The "Best" Bicentennial Episode
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Welcome to Inside Economics. I'm Mark Sandy, the Chief Economist of Moody's Analytics, and I'm joined by my two trusted co-hosts, Marissa DiNatale and Chris Dredis. Hi, guys. Hey, Mark. Hi, Mark. This is a big podcast, I understand. Yes. 100%.

This is the 200th episode of Inside Economics. Not counting the, I think not counting the bonus episodes. This is the standard weekly podcast. That's pretty amazing, right? That is. Yeah. Congratulations. Have you ever done anything 200 times or more? I guess brush your teeth. I've done that more than 200 times. That's pretty impressive. Yeah. Yeah.

It was something to be proud of. Yeah. Right. Yeah. Very cool. Yeah. So does that mean Moody's will give us,

something for that or no it's probably doesn't mean that doesn't mean that hearty congratulations yeah yeah have you uh moody's does give gifts though like if you hit your 10th anniversary or 20th anniversary have you gotten a gift just had my 20th in december and i i perused the catalog of gifts i could select from it's pretty impressive

Yeah. What'd you get? I didn't yet. I I'm overwhelmed by the choice, so I haven't bank up my points. Well, knowing Moody's there's a limitation on how much time you have. I'm guessing. I checked that Mark. Oh, you did. There is no limit. I checked. There's no limit. That's very unmoved. You know, that's, you know, it could, it could disappear tomorrow. Yeah.

Yeah, maybe. You know what I was looking at, Mark? I appreciate this. A power washer. You know, I'm all for that. Yeah, but it has to be a high-end power washer, Marissa. There's a whole range you can select from.

Really? Yeah. I have my eye on one. When's your anniversary, Mark? Sounds like you're getting- I don't know. Let me think. The thing about, this is the good thing. When we sold our company to Moody's, we were grandfathered in as if we were Moody's employees. When we sold to Moody's, we were already-

15 years in as Moody employees. So now I am a Moody's employee officially for 35 years, I think, 35 or 36 years. That's pretty, I guess, something, right? That's a deluxe power washer, right? Yeah, it's a deluxe power washer. And we have a guest for our 200th...

We have Wayne Best. Wayne, good to see you. Yeah, it's great to be back. Yeah, and you were one of the first guests, I think, back then.

Some four years ago now. So thank you. Yeah. Yeah. Remember that? Remember that? Well, and several times in between. Really? You remember that? Well, yeah, absolutely. Yeah. They're fun. These are great. I'll say, and I'll say, since you're talking about lifetime at work, March, I will celebrate 35 years at Visa. Honestly. Wow. Wow. 35 years. So definitely one of the,

I got to be careful, not oldest, most tenured person in the company. One of the wisest people in the company. Okay, I can say that too, probably. 35 years, that's pretty amazing. And you are now the chief economist. So when you joined, did you join as an economist? No, I was running a research and statistics area and got heavily involved with a lot of the business case analysis for a lot of the new products.

Way back in the 90s, we opened or created a debit card. And so we created the business case for that, which is now mainstream today. And also something called a Bucks card, B-U-X-X. Few people probably remember that, but the intent was it was the first prepaid card that you would give to your kids.

So, and teenagers really. So the teenagers would have access to funds. You didn't want to give them a debit card to have access to your entire checking account. So this was like a prepaid thing that would be automatically loaded with allowances, et cetera. And I worked on the business case for that way back early on also. So yeah, that was some of the initial things that I had done. Well, now that I think about it, economy.com, which 35 years ago was Regional Financial Associates. That was our first name.

I don't know if I've ever told this story, but it started because of a consulting project for our first card. I think first card was sold to JP, I think bank one, and then now it's part of JP Morgan Chase. And at the time they had 7 million cardholders and we got a project. This was a very first project and how the company started was,

determine the efficacy of various types of advertising for cash advances, you know, cash advances. And I, when I, I didn't even know what a cash advance was when I got the project and I go, well, who would ever take out a cash advance? I mean, cause the economics of that are pretty tough, right? I mean, but anyway, we got this, believe this, it's hard to believe this, but first card sent us via, I think UPS, uh,

all information about all 7 million cardholders on tapes. And we had individual, each individual, their social security number, all of everything. Yeah. Can you imagine that? Can you imagine that? Just a pretty amazing. And, uh,

And we ultimately became kind of the data processing center for the research group at FirstCarb because if they wanted to get any kind of diagnostics done on their data, they had to go to their tech people, put in an order, and three weeks later it would come back. And we could do it instantly, right? Yeah.

At the time. So pretty. Really rings a bell too, because I was doing cost studies or benchmarking studies. And I think with them back in that timeframe. And I do remember access, you know, a lot of data that we collect to be able to determine what their cost dynamics look like and that kind of stuff. Unit costs, et cetera. And I remembered access to that data being much more readily available than other institutions, but I had no idea it was you at the time. That's interesting. Yeah. Yeah. We were the largest.

When I say we, it was myself, my brother, and my best friend, a fellow named Paul Gettman. We were the largest user of University of Pennsylvania's mainframe. They had a mainframe in that year. In 1990, when we started the company, we were the largest. I don't know. They told us that. I don't know how big a deal that is, but it felt like it was a big deal. Certainly at the time, it felt like it was a big deal. Yeah, definitely. Anyway. That's interesting. Yeah.

But thank you. Thanks for coming on and for coming on more than, I think you've been on like at least three times, probably four times. So thank you. I'm getting close to my Saturday Night Live jacket. Yeah, exactly. Next time I'll have to wear a new jacket. It's velvet lined and all that kind of stuff, as I recall. Well, don't get carried away, Wayne. Come on. Don't get carried away. We'll get you a cowbell. It'll help if it's a podcast for those that aren't watching it on YouTube. Yeah.

Very good. Well, yeah, we've got to do something for this 200th anniversary, but I'm glad you're on with us. And I thought we'd talk about the consumer, the American consumer. And I know you give many talks to lots of different stakeholders, Visa stakeholders, clients, and others.

that when I'm giving a talk now and I talk about why we can or should be optimistic about the economy, the U.S. economy, it always centers around the consumer. The consumer kind of drives the train and right now doing a pretty good job at driving. Growth is very strong.

What is your sense of the American consumer from your perch? How are you feeling about things? Well, I think it's, in our annual outlook that we just put out, we talked about the tale of two consumers and the tale of two halves. And when I break that down, the tale of two consumers is the middle-income households are

you know, have cut back or they have reduced some of their credit usage and really have relied much more significantly on their debit cards when we look at our data, for example. And why that's important is, you know, obviously the uncertainty, the concern that's still out there, the high inflation, high interest rates, you know, are really impacting this particular cohort quite strongly. They're still spending, but they're being more cautious. The upper income households,

you know, a little less so that they're still spending and maybe changing some of their behaviors more towards experiences and travel and those things. But the other half is really related to the lower income households and they are continuing to struggle. So that is a challenge. They've used up all their excess savings.

while their wage growth is generally holding well, I think this is the group that where you see a little bit more of the concern, especially in the credit markets also, which I know we'll chat about later. But that's the tale of the two consumers that I think could break out, middle income and high income or upper income households, and then the lower income households. On the two halves, I think we're really gonna see some separation here too, where the first part of the year is likely to be a bit slower.

In terms of consumer spending, again, interest rates are still high. Inflation is still up there. And once again, we got a lot of uncertainty, whether it's the new administration, it's future inflation trends, et cetera. We'll look at the second half maybe a little bit differently with some interest rate declines that we can talk about that will result in a little bit more breathing room. But it's going to be a slower year than it was last year, I think, in terms of the consumer by a little bit.

Well, last year was fantastic, right? I mean, if I look at real consumer spending growth in 2024, we're going to get Q4 data here shortly next week, but it feels like close to 3% growth. I mean, if you look at across all consumer spending, which is extraordinary. I mean, that's pretty amazing. So you're saying in 2025, not 3%, but-

What, closer to two, something like that? Yeah. So we're projecting 2.7% real growth in spending in 24, and we think that number goes around 2.3% in 25. So, you know, a notch down. And I think this gets us more towards the level of the potential growth of the economy, right?

absent any other big hiccups that go on out there. Okay. So if you step back and you take a look at the American consumer in totality, abstracting for a second from these differences across the income and wealth distribution, it feels pretty good. It does. Okay. Yeah. I think they're holding their own. Okay. And before we move on, because I do want to dig deeper into these differences,

across households. I know you guys put together an index that gives us a sense of the strength of consumer spending. Do you want to describe that index? Sure. So we call it the Spending Momentum Index. And the concept behind this is it allows us to look at the momentum of spending or the people that are out there shopping. Through some work we did years ago with Stanford's economics department,

It turns out if you look at the growth in, let's say, retail sales at a store, the growth rate, nearly 80% of that growth comes from more people showing up. And now, of course, it doesn't have to be in the store. It can be virtual versus the 20%, which is people spending more.

We leverage the vast amount of data that we have available at Visa, all anonymously, of course, and look to create an index that allows us to say what is the spending that's happening on a consumer's card, credit or debit, and if that spending is going up this year,

versus for that month for this versus last year, we score 200. If it stays the same 100, if it's less, it's zero. So it's a classic diffusion index. We look at the most recent data, which we just put out earlier in the week, the overall nationwide number is 95.8. So what does that mean? It's below 100. So there are fewer people that are out there spending at the levels that they did in the previous month. This is for December now.

um than there was previously um it's been below 100 for several years now

And yet you say, well, if there's less people out there spending, and that's one of the key drivers, how is it we could have positive spending growth? And the difference is, of course, is that those that are out there spending are spending more. So that gets us back to the upper middle income class, as well as the affluent actually out there spending more. So that's how you can translate that. Now, we break it down between discretionary expenditures, non-discretionary. We break out gas and restaurants.

separately because they can either be discretionary or non-discretionary depending if you're driving on vacation or driving to work. And so there's some nuances there. But the beauty of this is because of the granularity, I'm using hundreds of millions of accounts, for example, in the United States, I can bring it all the way down to a metro level. And by the way, I can do this and come out with this data roughly six, seven days after the end of the month. So it's a very timely indicator of what we're doing with that.

I'm pleased to say since the last time I was on, we've expanded this to now 100 countries around the world. So we have this kind of real-time view of what's happening with the consumer, specifically in all these different regions and countries around the world, which is pretty exciting. And others are picking it up. You know, the...

the fred database has it i'm pleased to say that moody's now has it as well we have an innovative series too so that's available to your subscribers and so that and what we're finding is that we're getting much more quotes from people economists that are using it in an economic series because it's such a strong indicator of that growth you know it's not a you know apparel sales grew at four percent kind of thing so you can't make that kind of translation it's a little bit more um

in the weeds relative to that, but it's being used broadly and funny. We're getting calls from very unusual companies that says, Hey, I heard about this, uh, when you were talking about it on television or whatever, and, uh, we want to know more and how could it be used to improve our business? And we're finding new and exciting ways to leverage it because it's so granular. I can take it down so far in terms of the, uh,

the geographic area, as well as the spending. So it's been a lot of changes since the last time I was on. So if the index is below 100, you're saying that there are fewer people out there actually spending? No, it's fewer people actually spending more than what they did last year. Last year. Okay. It's how much they're spending, but there's fewer of them spending. Right.

So it's less than 100. There are more people out there that are spending less than they did the year before. Yes. Okay. Above 100, there's more people out there spending more than they did the year before. Okay. And we look at other countries like the UK, surprisingly, despite all the challenges the UK is going through, our index there shows it is above 100. Above 100.

And it has been for quite a few months now. So more people out there spending more than they did in the previous year. We control for inflationary effects and those types of things also in the index. Seasonality. Yeah. So if you look across the U.S., are there any...

parts of the country that stand out one way or the other with a lower index or a higher index? You know, on a regional basis, the momentum accelerated month over month in December, for example, across all the regions except the South. We posted a half point decline. And obviously, one of the big things that happened in December, and we can see it right away in our data,

is the outbreak of tornadoes that struck Texas, Louisiana, Mississippi, Alabama, South Carolina, and Georgia. Those resulted in a lot of widespread destruction and really consumer disruption also. And it shows up in the data quite specifically. So I would imagine that on the roughly the 7th or 8th of February, we'll see really the impacts, for example, in the West with what happened with the wildfires that, of course, occurred outside of L.A. Yeah.

Yeah, right. And if you look across the globe, you said you have the index in 100 countries. You mentioned the UK. Are there any parts of the world that kind of stand out, good or bad? I think Southeast Asia is actually doing quite well. Quite well. I mean, you got a lot of the transfer of...

manufacturing that's now being moved out of China for various reasons. Tariffs, not the least of it. And moving into many of those Southeast Asia countries, which creates a stronger employment base, more people earning more money out there being able to spend. So

So our Southeast Asia indexes is in many of those countries are 103, 105, you know, much higher than what we're seeing in other places. Other pockets of growth that we see in other countries, whether it be in Cape Town, for example, or the Middle East as examples of that. In the U.S. at 95, 96, is that relatively low compared to much of the rest of the world?

I think for many advanced economies, honestly, UK being an exception, it's pretty close to these kinds of numbers. You know, they're all around 90. So if I look at, you know, kind of globally, what we're seeing is definitely a, uh,

a bit of a pullback. I mean, let's face it, high inflation that's occurred everywhere and high interest rates are impacting the consumer and they're having to slow some of that spending down versus what they would have done if we didn't have those two impacts. Great, great, great. Let me turn to Chris and Marissa. You heard Wayne's kind of characterization of the American consumer writ large, and we're going to dig deeper into the kind of the distribution here.

Does that resonate with you, Chris? Does that characterization resonate with you? Yeah. I think it's confirmed by other data in terms of that K-shaped economy that we have here. And we've talked about it in our previous podcast as well, that we focus on the macro and we can say one story, but certainly as you peel back, there are some different trends among the

low, middle, and high-income households. So I think that makes a lot of sense. You have that lower-income household that's also still recovering, even though things are getting better.

They may be rebuilding some of their savings or pulling back on spending from that reason. Right. Marissa? Yeah. I mean, I think we know that lower income households have drawn down any excess saving they may have accumulated during the pandemic. They're the ones that are much more exposed to inflation, especially the kind of inflation we've had over the past few years with food and energy prices and

medical care, that kind of thing. So it all, it kind of all makes sense to me. Wayne, can I ask you one question? Do you have data on China for this index? - No. - Okay. - No. And obviously there's not a lot of card usage within the country. And so we obviously have to see. Chinese citizens often have these cards and they'll use those when they leave the country.

So the cross-border activity we do see, but when they're within the country itself, they're usually using the local network within China. We don't have that. I have to say, I'm a little surprised by the index, the ostensible weakness in the index. I mean, in aggregate, I mean, I'm totally on board with

There's the characterization of low-income households struggling, high-income households doing well and kind of driving the train. But if I look at overall spending in the US, if I look at overall consumer spending, real consumer spending, that's the whole shoot match. I look at retail sales, which is just the good side of consumer spending.

It all feels better than that to me. It feels stronger to me than that. I come away thinking the consumer is, again, writ large, in aggregate, in a much better spot. I think that, again, I think the biggest difference here is that

you know, the affluent are spending more money. I mean, they definitely, but you know, that's, you know, let's say 20%, the top 20% of households based on income. And so you have those people. So again, we're not looking at,

The dollars in total, we're looking at each of those individuals. So if you start splitting it down, top 20%, 20 to 80, and then the lower 20, there are people, there are no equal sized numbers of people in each of those categories. And so, yes, the lower 20% based on income are not spending as much as they did last year. And the middle class, again, sits kind of in the middle. Some of them may be if they're the upper middle class, but many of them are

you just can't ignore the high inflation, high interest rates are really indeed having an impact on spending that we see there. But it can be outsized gains that we see, hence why nominal consumption we think will be 5.3% in 2024 has continued to be so robust. A lot of spending going on there with the affluent, that's for sure. And again, middle and upper income, part of the middle income class.

Yeah, I guess that's how you'd square the circle with the aggregate statistics I'm spouting in your index. You could have this situation where in terms of the numbers of people who are spending more compared to last year, that's down. That goes to the bottom half of the distribution, maybe even the bottom two thirds. But it's the top third, the top 10%. It could be the top 5% that are

spending a lot more and because the dollars there are so much larger than the dollar spent by folks in the middle and the bottom part of the distribution, you could get this effect, which is what we're observing. That's what you're thinking is what's going on. So, I mean, again, if Mark Zandi is out there spending not $10 more for the month or $100 more for the month than he did last year, but actually $5,000 more,

That's not me, by the way. That may be my wife, but that's not me. I never know with your reputation. Oh, my reputation? That's counted as one. That's counted as one person getting that extra amount. So as opposed to many, many people.

people. And that's the beauty of it. I mean, that's the granularity of it. It allows us to look at that growth. You know, we could see, for example, back in 21 and 22, that inflation was going to remain very, very sticky. You know, this is back in the old transitory days and all that kind of stuff.

Because we were able to look at it by some of the areas. If you look at the areas, for example, that have a larger group of consumers that are, let's face it, a little bit older, Arizona, Florida would be classic examples. And a larger portion of their people are an aging population, let's say. They're going to be much, you know, the problem is as they consume, you know,

they're not able, you know, they don't have as many young people to be able to fill the shelves up and those types of things in the store, bam, you saw higher inflation in those particular areas. And I think I talked about that last time that inflation was higher in areas that have a higher share of people that are older. And SMI just easily pointed that out. And so we could see that that inflation was going to remain stickier for longer years ahead because of those types of trends.

Hmm. Okay. So let's, let's dig down into the income and wealth distribution and what we're observing there. And I've got a factoid. I, I, I don't know what a factoid is, but I just sounds better than a fact. I'm not sure. Maybe a stylized fact. Maybe I've said it before, but just to, to, I find it fascinating. The folks in the top

Third of the distribution of income account for 55% of overall consumer spending. And that that's through the business cycle. So my guess is it's higher now than, than, than that, but that's on average through the cycle, the folks in the middle third of the distribution account for a pro rata share of the spending a third and the folks in the bottom third of the distribution, they account for only 15% of the spending. So this goes to what you were just saying, uh,

the dollars are just so much lower at the high end. So let's talk about the folks at the bottom end of the distribution first.

And in there, how would you characterize things there? I'm curious. You mentioned that early on is a lot of stress, but do you sense any easing of that stress given that inflation is back in and interest rates, they're not down a lot, but certainly they've peaked. Borrowing has slowed, at least in the data I've seen. Do you sense any improvement in the level of stress that those folks are facing? Yeah.

Well, I kind of sit back and think about it from where the income is coming from, the income spectrum. And if I look, for example, and I didn't break it down by thirds, but we did it again for the bottom 20%. If you look at the net worth changes that they've had since the pre-COVID period, it's actually up about 43%. And a lot of people don't realize. Now, granted, it's a much smaller base. Okay, I get that.

And a lot of that comes from the fact from two real big factors. One, if they happen to own a home, and there's some people in that group, of course, that own homes,

They've enjoyed a 50% increase in housing prices. So that's a lot of additional equity. We know equity levels for consumers have gone up quite substantially, and that is creating another kind of a cushion. It's not an excess savings cushion. It's the equity in their home. Now, being able to tap that can be a challenge, but oh, by the way, home equity credit lines have skyrocketed.

People are taking out more and more home equity credit lines to be able to tap it because they're not going to do a cash out refinancing or, you know, and those types of things with interest rates where they're at. And then the second piece for that group, and it's true for all groups, but also is you pretty much can't get a job anywhere that has some kind of 401k program without automatically being enrolled.

I mean, as soon as you walk in the door, you're automatically enrolled at some preset level. You can change it, of course, to zero if you wanted. I think that's created. And so again, if we look at what's happening with stock gains since pre-COVID, maybe a few months ago, we were sitting at well above 50% increases in the stock market. So now all of a sudden there's additional wealth that this group of people have. Now they'd be able to do that. If it's a 401k, they're probably not gonna be able to tap about it or tap it, but lo and behold,

the number of hardship withdrawals that we see from 401 programs has continued to go up. So, you know, yes, they may be having challenges,

but at least they have some kind of cushion that you know five years ago they didn't have at all i think that speaks very broadly the the similar gains for the 20 to 80th percentile so the middle 60 percent if you will their wealth gains have gone up 40 percent and just under that for the top 20 percent of course that distribution between how much of that is housing versus stock is different for each of those groups but both of those asset classes have done really well

over this time period. And so that also creates some level of cushion. Now, again, if you don't have a house and you didn't have any access to a 401k program, yeah, you're going to be in more challenging other than the fact that wage growth has at least held up relative to inflation for that income group. That 40, 45% increase you mentioned is that's the percent increase in the net worth of households in that part of the income distribution since when? Since the pandemic or-

Okay, since the pandemic. Okay, really over the past five years. Marissa, what do you think in terms of the folks at the bottom end of the distribution? Do you sense any... I guess everyone would agree that there's a lot of stress there. You can see it in the delinquency rates. You can see it in the defaults on credit cards, that kind of thing. But do you sense any easing of the stress there in the data that you look at? Yeah.

No, not much, I would say. I mean, I think, so I agree with Wayne. I think those numbers that you have on net worth, those are consistent with what we saw from the survey of consumer finance that came out last year, right? That net worth has risen across all buckets of income distribution, right?

I think the thing to remember is that if you're in that bottom bucket, you're far less likely to own a home. You're far less likely to have a 401k or an IRA or any savings like that. So if you are lucky enough to have that, yes, your net worth has gone up, but a lot of those people and maybe most of those people don't have those things. So I think there's still a lot of stress at the bottom.

Yes, interest rates have come down, but that hasn't really translated into large declines in rates that people are paying on things like cards, certainly not mortgages, right? So rates are still high relative to where they were

So I think the outlook is a bit better maybe for this group, but I don't think they've had that much relief in the form of interest rates. The job market is slowing now. I mean, it's still strong, but it's slowing. And we could be facing higher inflation again this year. I mean, the inflation outlook is pretty murky, I would argue. And that could be giving some people pause on the spending front. Totally.

You're referring to tariffs. Yes, and perhaps other policies that might put upward pressure on prices. Chris, what do you think? Of course, I agree in general with the characterization. I guess I would be a little... I push back a little bit in terms of the stress. Certainly, there is stress at that lower end, but if we look at the consumer credit delinquencies, it does seem as though they may be leveling off here. Some of the more recent...

originations of loans that maybe may have been originated back in last year or the year before that looks like there's progressively some improvement there. So

I'm not suggesting things are going to turn a sharp corner here, but at this point it looks as though things aren't going to get all that much worse unless the economy, of course, takes a turn here. So I would suggest that things will progressively get better for these individuals if inflation continues down its path, wages continue to remain relatively robust. I think it will be some easing here. So I'm not...

Not maybe quite as pessimistic as some other analysts might be. I think things will gradually improve for this group. Yeah. And you're referring to the Equifax-based data that we get every month. Right. And you're saying, hey, we got the December data, but a few days ago. And if you look at that, the delinquency rate on credit cards or consumer finance loans, even auto loans, I think, a retail card, they're down. They're still elevated compared to pre-pandemic. Yeah.

but they are down, definitively down from where they were this past summer when they peaked. And that's what you're kind of referring to. That's right. That's right. Yeah.

I mean, they're not dropping like a stone, don't get me wrong. No. Right. But they are gradually coming back to more of an equilibrium. So at least provide some indication that things are getting better. Yeah. I guess the other positive indicator is that the rate of credit growth, the amount of growth in the debt outstanding has slowed very sharply, right? Maybe partly because inflation's come in, maybe partly because of underwriting standards have tightened up since the banking crisis a couple of years ago.

And even though the growth has slowed, typically that would bias upward these measured delinquency rates. We're still getting the decline in delinquency. That's right. Okay. Hey, one thing that, and I agree with you, Chris. One thing that makes me really nervous about what's going on for lower income households is,

is interest rates are still very high. I mean, despite the Fed's easing, the Fed's lowered the funds rate 100 basis points, a full percentage point, credit card interest rates have not come in at all. And if you look at the

Wayne, if you look at the Federal Reserve's data on interest rates on cards that are assessed interest, those are the folks that are using their cards for debt as a debt vehicle. I think it's 24%, and I think that's a record high. What's your sense of that? What's going on? Do you have a sense of that?

What's your sense of that? So I'm going to tie a couple of things together based on the data that we've been looking at. We use a different credit bureau, but that's okay. Um, one of the things that's interesting to start observing is, uh, by the way, we, we were friends with all the bureaus going. I know you are buddies with all of them. So, okay. Well, we, we, uh, we have a contract with one of them. Let's okay. Got it. Got it. Okay. Um,

So one of the things that we started looking at is let's sit back and think about the job losses that have occurred over the last couple of years. They've generally been in the tech industry, the information technology industry. This could be a result of over hiring that occurred during COVID or rejiggering the group based on AI principles and what they're trying to do in the future and having more of those types of people on board.

So we started going back and looking at some of these derogatory measures relative to different income groups. And one of the ones that we focused on in the fall was the affluent. It turns out one of the areas that I look at very closely to say whether or not someone's potentially going to be a problem, I mean, a derogatory issue of having delinquencies, is what's happening with the minimum payments. If people are only paying the minimum payment, then there's something going on there.

because they're not retiring all of their debt or they're not paying more than the minimum payment more than the minimum that's required and if i look at the share of the affluent consumers here let me define the affluent as being 125 000 plus in terms of household income that minimum payment for the affluent is now hit is for my i can tell an all-time high

It's just under 17%, about 16.5%, 16.8% or so. And that has continually risen over the last couple of years.

So you have these people that are affluent, that have lost their job on the high-tech thing. And we all know from the jobs report and other thing that we're seeing, that's pretty tough market out there. And there's a lot of people that are, we're in those kinds of income groups that are not as easily able to find jobs right now. And so I see this affluent population

minimum payment going up, which to me is a concern. We did look at those that are seriously delinquent. So 90 days plus past due, this is on balances, not accounts, just to be very clear. And that number has also gotten pretty close to an all time high. Now, granted, it's like 0.6% of the overall balances, but it's risen quite substantially from the lows that we saw even a few years ago. So

That's an angle that I don't think is often being talked about, that there are some challenges with the affluent consumer. Yes, they may have equity that they're tapping, et cetera, but they're only paying that minimum payment. Now, one other comment on minimum payments that often come up is, what if somebody has a 0% offer, a 0% credit card? Revolve on our card and I'll give you a 0%. Why would you pay anything more than the minimum payment? True.

but in our research we were able to find very few offers that were at zero percent very if any so yes the that headline apr uh the overall number one as you can has come down a little bit from 23.9 down to about uh 22 22.9 something that consists of is that right 100 basis point drop in the fed funds rate tied to the prime rate all credit cards are generally tied to the prime rate now so

So there has been some drop, but you have a little bit more revolving activity that's going on. And we looked at that across a number of different sectors that it's certainly important to kind of keep an eye on. Okay. Okay. All right. Let's turn to the high-end consumer. And there, the narrative in my kind of thinking is that

It's the wealth effect. You know, the fact that stock prices are, I don't know, I didn't look today, but stock market's been hitting record highs. Crypto, Chris knows this quite well. You know, he's a big crypto investor. I won't go there, but, you know, that's why he's so dapper looking, you know, nice haircut and everything, you know.

I just do this for fun. He just does this for fun. Exactly. Housing values are at record highs. People are just wealthy. The wealth effect is that if you feel wealthier, you feel more confident, you need to save less, you're prepared for the rainy day, you're prepared for child's education, you're prepared for

your own retirement, you spend more out of income, your saving rate comes down. And that's what we've been observing, at least in the data that we construct based on the survey of consumer finance and the financial accounts, we construct saving rates by different demographic, including income and saving rates for the folks in the top 20% of the distribution, their saving rate has come in.

And, you know, again, going back to the fact that there's big dollars there, even a small decline in saving for folks in the top part of the income distribution translates into big bucks, you know, big, big spending increases.

Does that narrative sound right to you, Wayne? Is that consistent with what you've observed? Absolutely. We decided this last fall to take it a step further because we know we have this roughly 11,600 or whatever it is, people turning 65 every single day between now and the end of the decade. So we've got this aging population that's going on, more and more people falling into that category. And

If you look at, for example, we created a wealth effect for just those that are 65 and older relative to all consumers, and then broke it down by housing wealth and financial wealth. And what we saw in that for those that are 65 and older, the wealth effect, 1% change in wealth results in about 0.1% change just over that for financial wealth and about 0.04% for housing wealth. So

A dollar change in wealth, you can translate that to a level of spending versus all consumers, which is closer to four or five or 6%, depending on if it's housing or financial wealth. And that kind of makes sense too. We've had big gains in the stock market. We know that 52% of all the wealth is now held by the baby boomers.

Those things come together to show the ability for that particular consumer group to spend on an outsized capacity because of the fact that the financial markets have done so well. Yeah. Okay. Chris, anything to add there? Marissa, on the wealth effects? I guess the question, do you think that there's still revenge spending going on? Have we seen a permanent shift in attitudes? Life is short or- Well, the way I always look at it is,

good luck trying to get in the front of the bus on an airline. You know, what quoted numbers from Delta, something like 88 or 90% of all the business class seats are actually sold. They're not upgraded.

So, yes, for certain classes, levels of income of people, yeah, they're buying those business class tickets. To me, that's a little bit of a revenge spend still in place. I think more broadly, I think a lot of that revenge spending has actually come down a little bit. But, you know, if you start looking at advanced bookings,

you know, vacations, things like that over the summer, you know, you can expect certain areas in Europe to continue to be absolutely packed, whether it's Spain or Italy, etc. I think the revenge spending in my mind was really defined as I didn't take any vacations in 2020 or part of 21. So I'm going to take now three or four this year.

I think that aspect of it is kind of over with. So, but I think it's also important to recognize if you look at the various classes of, let's say, cruise ships, you know, the upper income ones, the more luxury cruise ships are packed. They're really pretty full because of the fact that people are willing to spend more. So they may not be doing as many vacations, but they're willing to spend more, again, as evidenced by some of the business class travel that we see in the seats that are being bought there.

Got it. Yeah. Oh, sorry, Chris. Go ahead. I guess it speaks to that inequality of spending trend that you were talking about earlier. The fact that the high-end consumer, the wealthy consumer, the well-to-do, their spending is driven in significant part by these positive wealth effects actually makes me pretty nervous, right? Because the stock market is at a record high. It feels like valuations are pretty up there.

What's going on in the crypto market feels highly speculative. Bond market feels fragile. I don't know. It just feels like a vulnerability to me. If asset prices, stock prices started to go south for whatever reason, it could translate through to the economy pretty quickly through these wealth effects. These high-end consumers pull back.

and they pull back in any significant way, we got a problem, you know, pretty quickly. I would totally agree. I mean, I think that's really the message here. Things have gone well because the markets have done well, the housing market's done well. But we also have to recognize too, like for the baby boomers,

They're thinking more and more about longevity and how long we have to make sure their money is going to last throughout that length of period. And so one of the things that we did is we started looking at card spending, for example, by generation, which is the first time we've done that. We usually look at it by income. An interesting sidebar is that when you look at spending by income, for example, it's generally based on wage income. Right.

All right. So what happens when you turn 65 and you actually do retire? Wage income goes to zero or very small, let's say. And now you have pensions, 401K withdrawals, all of that kind of stuff. So all of a sudden, in a normal calculation of looking at spending by income, you're going to miss those consumers. So we decided to look at it differently and cut our data differently and started looking at it by generation.

And what we see over the last few months, really over the last six months of last year, as an example, that the spending that is coming from the affluent or excuse me, I'm sorry, the baby boomers has started to come down a little bit. So back to Chris's point about the revenge spending, I think that started to fade a little bit.

But it does call into questions if the wealth effect is this strong for the financial markets, then yes, if the financial markets start to slow, this could have a reverse wealth effect impact. Well, I'm going to go play the game. But before I do, we talked about the kind of the folks in the bottom part of the distribution. Let's say the bottom third folks in the top part of the distribution. Let's say the top third. Anything to say about the folks in the middle third? I mean, it feels like to me, those are the folks that are most tied into the labor market, right? They've got a home. They probably don't have a lot of stock. Right.

Clearly, they've got a lot of homeowners equity. That's helping support spending. You mentioned the home equity lines of credit. But for them, it's mostly, you know, they're tied directly into the labor market. If job growth is okay, wage growth is okay.

pretty good and unemployment is low, then they're going to hang tough. They're going to do their thing. And that means the economy should be able to power through. I would agree. What I would say and would add to that is to say that they are cautious right now. And again, one of those areas that we see in terms of cautious behavior is people in that income group moving more from credit cards to debit cards.

That transition happened over a year ago. So I'm a lot of uncertain about what's gonna happen with the markets at the time, uncertain about what's gonna happen with the election, all of these various uncertainties that were out there. And you can see that in the consumer confidence survey data

uh caused them to become more cautious so um they are the ones that are at least being much more careful coupled with high inflation high interest rates Etc so they're kind of in a wait and see thing and they're obviously concerned very much of course because one of their chief income is related to their wage income or their job uh what's happening there so if they start hearing more people that they know losing their job they're going to start pulling back on spending also

Right. But anyway, why don't we play the game, the stats game? We each put forward a statistic. The rest of the group tries to figure that out through clues, deductive reasoning questions. The best stats, one that's not so easy, we get it immediately. One that's not so hard that we never get it. Excuse me. And if it's apropos to the topic at hand, the consumer, all the better, but it doesn't have to be. We always begin with Marissa. Marissa, you're up. What's your stat? Okay. I have a sort of a suite of statistics that are all

I'm going to give you a hint. This is related to the University of Michigan. Okay. This is where the data is coming from. I know what you're going to say. I can read your mind. I think I do too. What am I going to say? Ray, do you want to go? I think it's related to

the massive change that occurred in the October timeframe and where it sits today about how people feel about the economy based on whether they're Republican or Democrat. Yeah, and I think she's most specifically talking about the inflation expectations of Republicans versus Democrats. That's right. You guys are sort of in the ballpark. Oh, okay. No, okay. Yeah. You're being rude. We deserve to get cut off at the knees. Go ahead. There's 62%

of these respondents versus 19% of these respondents. So what's the 62% and what's the 19%? - This is in the University of Michigan survey. And it's, okay, is it Republican versus Democrat? - No. - No, it's not, okay. Oh, interesting. - Are you asking for a demographic cut? - It's not a demographic cut, but it is a cut that they published with this latest survey.

Is it related to purchases of like appliances or large durable goods or things like that? No. So 62% of the folks, is it related to the same question, the same question in the survey?

62 and 19. Okay. I think it's a special question that they asked. Oh, it's a special question. So 62% of people believe something and 19% of people believe the opposite. 62% believe there are in fact...

aliens among us. 19% don't believe that. I actually wouldn't be surprised if they asked that. And I think those would be the response rates. Yeah. Is it 62% of the people feel that the economy is on the wrong track? No. I'm going to tell you. Tell us, yeah. 62% believe that tariffs are bad

bad for the economy. And 90% of people believe that higher tariffs are good for the economy. And among the people that, so if we just look at the 62% that say lower tariffs are better for the economy, they have much higher expectations for inflation over the next year and over the next five years than the people who think that high tariffs are good for the economy. Hmm.

So we're talking like over the next year, the people that think that tariffs are bad are expecting four and a half percent inflation. The people that think that tariffs are good are expecting a decline in an outright deflation over the next year. Wow.

And this probably aligns to some degree on political lines, right? But the fact that you have 62% saying they think high tariffs are bad means it's crossing political lines. If we think it's probably, you know, somewhere around 50-50 Democrat, Republican. So you have almost two thirds of people think that tariffs are bad and therefore expecting higher inflation. And we saw that in the top line number.

With Michigan this time, we saw a big jump in inflation expectations over the month. That's fascinating. That's a really cool statistic. There's this chart that's making its way around blue sky. By the way, at Mark Zandi, I'm just saying at Mark Zandi and blue sky and X, where they show the inflation expectations. I think it's three-year expectations for Republicans, independents, and Democrats in

And for the Republicans, before the election, I'm making this up, but 3%, 4%. This latest survey, zero.

Zero. And the Democrats were before the election to 3%. Now they're 3, 4%. So it's risen. Yeah. It's going like that. Right. Only the independents make any sense whatsoever, you know? You know, so got to stick with the independents, but that's, so that's what I thought you were, you were, you were referring to anyway. Wayne, do you want to go next? Sure. There's two percentages that I'll give you.

It's intended to cover the same item, but they come from two different data sources. So 4.6% and 5.4%. Related to the job market? No. Are these government statistics? No. No. Okay. So from a trade group.

something like a trade group or an association. Or the Fed or the Fed. Or Visa. Or Visa. Or Visa. Is it related to the consumer? Yes. Is it related to- Are they delinquency rates? Sorry, what? Are they delinquency rates? No. Are they growth rates? Yes. Okay. Year over year. Year over year.

What were the two numbers again? 4.6 and 5.4. So let's say- Measuring the same thing. Measuring the same thing, but they come from different companies or different associations. House prices. House price growth year over year? Yeah. The 4.6 from the American Enterprise Institute Housing Center and 5.4 from Redfin.

So, but you know, you think about it, I mean, we saw 16 plus percent, right? The last couple of years, 5, 7, 4, 7, 6, still growing at 5%. Let's just say on average of these two indexes, that's pretty impressive.

We're a little disappointed, Wayne, because we thought you were going to mention the Moody's Analytics House Price Index. Yeah, which was? I don't know. The latest number? What's the latest number, Chris? I should, that's around three. It's around five. It's around five. It's lower than five? It's lower, yeah. I want to say it's three, six, but I mean, that was a few months back or something like that. So, I mean, the fact that they came 5%,

Yeah, it's pretty respectable. Large number of metro areas all falling into that category. I don't, you guys usually publish, you know, how many metro areas actually fell in house prices. So that'll be interesting to see when that, this 2024. Yeah, it's amazing. House prices are amazing. They're just, there's just no supply. It goes back to,

Mortgage rates. And yeah, that was a good one. And Marissa was a little disappointed that I got it. I'm just, I noticed, I saw her face when I got it. I'm always disappointed when you- Especially on the 200th episode. Yeah. Chris, you're up. All right. I'll give you a quick one in the interest of time. 4.06 million. Home sales? Related to home sales? Yes. Can you be more specific? Yeah.

Well, overall existing home sales were 4.22 million in the month. So 4.06. Seasonally unadjusted or something or no? I think you said in the month. Oh, on average over the year? Over the year, over 2024. And that's the lowest it's been in a long, long time, right? Since 95, right? Wow. And the year before was also quite low, right?

Very close to that. You said existing, right? Existing not. Existing home sales, correct. Yep. And I chose it because of the consumer, right? I'm actually a bit surprised by the strength of the consumer and the retail sales, given that weakness in existing home sales, right? When you sell an existing home, it generates a lot of additional sales at home, good stores and other places. So that's a pretty significant headwind. And it does suggest that perhaps there, at least there has been some underlying strength here. Yeah.

That's a good one. I don't normally go because we generally run out of time, but I have one that I'm pretty proud of. So I want to do it. It makes a point. It might be a little too hard, but we'll see how it goes. $31.64.

$31. And it's, it's, it's a, I'll give you a hint. It's a financial related statistic. So it's changing very quickly. Cause I was going to say the price of a dozen eggs. Oh, close. Getting there. Yeah. So it's a commodity price. It's in that vein. It's in the, I'll give you another hint. It's a crypto price.

Oh, is it the new meme? No, no, no, no. Trump coin? It's not. Yeah, it's Trump coin. It's Trump coin. Yeah, Trump coin. You know, Trump coin has a market value of $6.32 billion. And you go back, I think, 24 hours ago, it was probably at 75 bucks and the market value was $12, $13 billion. So-

That, to me, is proof positive we're losing our minds. There's just raw speculation going on here. I mean, the meme coin has literally no value. There's nothing there except the guy's name. Come on, hit me a break. Really? I mean, it's just pure, raw, unadulterated speculation.

Be baby crazy, crazy mania. You know, it's just so that makes me nervous. It makes me nervous when people are willing to plunk down and play that game, you know, with just wait till the next executive order. Right. Exactly. Exactly. OK, well, we're already getting along in the tooth here, but I do want to end the conversation, you know, talking about President Trump and economic policy.

And perhaps we can do it through the prism of what it might mean for the consumer. I know, Wayne, you think about this very deeply. You do a very detailed forecast for the economy, which clearly is dependent to some degree on economic policy, fiscal policy, immigration, trade policy, all those things, regulation policies.

What's your general sense of things? How are you thinking about the economic policy unfolding here and likely to play out over the course of the next few months, next year, and what it means for the consumer, what it means for the economy?

Well, I think first off, this was the title of our annual outlook that we put out last month called A Year of Known Unknowns. And to riff on others that have used that title before. But I mean, it's just so much unknown about, you know, first off, we say that, you know, 25% tariffs on Mexico and Canada as an example.

And so, you know, you have to kind of factor in what you think that's going to be. I really question whether or not we will really have 25% on all items that are imported. I think Mexico,

90% or so, 95% of all the avocados that are grown in Mexico come to the United States. Do you think we're going to have a 25% tariff on avocados? That's going to make a lot of people upset. That made me pretty upset. Yeah, 100% of blueberries come from Mexico. And so these kinds of things that I think that we'll start to see carve-outs. And so the effective rate is,

on the tariff I think could look quite a bit different. That's certainly the way it looked in what we call Trump 1.0 in the first term. So, you know, that quotes these kinds of rates, but the effective rate was three to four to 5%, let's say. And I think that's gonna be part of that uncertainty factor about what is the carve outs look like, what is really being tariffed, et cetera. And all of that has massive implications for the consumer businesses, inflation, et cetera.

So that that is a big the other big one is what's going to happen with immigration. You can make projections of that about what that flow is. But let's be honest, as I mentioned before, I got almost 12000 people turning 65 every day, many of which are retiring and we need.

to do something about the size of our labor force. We're not having as many kids. So the labor force growth is gonna be very much challenged. And how goes the economy is how goes the labor force? So that immigration aspect could have pretty profound implications on that, as well as if there are fewer people in the labor force and yet the demand is still there,

we're going to end up having to have higher wages. There'll be a higher wage count. So that will also create some concern of inflation. So that's why I say, and then all of that just blends into what the Fed's going to do next and the timing of rate cuts. And I think Marissa said it early on in the call, rate increase is not out of the question when you start looking at those kinds of implications. So it feels like

or sounds like directionally the policies we're talking about here on particular more specifically tariffs immigration maybe fed policy uh is uh inflate somewhat inflationary and counterproductive in terms of consumer spending and economic growth that's what it sounds like you're saying and you're saying look

Obviously, there's a boatload of uncertainty here. Who the heck knows to what degree? It may end up being much to do about nothing, but directionally, it doesn't feel like this is a positive for the consumer and the broader economy. I think that's right. I mean, there could be some ancillary impacts of

you know, much less regulation. For example, you know, just I've been watching very, very closely the Los Angeles fires, people that had their homes impacted in 2018 fires. It's taken in many cases four to six years to get full permitting to rebuild. You know, some of that restrictions coming down that would allow for, that could be actually quite productive,

and help consumer spending out, I think in that regard, or at least erase some of the uncertainty associated with that. So I think that we've got some offsets here that a lot of people don't know about tariffs, immigration still not completely clear about what's gonna happen next. And then the concern of, or the benefit, I guess, or the offsetting effect of regulations and of course tax policy towards the end of the year. - Chris, Marissa, anything you wanna add here?

Chris? I just underscore the uncertainty. I think that that is going to have a real effect in the short term, regardless of what actually pans out here. Maybe tariffs aren't as big a deal as they're made out to be. But in the meantime, businesses, households are going to be changing their behavior, certainly, or in a wait and see mode, right? Before they deploy a lot of capital, let's get a clearer part of the landscape. That certainly could

cause economic growth to slow, right? As people just sit on their hands for a while. And you see some of that impact, you know, what's going to happen with the strength of the dollar. We're still forecasting a pretty strong dollar this year that's going to have all kinds of impacts in other outside the United States, not only travel into the United States, but of course countries that are pegged to the dollar.

I'm heading out to the Middle East shortly. And, you know, that's going to be a big impact for those types of countries relative to a more modest or weaker dollar scenario. Yeah. Marissa, anything to add? I'm more with Chris in the sense that I think it just causes potentially a freeze in investment, hiring, consumer spending, because people don't know what to expect.

So not so much that people are necessarily going to change their behavior right away, but they're going to just not do anything which could be equally harmful to the economy, especially if you're a business. You don't know what your tax bill is going to look like. You don't know what your input costs are going to look like, particularly if you're in manufacturing or some kind of production. And so you just don't do anything in terms of investment or hiring. And that in and of itself, if there's enough of that could cause a recession. Yeah.

Yeah, I agree with you guys. I think the biggest fallout here might be related to the, we're using the word uncertainty, the uncertainty of all this. I mean, speaking as a business person, you know, when you're thinking about an investment, because we're business people, we have a business and, you know, we're constantly thinking about what is the best place to invest. It really boils down to a spreadsheet, you know, just,

Simply put, you have a spreadsheet, you fill in your expected revenue, you fill in your expected costs, you take the difference, that's your profitability. You look at your return on investment, you compare that to your cost of capital and you make a decision. Do I...

Do I invest or not based on that? If I can't fill in every cell in the spreadsheet, I can't calculate the return on investment. That doesn't mean I don't invest. It just means I kind of sit on my hands and wait and see until I can fill in the cell. It just feels like there's a lot of cells in these spreadsheets that just can't get filled, especially when it comes to things like tariffs and immigration because, okay, I'm going to impose a tariff. Say I post 10% extra tariff on China today.

Then the question is which products, you know, and then really over what period of time? Is that a 10% tariff forever? I mean, my investment's not going to just be for the next six months. It might be for the next five years. It could be for the next 10. It could be for the next 30 years if I'm investing in a data center or whatever it is. So, you know, if you can't answer that question and you can't, you really can't, are you going to make that investment? So I get so perplexed.

When there's discussion about, oh, we're going to bring all this investment into the United States. Really? Really? It just feels like the opposite to me, given the uncertainty that it creates. Anyway, just a little bit of a rant. Okay. Well, that was a good 200th episode, I'll have to say. Thank you, Wayne, for...

uh, uh, joining us for this, uh, August occasion. And, uh, you definitely deserve, I, I don't know if I can promise a suede jacket, uh, but, uh, at least a cowbell, we're going to work on getting you a cowbell with a bottle of wine. Well, maybe not a wine. Cause you, you know, your wines, I mean, the one thing about Wayne and wait, Wayne is a great friend and we go way back, uh,

You really want to go out to dinner with Wayne. Even better, you really want Wayne to cook you a dinner. That's what you want. You really want that. That's a real treat. That's a real treat. But thank you for joining us. Yeah, it was a pleasure, especially on this momentous occasion of the 200th episode. So thanks for including me. Yeah. And Chris, Marissa, anything to chime in before we call it a podcast? I have a quick...

joke for you if you're willing to yeah far away this is my son my son learned that you uh have this aspiring uh stand-up comedy career he heard that on the podcast and so he wrote a joke for you oh no who are we talking about me or wayne for you mark sandy mark aspiring aspiring comic right that's it i am an aspiring comic yes why do people bring ladders to shopping

Why do you bring ladders to shopping? Yeah. Why? Why? Because the prices are rising. Wow. Your son wrote that? My son wrote that. That's a junior economist right there. You know what? Here's the thing. Foster that. Chris has already taught his son AI. He's got chat GPT. He's got chat GPT. He's smarter than all of us already. Yeah.

He's got a PhD. Oh, no. Oh, that's great. You can use that on the road. I definitely will. And thank your son for that, for the material. Is it copyrighted or anything? Do I have to worry about that? No, no. It actually says four marks Andy. Four marks Andy. Okay. Oh, that's so cute. That's great. How old is he? He's almost eight. Okay. That's exciting. I appreciate that. Thank him for me, Chris. I really appreciate that.

Okay, guys. Well, with that, we're going to call this a podcast. Dear listener, I hope you enjoyed it and we will talk to you next week. Take care now.