all of what they make per week. Then you have the lost production. So that's the lost income going into the corporation. So you have that channel as well. On the other side of the equation, you have all the suppliers. So if the suppliers have to shut down, that's lost income for those workers as well. So you have all of these, and then you have the spillover effect.

                                                So you have ... when those workers aren't getting that income, what are they spending? So the spillover effect, so you're not spending as much because you're not getting paid and at the same rate that you were. So you have all of these economic impacts that are coming from the lost production, lost output, and the lost incomes that are coming in for the whole infrastructure, the whole ecosystem for the automakers. So that's where we consider the GDP impacts and these GDP impacts-

Mark Zandi:                       Can I just rephrase it in Mark Zandi's frame?

Michael Brisson:              Sure. Give me the Zandism on it.

Mark Zandi:                       The way I would articulate it, is it's just output. The first thing is I'm producing less vehicles and therefore that's a hit to GDP. GDP is the value of the things that we produce. We're just going to produce simply less vehicles. Then, you have the so-called multiplier effects. So if I'm producing less vehicles, then I'm going to be producing less of the things that go into the vehicles, electronics, paint, whatever it is, tires, that kind of thing, that's lost output. And then also, the workers in this case may not lose that much income, given that they might be compensated by the UAW, but they're going to lose some income.

                                                That means less spending in whatever they're spending less on means less output, and that's across the board. That's pretty much everything. That's also the multiplier. And then, in this case, the other aspect of the macroeconomic consequence is ... and Jonathan did a great job of talking about this, it's the price effects. The fact that inventories are pretty lean coming out of the pandemic. Prices have gone skyward, and we're going to come back to this when we talk about inflation and if the vehicle manufacturers can't produce inventory is getting drawn down, vehicle prices ... they're certainly not going to fall.

                                                They may start to rise again, and that complicates things enormously in terms of the inflation picture and maybe at some point under some scenarios effects, thinking at the Federal Reserve around monetary policy. I think that's a stretch, but I'll just throw it into the mix. Then the final thing, I'll say it hasn't happened yet, but at some point the longer the strike goes on and the more it looks like it might really do some macroeconomic damage, then it starts showing up in the stock market, potentially the bond market too. Credit spread start to widen, and then that has all kinds of implications for broader macroeconomic, the broader macroeconomy. Is that fair the way I laid that out? Does that sound okay?

Michael Brisson:              Yes. So you're using the output approach or the income approach for calculating GDP.

Mark Zandi:                       Okay. Yeah. Yeah. That was the Mark Zandi kind of frame. Jonathan, is that how you would think about it too, in terms of the way this would work?

Jonathan Smoke:             Yes, and I mean-

Mark Zandi:                       Am I missing anything? Is there any channel that I didn't get or I didn't emphasize properly?

Jonathan Smoke:             There's one other component that I think in terms of the impact to regional and local markets, these disruptions are obviously, much more significant to Michigan and other portions in the Midwest. It's interesting, there is a very different profile for the store footprint for the so-called Detroit 3 compared to all other brands. For example, Ford and GM or Ford and Chevrolet specifically each have over 3000 stores in the country, whereas Toyota has 1300. So what you see is that these brands represent almost two thirds of the franchises in the country. They tend to be much lower throughput, and a lot of the sort of inventory that these brands need to carry are because they have thousands more stores.

                                                So if you need an option, a version of every model sitting on the lot, you very quickly get to those numbers. So you're going to start seeing more localized problems, and I wonder about some of those smaller tertiary markets and rural markets where the Ford dealership may be the biggest employer in town other than Walmart.

Mark Zandi:                       Interesting, interesting. You forget about this really significant ecosystem that supports the vehicle industry. It's not just production, but everyone else involved from, as you pointed out, the dealers, and then you've got the mechanics and the maintenance and insurance and so forth and so on. Massive industry.

Jonathan Smoke:             We continue to see ... I mean, what we see in the CPI data, we continue to see problems with auto insurance, which is related to parts and service, which the parts situation is not going to be helped by factories being shut down.

Mark Zandi:                       Right. Here, let me lay out sort of my ... put some numbers to this framework, and I've consistent with Mike thinking that this strike is going to last somewhere around six weeks. So split the difference between the one-month consensus than the two-month smoke pessimism, so 1.6-

Jonathan Smoke:             Better to worry about-

Mark Zandi:                       Yeah. Yeah. So that's what I traditionally do. I just go right down the middle when there's a lot of uncertainty and I do the calculation and the impact is small, a couple 10th of a percentage, GDP in the fourth quarter. The reason being in part, it's just timing. It's happening at the end of the third, beginning of the fourth, and you can have some makeup later in the quarter, potentially. Also, to your point that while ... we're going to see obviously less production by the domestic manufacturers, we could see some pickup by other manufacturers. So that's some offset to that. You kind of do the arithmetic.

                                                It's meaningful, it's measurable, it's going to show up, and that's nationwide. Obviously in places like Michigan and other places, and we can talk about it, where there's going to be much more disruption because that's where the production is located. It's going to be much worse than that. Maybe even recession like in Michigan for example. Generally speaking, it's going to be modest, small, not a game-changing macroeconomic event. What do you think? Jonathan, I'll turn to you first and then we'll go to Mike. Does that sit with you or does that sound like I'm being overly optimistic?

Jonathan Smoke:             That does sit with me because I actually ... I don't think we're going to see a substantial change, and my opinion is we probably won't see a lot of change even next week in pricing and levels of activity because the market ... dealers are being and have been in the used car market, far more conservative or keeping inventories lean. There's no real evidence that there's suddenly this move to stock up on used cars because we think we're going to run out of new cars. I think that we have the time to navigate this. There are offsetting currents. The math makes logical sense to me, and the risk of it being larger I think is more spillover or maybe when you combine this with the other negative things that are happening in September and October or have the potential to happen.

                                                Like government shutdown down and student loan payments, curtailing, spending. It's when you cascade all of those that I've become a little bit more worried about the GDP forecast.

Mark Zandi:                       Right, right. No, that makes total sense.

Jonathan Smoke:             I use your forecast, so I'm dependent on you getting that, right?

Mark Zandi:                       No. No, you're using Mike's forecast. Mike, what did he think of the way the numbers I came up with, does that sit with you?

Michael Brisson:              Yeah, that's the framework we've been using.

Mark Zandi:                       Yeah.

Michael Brisson:              One point to that is I think that the reduction in spending would've taken ... it's already started. So if I am a member of the union and I've seen the language that's happened over the past month, if I'm able to forecast with an 80% chance that there's going to be a strike, they're able to forecast that there's going to be a high likelihood of strike a month ago. So, they slowed their spending going into this. They were practicing strikes over a month ago outside of the assembly plans. So this is something that the workers have known about before. So we're not going to see it directly in that single fourth quarter. If the slowdown in spending takes place because you slow down your spending in August and September, the strike happens and you smooth out that spending over October, November while the strike is going on.

                                                So to say that it's going to be, "Oh, we have this large decrease in spending in the fourth quarter or this large decrease in output," then I think it's not going to show up in the numbers the way that that type of impact will happen.

Mark Zandi:                       Interesting. And I do want to play the statistics game and I want to go into inflation, but Jonathan, you made a really good point. I just want to reinforce, and then Cris, I'm going to turn to you and see if there's anything else you want to add to this, because I've kind of locked you out of the conversation, which I'm sorry I did that, but to get you back into the conversation, see if something, if we missed something. You made a really good point, and that is it feels like the economy is struggling with all these little headwinds that if you sort of add them all up, they feel like kind of a big headwind. You mentioned the end of the student loan payment moratorium that starts in October at the same time, the strike is presumably going to be in full swing.

                                                We've got a potential federal government shutdown, which is likely on October 1, because that's the start of the fiscal year, federal fiscal year. You got mortgage rate. Long-term rates have now popped here a little bit. And so we got fixed mortgage rates back over 7%, which is kiboshed the home sales, and of course no refinancing activity. And probably the thing that worries me the most is the higher oil prices. I mean, you've seen oil now back to $90 a barrel. That means the cost of a gallon regular unleaded is certainly going to be four bucks here pretty soon if it's not there already. That I think is a threshold in people's thinking about the economy in their own personal finances.

                                                It kind of sort of had all that ... any one of those things, like I just said about the strike, if it's six weeks, well, it's okay, but then you throw in all these things and if one of those things kind of goes a little off the ... you can see Cris is smiling over there. It's exactly what he's been saying. There he goes. Yes, exactly. We could have a problem. We could have a problem. I just ranted anybody wanted ... Cris, do you have a view on what I just said? I know that kind of is music to your ears. Well, I guess it's not music to your ears but it's consistent with what you've been saying. Yeah.

Cris deRitis:                        Yeah, it's consistent with my fears. It's not music to my ears.

Mark Zandi:                       Consistent to your fears.

Cris deRitis:                        Yeah, that's a way to put it. Yeah.

Mark Zandi:                       Yeah, so that summarizes it. This is just another potential risk, hard to forecast these well in advance, but these are the types of things that creep up when you're in this very long period of vulnerability. So I guess the question I would have is more of a curiosity around any political involvement here. Jon, do you expect administration or others to step in here to take one side of the other?

Jonathan Smoke:             I think they're attempting to, to try to get the tables to reach an agreement and not be so far apart.

Mark Zandi:                       Maybe being the Biden administration.

Jonathan Smoke:             The Biden administration specifically working, and especially I think also with Michigan, because there's a lot of vested political interest in the state of Michigan to see this resolve sooner rather than later. Even politically, this doesn't evenly fall straight down traditional camps because the electrification issue is actually ... the union is in a different page than the Biden administration, and they view some of those policies as part of what threatens their future. I don't think that there's an easy answer to it. For the record, Mark, I generally believe your view is correct through all the episodes. I'm in the more optimistic camp, but I'm seeing these things quickly change.

                                                It's amazing how in June and July, we were moving towards this direction that looked like the consumer was past the inflation problem, strong income growth, very strong labor market. We were improving, and we continue to see strong retail demand in the vehicle market. So there's no evidence, in fact, the used car market is stronger here at the beginning of September than it has been at any week so far this year. So we're not seeing the consumer pull back on the vehicle side yet, but consumer sentiment, the numbers come out tomorrow from Michigan, and I'm betting that number is pretty negative for the first half of September.

Mark Zandi:                       Going right back to that price of a gallon regular unleaded.

Jonathan Smoke:             Yeah.

Mark Zandi:                       Yeah.

Jonathan Smoke:             Yeah and it's funny because the Fed with the focus on super core, everybody is relieved, we're continuing to see progress, but the bite that it has on the real consumer, we do a little calculation every month where we take the consumer expenditure survey baskets for the quintiles and we apply it to the inflation numbers, and we're back to a bottom income quintile of having year over year inflation at close to 9% using the August data, and it's a meaningful pinch, and it causes things like loan delinquencies to get worse rather than get better when we were right there, almost at the point of threading the needle and making it to the end and proving Cris wrong.

Mark Zandi:                       Don't give up. Don't give up. You're sounding awfully lugubrious to me, but you got to stick around me a little bit more. I'm just saying. All right, let's play the statistics game. The game is we each put forward a statistic, the rest of the group tries to figure out what that is through clues and deductive reasoning and questions, and the best statistic is one that's not so easy, we get it immediately. Although that's hard when Bernard is playing because he gets them all very quickly and not so difficult. We never get it. So let me ... Cris, you want to go first? Can I go with you first? You want to give us your statistic?

Cris deRitis:                        Sure. This is going to be a jump ball, but it's an important statistic.

Mark Zandi:                       Jump ball. No. Wait, let me get ready. Let me get ready. Go ahead.

Cris deRitis:                        Ready?

Mark Zandi:                       Yep, ready.

Cris deRitis:                        The clue is that it's Bernard's favorite radio station, 91.3.

Mark Zandi:                       That's like the old person's radio station.

Cris deRitis:                        It strikes me like the smooth jazz.

Mark Zandi:                       Smooth jazz. That's right. That's-

Cris deRitis:                        Classical in the morning.

Mark Zandi:                       When I think Bernard, I think smooth jazz. Yeah. Yeah.

Cris deRitis:                        We'll get the truth here, but-

Mark Zandi:                       Yeah, 91.3, is it an index?

Cris deRitis:                        It is. It is.

Bernard Yaros Jr:              NFIB survey.

Cris deRitis:                        You got it, Bernard.

Mark Zandi:                       There you go. I told you Bernard is like me.

Cris deRitis:                        Damn, he's so good at this.

Mark Zandi:                       Do you want to explain?

Cris deRitis:                        Sure. NFIB, National Federation of Independent Business. This is their optimism survey. So how do small businesses feel about the economy? 91.3 was the number for August, came out this week. That's down from what it was in July, 91.9. So small businesses are more pessimistic and particular, you can look at some detail, right? This is a survey of small businesses across the country, lots of different questions about their views on sales as well as costs. Yeah, the pessimism is widespread, so they're down on the economic prospects of the future, not planning large capital investments or fewer capital investments, I should say. They do plan to raise compensation and prices to a larger degree than they did previously.

                                                So pointing in all those negative directions, those small businesses are feeling the pinch in terms of perhaps some slowing sales in the future as well as still fairly high costs from compensation. The one factor that did strike out to me is a little bit more positive is that they're not really complaining about credit or difficulty obtaining credit. So that doesn't seem to be a real issue, at least not one of their top issues at the moment.

Mark Zandi:                       This might be a good time to plug the survey business confidence again. You want to do the plug? I mean, actually we do the survey every week. It's a global survey and we're looking for participants. So please and Cris, if people want to participate, they can just go to economy.com and they'll see a way to sign up. It's a survey that we've been doing for 20 years and those survey results are ... because I look at that carefully and I do the analysis every week. In fact, every Saturday morning I get up. First thing I do is I go look at the survey business confidence. I've been doing it for 20 years. It's actually improved recently. In recent weeks. It's got a ... the way I described it a brighter hue.

                                                I'm getting more positive responses. So this feels like it stands in contrast to that.

Cris deRitis:                        It does. It does. You're right. It could be different parts of the market that the survey business confidence is everyone, broader swath. This is really focused more on the small business, so there could be some differences there.

Mark Zandi:                       Interesting. Hey Mike, let me go to you next, and I'm guessing you've got ... unless you do a head fake here, a statistic around the vehicle industry. I'm just guessing.

Michael Brisson:              Maybe. 3.1%.

Mark Zandi:                       Is it related to the vehicle industry?

Michael Brisson:              Yes.

Mark Zandi:                       No, Jonathan, you must have an advantage here. So 3.1%, is that a growth rate?

Jonathan Smoke:             I think Bernard might have more of an advantage.

Bernard Yaros Jr:              It's the Moody's Analytics used vehicle retention value index.

Mark Zandi:                       Geez.

Michael Brisson:              No, it's not.

Mark Zandi:                       Good. Thank you. That would've been embarrassing. Is it one of the ... is it a Moody's statistic or is it a government?

Michael Brisson:              No, it's government.

Mark Zandi:                       It's a government statistic. Could it possibly be the ... and I'm really stretching the year-over-year growth in auto loans outstanding through the month of August?

Michael Brisson:              Nope, it's a price level.

Mark Zandi:                       It's a price level. Yeah, we didn't see the CPI-

Cris deRitis:                        Yeah, that CPI Report.

Mark Zandi:                       The consumer price index?

Michael Brisson:              Yes. From CPI.

Mark Zandi:                       Is it year over year CPI for used vehicles?

Michael Brisson:              Nope. That's negative 6.6.

Mark Zandi:                       Negative 6.6. It can't be maintenance. It can't be insurance because that's up a lot. Is it the month to month percent change in-

Michael Brisson:              No, it's year over year.

Mark Zandi:                       Year over year. What do you think, Bernard? You're the CPI Maven.

Jonathan Smoke:             Is it a subset of the new, because new is 2.9.

Michael Brisson:              It's a subset of the new. Yep.

Mark Zandi:                       Subset of the new.

Jonathan Smoke:             New cars. New trucks. New trucks.

Mark Zandi:                       Okay.

Michael Brisson:              And that goes to what Jonathan was saying with the strikes going to impact trucks more than the cars. So we would expect to see this come through if we see price increases start coming through there first on the new trucks versus the new cars.

Mark Zandi:                       Interesting. Okay. Well, I do want to come back to vehicle prices in the context of the next part of the conversation with Bernard around CPI, so we'll come back to that. Let's do a couple more. Bernard, do you want to go next?

Bernard Yaros Jr:              Sure. So my statistic is 89.3 billion dollars.

Mark Zandi:                       Is that the budget surplus in August?

Bernard Yaros Jr:              Yep. Yep.

Mark Zandi:                       Okay. Now how impressive is that?

Bernard Yaros Jr:              Very impressive,

Mark Zandi:                       Jonathan. Is that impressive or what?

Jonathan Smoke:             That was good, Mark. I don't hear cowbells anymore but-

Mark Zandi:                       And actually that's a really cool ... that's a really cool-

Bernard Yaros Jr:              Because this is the ... I mean, I was a bit surprised when I saw it, but you've never had a surplus for the month of August. Typically, we get surpluses whenever there's ... typically, we get a treasury budget surplus whenever there's a big windfall of taxes. So I think April, sometimes in June and September. August is really ... it's historically a month where the government is always running a budget deficit. We got a surplus this August and it was really a quirk. It really doesn't have any ... I don't think that this is somehow a turnaround in the fiscal budget trajectory. The federal budget is still gushing red ink and the outlook is not bright.

                                                However, this had to do with the actions around the Biden administration student loan forgiveness plan. So because the Supreme Court struck down its implementation, the administration recorded in the books a 330 billion dollar decrease in outlays for the Department of Education. And this goes to the Federal Credit Reform Act. So under that law, whenever you have changes to student loan programs, the entire multi-year cost of this ... of any such action has to be recorded upfront on a present value basis in the current fiscal year deficit. So if you go back to last summer when the administration first announced the student loan forgiveness plan, there was also a sharp increase in September of last year to account for the full multi-year cost of the debt cancellation plan.

                                                Now, that this is struck down, it's not going to happen, at least in its earlier form. The administration now had to record that as a reduction in outlays on a net present value basis by the Department of Education. If you abstract from this, we're still talking about a deficit last month of more than 200 billion. Even the fiscal year to date, deficit is 1.5 trillion, which is up from under one trillion last fiscal year. So we're still heading in the wrong direction, and it just highlights the fiscal challenges that will have to be addressed, especially later on in this decade and early next decade.

Mark Zandi:                       Yeah, it feels like the deficit for this fiscal year that's going to end in September is going to be 1.7 trillion. It was like 950 billion last fiscal year. Now, there's some timing issues here too. So I think that overstates the case, like California residents didn't have to pay until October, I believe.

Bernard Yaros Jr:              Exactly. Well, what really whip sod, there's a lot of temporary one-time factors. So the sharp reduction ... because of all the hit that asset prices took last year, you had a sharp reduction in capital gains.

Mark Zandi:                       I'm going to stop you, Bernard, because I want to get to the CPI, and this is what I love about you. We could have a whole another podcast, but we can't because you're leaving. Come on. Why don't you stay and we can have another podcast and we could talk about the budget to your heart's content, because I can feel it, you just want to talk about this budget. Every line item, Bernard knows. So as I said, I'm going to cry. I'm just going to cry. I'm going to cry. Jonathan, one more statistic and then, we'll go on because we're getting along in the tooth here.

Jonathan Smoke:             I'm going to offer you a twofer, 0.1% and 2.3%, and they go together

Mark Zandi:                       Is one month to month, the other year to year,

Jonathan Smoke:             They're both year over year.

Mark Zandi:                       Both year over year.

Cris deRitis:                        Are they from the CPI?

Jonathan Smoke:             No, but related

Mark Zandi:                       PPI?

Cris deRitis:                        PPI. That would be a stretch.

Jonathan Smoke:             Mike is the one that I figured would get one of them immediately, but he's slow to the draw

Mark Zandi:                       Is it a place. Manheim.

Jonathan Smoke:             What did you say?

Michael Brisson:              Increase in the Manheim?

Jonathan Smoke:             No, that was 0.2% and I figured somebody would guess that and points for that, it is an ingredient that we use for the vehicle affordability. It's Kelley Blue Book's, average transaction price year over year was 0.1% in August, in comparison to the CPI that was up closer to 3%, like Mike was talking about with trucks. And a crucial difference is the CPI bases, there's on a defined basket of vehicles, and we both in the Manheim Index and Kelley Blue Book, look at the mix of what's being sold. And the mix has decidedly shifted to lower price points, more segments. And that's why, one, you can't draw the conclusion immediately that this strike is actually going to cause new vehicle prices to go up on an aggregate basis, like in our Kelley Blue Book measure.

                                                It actually is going to reduce the more expensive vehicles in the mix, allowing competitors like Nissan and Toyota and Honda who are selling more lower price Sedans to potentially make a larger volume.

Mark Zandi:                       That's interesting.

Jonathan Smoke:             The other number was the sticker price, MSRP was up 2.3% year over year. So it's been interesting to observe that manufacturers have been pushing up the stickers and the invoices at a greater pace than the transaction prices, which means that the margins are being compressed by the dealers as this county's return.

Mark Zandi:                       Just so I understand, Jonathan, so what you're saying is because of the strike and the fact that we're going to see potentially a shift in sales over to non-luxury foreign vehicles, because there is inventory there and they can pick up production, because of that mix effect that could reduce the effects on overall measured inflation?

Jonathan Smoke:             When you're looking at true averages of what's being sold.

Mark Zandi:                       Yeah, but not the CPI because that's a basket.

Jonathan Smoke:             Not the CPI because it's a basket.

Mark Zandi:                       Right. Got it. Got it. Okay. Let's turn to the aforementioned. Yeah, aforementioned, I don't think I've ever said that word out loud, but now aforementioned CPI. Bernard, do you want to give us a rundown on that CPI number?

Bernard Yaros Jr:              Of course, so I would just start out saying that the CPI number looks much worse than it actually is. So as a reminder to our listeners, the CPI or the Consumer Price Index, it measures the average change in prices paid by consumers for a basket of goods and services. So in August, the overall CPI jumped by 0.6%, which was the strongest pace since June of last year. And I don't think it's an exaggeration to say that June 2022 is etched into every macroeconomist's mind because that was the month when year over year, CPI inflation peaked at a multi-decade high of nearly 9%. At the time, the Federal Reserve was on a war footing, raising the target range for the Fed funds rate by three quarters of a percentage point.

                                                And in one sense, the August CPI was similar to the CPI back in June of last year. So last month, the CPI for gasoline jumped by 10.6%, which added nearly 0.4 percentage point to the month-over-month increase in the overall CPI. And back in June of 2022, gasoline also surged by more than 10%. So last month it was more of an issue of oil production cuts by Saudi Arabia and Russia that contributed to the jump in pump prices. Whereas last year, last summer, it was really the direct fallout from Russia's invasion of Ukraine, but it's important to really emphasize that the similarities between the August CPI and the June 2022 CPI really stop at energy.

                                                And the key difference between the two is that in June of 2022, it wasn't just energy prices that were rising. Inflationary pressures were very broad based across all goods and services, whereas now inflationary pressures are much narrower. So if we take the median CPI, for example, this is calculated by the Cleveland Fed, and in the most simplest terms, the median CPI ignores all outliers. So major swings to the upside or downside across the basket of goods and services. And it really focuses just in the middle of the distribution of price changes. The median CPI, it's a great representation of just an underlying trend in inflation.

                                                And in June of 2022, the median CPI rose by 0.6%, whereas last month, it only rose by 0.3% and in the prior month, it only rose by 0.2%. So because inflation is just nowhere near as widespread as it was last summer, I wouldn't worry that the August CPI is going to spur the Federal Reserve to raise interest rates next week at its September meeting, and I think it's also important to keep in mind that gasoline futures, which are a good leading indicator by about two weeks of retail pump prices are now falling, and that suggests that if it holds, gasoline should weigh on the headline CPI.

Mark Zandi:                       That's interesting. Oils ... that goes to the blended gas or less driving.

Bernard Yaros Jr:              It's all formulations. Yeah.

Mark Zandi:                       Formulations. Okay.

Bernard Yaros Jr:              Yeah. Yeah.

Mark Zandi:                       Interesting.

Bernard Yaros Jr:              Again, we don't have for all of September, but for now, at least it's flat to down. Again, we don't have it for all of September. So again, I don't think we should fret too much about this strong August CPI. And I also, wouldn't worry too much about the core CPI, which was a bit stronger relative to expectations. So the core CPI, which excludes food and energy prices, it rose 0.3% in August, which was the strongest since May of this year and it also exceeded our and consensus expectations for just a 0.2% increase. The core CPI was also tainted by higher energy prices. So even though the core CPI excludes energy, higher energy prices can still bleed into the core CPI through higher jet fuel prices, which then put upward pressure on airfares.

                                                And that's exactly what we saw. So the CPI for airfares has climbed almost 5% last month. And that comes after two consecutive 8% declines in the prior months. And this was also the first time in several months since that airfares had risen. So it was really airfares and transportation services in general that just seemed to be behind the upside surprise in core services.

Mark Zandi:                       Which goes back to the vehicles, right? Because transportation-

Bernard Yaros Jr:              We're looking at transportation services. So vehicle prices would be in the core goods.

Mark Zandi:                       No, but don't transportation services include car insurance and-

Bernard Yaros Jr:              Exactly. Yeah. So car insurance-

Mark Zandi:                       And vehicle maintenance, isn't it in there?

Bernard Yaros Jr:              Exactly. Yeah. So car insurance rose at its fastest on record if you exclude some of the pandemic era distortions. And I've spoken with Mike about this. It seems that replacement costs for wrecked vehicles were higher last year than insurers had budgeted for, so they're now raising premiums. Mike and I have also looked at the highway accident data, and those are also pretty elevated relative to pre-pandemic norms, but I would assume that the impulse to just core CPI inflation from motor vehicle insurance should fade because I've started to read some articles about regulators really pushing back against some of these sharp increases in auto insurance rates.

                                                And there's also pass through from higher new vehicle costs to auto insurance. So now, that hopefully if we ... assuming that new vehicle prices don't really spike up again, I think the fading away of the prior jump in new vehicle prices should also alleviate auto insurance.

Mark Zandi:                       This would be a good place to bring Jonathan and Mike back into the conversation. Have you guys ... this conversation has reminded me of something I'd like to see, and that is the impact of rising vehicle prices broadly on inflation over the past year, not just directly, not just the used vehicle and the new, but also including maintenance and insurance and anything else that we should be considering. Has anyone done that? I mean CPI inflation is ... overall, core CPI inflation year over year ending in August was what, 4.4%, how much of that is simply related to vehicle prices? Do you have any sense of that? I know that's a tough question.

Jonathan Smoke:             Yeah. I haven't looked at it recently, but at one point, vehicles were directly related to almost half of the information that we were seeing because of direct issues and used and new, but then indirect with maintenance and repair, car rental and auto insurance have all been at different times substantial contributors. Some of what you're describing with service and repair is likely a longer term systemic shift because the move to electrification, parallels a move to vehicle complexity and vehicles essentially embedded with software and sensors, whether they're electric or not. And that really increases the complexity of minor accidents, problems going ... wrong with the technology, requiring specialized equipment.

                                                It is hard to envision a world that we aren't going to have higher inflation on that side. Plus we're capacity constrained on the labor side too. And I've heard dealers talking about needing to hire electrical engineers to run, service departments related to some of the more complex vehicles.

Mark Zandi:                       Maybe Mike, could you update us on your thinking about both used and new vehicles? I mean, I've been waiting, but used vehicles have seemingly rolled over. They declined again in August, I think. Down what Bernard, one, two, something like that.

Bernard Yaros Jr:              1.2%, and that was in line ... so Mike and I have a forecast for used vehicle prices and that was in line with what our expectations.

Mark Zandi:                       Yeah, and that feels like that ... but although as Jonathan just pointed out, that market feels like it might have a stronger tone to it most recently. Anyway, will the declines in used vehicle prices continue more or less over the next 6, 12, 18 months? And what about new, it felt like they were starting to roll over, but they haven't. Mike, do you have a view on ... can you just update us on your view on those things?

Michael Brisson:              Yep. One quick point to the relative importance. The relative importance of insurance compared with used vehicles are almost exactly the same. Inside the CPI report. Insurance is 2.7 and used vehicles 2.8, so they're almost the same. That's not even talking about what maintenance is plus that. So those secondary features are more important than just the used vehicles themselves. To your point, what are our expectations on used vehicle prices? So we've seen a large decrease in our wholesale indexes over this past year. I think we're almost 20% down now from where the peak was at the start of 2022 for our wholesale index, but we aren't expecting any additional price decreases in the wholesale market.

                                                We are expecting to see a little bit more in that retail to CPI numbers to get back down and match where the wholesale numbers are over the next month or two since they're lagged on that, but given the lack of inventory on the used market as well as the continued strong demand and the strength of labor market and our baseline forecast for the slow session or no recession, we are expecting their demand to remain high, and so use vehicle prices to pretty much flatten out over the next 12 to 18 months.

Mark Zandi:                       And new, what do you think about new?

Michael Brisson:              Assuming the impact of the strike doesn't come to play, this is all assuming the strike resolves itself rather nicely over the next month or so, we expect new prices to remain similar to where they are and come down about 5% I think we have in the forecast

Mark Zandi:                       Over what period?

Michael Brisson:              Over the next 12 to 18 months.

Mark Zandi:                       Okay, Fine. Okay. Jonathan, does that sound about right to you?

Jonathan Smoke:             Yeah, we have a very similar outlook. I think the risks that we have is one that we go through perhaps some episodic cycles because what we're seeing in the used market is as the wholesale prices cascade into used retail, it actually creates demand because you've got consumers from an affordability standpoint that have been priced out of the market, finally seeing lower prices. They literally can come in the market, but as they do, dealers have to restock their inventories, buy more aggressively at wholesale. And that causes prices to go up like we did in the Manheim Index in August, and very likely will in the second half of September.

                                                I don't think we're going to go through another episode of big inflation because we're essentially looking at the demand curve in the used car market. When prices go up, demand declines. These consumers ... by our calculations, we think a substantial number of consumers have been priced out of the market. And as long as interest rates are not coming down and prices are not falling more than depreciation, it's a slow and gradual improvement in demand.

Mark Zandi:                       So what you're saying, my interpretation of what you're saying is well, prices may not come down a lot, but they're not going up because there's lots of sensitivity to price at this point.

Jonathan Smoke:             That's right. If they go up, they almost immediately curtail demand.

Mark Zandi:                       Okay. Okay, good. Hey, we're running out of time, but I just want to quickly throw out my three cents on the inflation numbers and I'll bring Cris back in and get his. Mine is that the CPI inflation was pretty close to script. We knew that we were going to get a big number top line because of energy, and we knew that. Core CPI came in a little hot, but it was the actual ... if you look at the second, third significant digit, it was like 2.75. So it got rounded up to 0.3 as opposed to rounded down to 0.2. So no big deal. Then, if you look at core CPI growth over the past three months, annualized, what is it, 2.4?

Bernard Yaros Jr:              2.4. I mean, it's spot on with what the Fed would want. I mean-

Mark Zandi:                       That's close to target. I mean target is two on the consumer expenditure deflator because of construction measurement differences. The CPI is a half a point or so higher. So 2.4 is pretty consistent with that. Then, the other statistic I look at is the overall CPI, less the cost of housing services, which is about a third of the index, but that's where a lot of the inflation has been focused. It's coming down pretty rapidly now because it's tied to rents and rents are weak. That measure is at 1.9% year-over-year. Excuse me. Overall, CPI X housing services in the month of August, year over year was up 1.9%.

                                                Now, I think these numbers overstate the case. I don't think inflation is back target, I'm not arguing that. All I'm arguing is that it feels like we're still well on our way to target, given the interest rate hikes that have been put in place and given everything else that we know about the economy. So like you, Bernard, I think I'd take a relatively sanguine perspective on the numbers. Cris, what do you think? Would you push back on that or is that consistent?

Cris deRitis:                        Not to a large degree. We knew it was going to be a bumpy ride, right? We've been saying that for a while. So even though the trajectory may still be there in terms of downward, we get back close to the Fed's target over time. There's bound to be these bouts of volatility here. So I'd say it's in line with what we've seen so far. I would say I'm concerned about what's gone on over the last few weeks since the reporting period of the report. We do have gas and particularly diesel prices rising, and that could certainly filter out into the broader economy. So I think we need to stay vigilant here.

Mark Zandi:                       Yeah. Hey, I want to end the podcast with a Mea Culpa. This goes to the podcast last week on artificial intelligence, AI. And I was playing a bit of a game with the folks on the podcast, including our esteemed guest, Martin Fleming, who was former Chief ... You know Martin, Jonathan. He's in the CBE with you, you and I. He's a former chief of commerce at IBM. And it was a great podcast. On the end, I said ... I asked the group, how long did it take for ChatGPT, that's the popular AI algorithm that was an interest back in November. How long did it take it to get a hundred million users? And Martin, I think he said two months. I can't quite remember. Do you remember Cris, what he said?

Cris deRitis:                        I think so.

Mark Zandi:                       Maybe three months, two, three months, and I actually kind of made fun of him. I kind of berated him because I said the answer was two days. Then, I said, well, how many days did it take for TikTok to get a 100 million users, and he said, three months or four months. And I said, no, nine days and then, I asked about, what was it? Instagram. Instagram. He said, five months and I said, "No, 19 days. I'm making up a little bit of the numbers. I don't quite remember." Well, it's not days. It was months. Actually, it was months, two months. I don't know how-

Cris deRitis:                        So he was exactly right.

Mark Zandi:                       He was exactly right. If he wasn't right, exactly right, he was pretty damn close. And he handled it so well. He didn't push back, come back, you moron, but you should have, because I got it dead wrong. It's still impressive two months, 100 million users, but it's not two days. It's not two days. So listen, really, I'm sorry. I blame it on Cris for some reason. It's got to be his fault. I don't know.

Cris deRitis:                        You got to watch out for the [inaudible 01:16:49].

Mark Zandi:                       We got to blame Bernard. It's got to be Bernard's fault because ... well, it's just because it's his fault. It's definitely his fault. Anyway, I thought this was a great podcast, Jonathan, thank you so much. You really articulate things so well and make it all easy to digest. And as well, Mike, you too. Really very helpful and Bernard, I have nothing more to say about you. Cris, I have a lot to say about you.

Cris deRitis:                        There's time though. There's time.

Mark Zandi:                       All right. Guys, anything else we want to say, no?

Jonathan Smoke:             I'm hopeful. It's not 60 days that you push me into, so that's all.

Mark Zandi:                       Okay, very good. Thanks again, Jonathan, and we're going to call this a podcast. Thanks everyone. Talk to you next week.