Will Economics Win?
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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, my two trusty co-hosts, Chris DeRuiz and Marissa DiNatale. Hi, guys. Hey, Mark. Do you guys notice that when I introduce you, I kind of mix it up a little bit?

Sometimes you say Chris first, sometimes you say me first. Yeah. Have you noticed that? Keeps listeners riveted, I'm sure. Yeah. And I just noticed that. I go, oh, I mixed it up this time. Yeah. I don't know if it means anything, but it is interesting. And we got Matt. Matt Collier. Hey, Matt. Hello, everybody. How's it going? That was pretty unenthusiastic. Hello. Hello.

Good afternoon, colleagues. Because this is Wednesday. What is it? Wednesday, March the 12th. The podcast a bit early here. We generally do this on a Friday, but we've got travel schedules, so we're getting in the way. And today is CPI Wednesday. We got the Consumer Price Index, so Matt is our maven on prices, so we'll come back to that. But...

It feels like... It actually feels like a Friday, doesn't it? I mean, all the drama, you know, going on. Every day feels like a week. Yeah. It does. Pretty much. I mean, it's just a blizzard of stuff. What do you make of all this... What's going on in the tariffs? I guess...

tariffs are like the number one issue now. I mean, it feels like that's the key here to how things are going to unfold. Would you agree with that, Chris? Absolutely. That's all I ever, all the questions I get are related to tariffs. Uh, yeah. I mean, and it feels like we're headed down the trade war path. I mean, today, uh,

The US tariffs on aluminum and steel were put into place, right? That's 25%. By the way, here's a question for you, a factoid. In fact, I'll ask you, how many people work in the steel and aluminum industry in the United States? What's the total employment of those two industries? 3.8 million.

Boy, are you wrong? That sounds really high. Yeah. Is it? 300K. I was going to say 500K. Damn. 300K. Okay. Here's another stat. How many people work at Walmart in the United States? This may be a little dated, but give or take.

Matt, you might be wrong again. A million? Go with the same exact number, 3.8 million. You are so wrong. Keep saying that until it is the right answer. That employs some industry. 1.6 million. 1.6 million. Yeah. That gives you a sense of the side. You're talking about, I want to bring jobs back to the United States. Uh,

Really? This is the steel and aluminum industry. And I think today, didn't the European Union and the Canadians came back with their own retaliatory tariffs? I believe they did, right? On a bunch of stuff, a bunch of different steel and aluminum, I'm sure, but a bunch of other stuff. So it feels like you can call this a trade war, no? At this point? Yes. I think we're in a trade war. Yeah. Trade war. Oh, it's been escalating, right? There's some...

There was the 50% tariff on Canadian electricity that went . That was the close and then went back. So it's clearly in the war part of the tariff engagement. Yeah, right. Of course you say these are all the questions you get is around tariffs. What would be an example of the question you're getting?

Do we believe this is a temporary measure just for negotiation or should we prepare for something that's longer? These are all banks, other companies that are trying to plan. What should they put in the model? What should they put in the spreadsheet for an assumption? What level of tariffs? What products? Which industries particularly are going to be hardest hit?

Just a lot of open questions, right? And this is, and I see it as just, this is just even just the risk management aspect of it, right? What does this mean for the loans I've booked, credit? There's a whole other chapter in terms of what do I do in terms of investment or hiring or think about the future. I'm just talking about kind of maintaining the business as it is and preparing for the future. Yeah. I'm sure Marissa, you're getting a lot of questions too. Similar questions?

Yeah, I mean, this morning I talked to a journalist about the prospect of recession this year. And, you know, he was asking about tariffs and does this represent like a one-time price increase or should we think of it as inflationary for an extended period of time, which I think is a really good question. And I think this, again, probably goes to the question

the expanse of these tariffs on how many goods are we talking about across what industries, the retaliation, you know, is this, does this become sort of like a kind of snowball effect with a whole bunch of prices? Or is it just like what we saw in 2017 where price of washing machines went up?

Right. I think this time there is the prospect of not only is it a level shift in prices, but it could have more downstream snowball effects on the trajectory of overall prices. Right, man. You're, you're our inflation guru, Mr. CPI. I mean, do you think, I mean, one thing you hear, one argument you hear is, well, I mean, the economists will say, look, tariffs means higher prices. Consumers are going to put the most of the bill. Uh, and, uh,

that this is inflationary in the sense that it raises the price level. And then you hear the counter largely from the administration that, and some think tanks, I guess, that, well, go back to the tariffs under President Trump's first term. Where was the inflation? The inflation wasn't even an issue. So what's the big deal? Why are you so concerned about it this go around? How do you respond to that? The comparison to 2017, 18, 19,

being an environment that we didn't had just experienced really high inflation. So I think if you want to show you want to talk about tariffs now, the biggest difference is we're talking about tariffs right after we just had decades high inflation. So the idea and you see it with rising inflation expectations is that people

are cognizant of the fact that prices can rise quickly based off of pandemic, supply chain issues, or because of tariffs. So I think there was already just the psychological effect that these tariffs will raise prices and people are aware of that and businesses have done it recently. They know if input costs rise, they can respond in kind. And also just the whole policy framework

as I understand it, minute to minute, is so much more broad than it was five, six years ago. We're not just talking washing machines. We're not just talking China. We're talking our closest trade partners, and we're talking massively significant input costs. If it boosts those few hundred thousand steel producers at the very beginning of the production line, those are inputs that go into everything, and those are input costs that will rise and flow through to consumers in a way that five, six years ago was just not comparable.

Right. You know, when you get the question, how long is this going to last? You know, where's it going? I find it particularly difficult to answer. When we forecast, that's what we do for a living. And when we're thinking about forecasting policy, you know, monetary or fiscal policy,

The way I approach it is I think about, well, what makes the most economic sense, right? What is the most logical way this is going to play out from an economic perspective? And generally, that's going to win the day. You know, politics will kind of bend things here and there, but generally that works out pretty well.

But here I can't, I'm lost. I can't, you know, I'm not even sure how to think about what the economic logic is. You know, what is the end game? What are we trying to achieve? You know, what's the motivation? Because that...

if we can figure that out that helps you know come to a place it helps you come to a place an understanding of how this might unfold but i just i can't do it i'm having a great deal of difficulty around you know is it is it politics is it performative is it is it um just wanting to negotiate whatever it is with individual countries is it the trade deficit is it

the argument that this is going to attract business investment here for the long run, obviously those things make no sense to me whatsoever. I mean, why would any business in their right mind think that's a good idea to invest here when these tariffs can be changed with a stroke of the pen? And not, you know, the thing is, it's not only...

a country tariffs on a country can vary. It's companies like I'm in the same industry and you know, that, that company could get a better tariff deal than I could get, or I could be, uh, my tariff could be a completely eliminated, uh,

by a stroke of the pen, by somebody's... It's not legislation. It's not sitting in legislation. It's an executive order. So I'm a CEO of a company, CFO, sitting there thinking, how can I possibly make an investment that is going to be around for a year, five years, 10 years, 15, 20 years? If you're going to change the rules of the game, which you're doing on a daily... This is happening on a daily basis. How

I don't get it. How that would lift investment or bring any jobs. Or the other motivation is just revenue, bringing in revenue. But even there, I'm confused, right? Because, you know, if it's tariffs under executive order, not legislation, it's not scored as revenue, you know, in the budget process. So you could say, well, no one cares about the budget process. They don't care what CBO, Congressional Budget Office, thinks. But, I mean...

okay, do I really think if I go down this path, I'm gonna generate a lot of revenue if I push the economy into recession? I mean, if I push the economy into recession, it's just gonna hurt other revenues to crush taxes and it's gonna raise spending, unemployment insurance and other income support programs. So I'm like, I'm totally flummoxed by all this, I'm lost. And if I am lost, then this is what I do for a living,

isn't everybody lost, you know, totally lost in all this. And if you're totally lost, what does that mean? You know, it means you don't invest, you don't hire, you sell stocks. It just, it's just, I can't get my mind around this. You know, what are we doing? What's going on here? What's going on? Okay. I ranted. Anyone want to react to that? Marissa, you want to react? I mean, as far, you're right about all of those things. So I just think it's a worldview thing.

that this administration is sticking to. I think it's just this sense of unfairness and this sort of economic populist outlook

And that it's not even necessarily being tied back to performance of the economy in the short term or the way the stock market... We had John Carney on a few weeks ago and he was saying... Breitbart. Yeah, he was saying, well, President Trump is going to look at how the stock market is performing and if...

that starts tanking. He'll pull back on some of this stuff. You know, he wants to have a strong economy. He wants to have a strong stock market. I think that's clearly not working. Right. So I just, I just think it's this sense of unfairness that other countries have a certain level of tariffs on U S imports. And so we're going to do it back to them. And if the trade policy

playing ground seems unfair, we're going to make it fair, even if that means some economic pain in the short term. That's as far as I can suss it out. It's not a very satisfying explanation, but it's the only one I can come up with. Yeah, I don't even think it's true. But I know that doesn't matter whether it's true or not true. I mean, it's what perceptions are, but-

that the U.S. is being treated unfairly in global trade. I mean, there are cases, you know, maybe India, I don't know. But don't you think that that is the administration's view? Yeah, it could be. Yeah, yeah, I'm sure you're right. You're right. And that's what, I guess at the end of the day, what matters. But that goes back to why I'm having a hard time here because I always think the truth will win out. Yeah.

the economics will win, but you know, obviously that's not going to work here. Chris, you want to react to my, my rant? No, I certainly agree. I don't know what the objective function is, right? How do I maximize the objective function when I don't know what that looks like? And it just keeps changing as well, right? It's the latest spin I hear is, oh, it's, it's actually a, it's actually a movement towards more free trade, right? This is a,

negotiation to actually get tariffs down to actually get tariffs down with other other countries. So, okay. That's the John Carney argument, the Breitbart argument we heard a couple weeks ago, right? He was saying, look,

you go through this, this drama, this German drag, and then ultimately people just drop their, other countries will drop their tariffs and we'll go to, it'll actually lower tariffs, not raise tariffs. That's right. Well, I heard it from the speaker of the house. Oh, is that right? Mike Johnson said that. That's what he's saying. Right. This is the argument. He's a free trader. And this is the, this is the way it's free trade. So, you know,

If that's the outcome, that's one potential outcome that we can model. But if that's not really the case, if it doesn't matter what the other side does or the other countries do and we're going to continue with the tariffs, that's a very different outcome. So it just makes it difficult. Yeah. Yeah. Okay. Matt, any thoughts?

perspective on this. I'm looking for guidance. I'm looking for light, Matt. Give me the light. Every time I hear fentanyl brought up from Canada, it just makes me more conspiratorial. It's obviously not that. It's another excuse. There must be something going on

Does the administration love being the bottleneck, love having companies come to the White House and ask for exemptions and then kind of control the flow of U.S. industry? Is that the motivation? I don't know. But I become more and more open-minded the less and less sense it makes because there's nothing obvious to track. Right, right. Still our working assumption here is that this is a bad idea. It's not going to work.

we are going to get retaliation. Prices are going to go up. It's going to forestall the Fed from doing what it would do otherwise, cut rates. It's going to slow growth, hurt the stock market, slow economic growth. And that will ultimately put so much pressure to bear that the administration figures out a way to pivot, to declare victory, accomplish whatever it is that

they said they're they're accomplishing and uh and uh cool things off let tariff rates come back in i don't know that they'll go back to the three percent that prevailed before all this that that's the tariff rate before uh president trump started all this uh the second go-round of all this uh but that's our baseline um

Do you think damage is done even if they pivot? Oh, yeah. Damage is done. Who's going to believe or who's going to think that it's actually done? I think businesses will still look to diversify, right? Because this could happen again or who knows? Something else could occur. Yeah, I guess it's a difference between a damaged economy, one that's not going to live up to what it could have certainly lived up to,

a recessionary economy because if That doesn't happen if there's no pivot if there's no declaration of victory if there's no bringing down of the tensions It just feels like we're at, you know brace for impact, you know, we are we're going in we're going in Right. Am I wrong?

Seems like investors have come to that conclusion. Not yet so far. I mean, we're down maybe 8%, 9%, 10% on the S&P. That's kind of still a garden variety correction, right? That's down from the peak, and the peak was pretty high. So-

It feels like for recession signal from the market, it's got to go down another 10%. It feels like, and it will do that. It's waiting for the data now. It's going to, you know, if you get a bum employment report, you know, three weeks from now for the month of March, because that survey is being done this week. Right. Right.

So, you know, if that comes in on the soft side, you know, an increase of less than 100K, certainly anything closer to zero. And if, God forbid, if it were negative, I don't think that would be the case. But, you know, if it did, then I think we go down another 10% on the stock market. And that feels like we're now in a self-reinforcing cycle, you know, into economic, you know, oblivion or recession. I guess I'm just, I've been a little...

watching there's no bounce when the good news or the good tweet comes out but okay never mind it's yeah there isn't the bounce which to me seems a fatigue to be uh it's all you know it's left the station kind of uh yeah in my opinion Chris I thought there would be more of a bounce this morning when CPI came out and yeah right and now it's still closed lower today

Right, the Dow closed lower. Right, S&P up a little bit, but Dow down. Okay, well, let's turn to that CPI, that economic news. And, you know, it was, can I ask, Matt, what was it to the third significant digit? Because it was up 0.2, both the top line consumer price index for the month, 0.2 percentage point, and 0.2 on the core, excluding food, you know, to the next digit.

I can stammer and buy time and get there if you could be. Oh my gosh. Poor CPI. Poor CPI was 0.23 and forecast was 0.25. So very, very close. Very close. But the rounding kind of, uh, uh,

made us, made everybody, everybody was a little high, even though they were rounding up to 0.3. So core CPI, and then I want to say headline CPI was 0.22. So we missed there a bit more, but we and everybody else was at 0.3. Oh, okay. Because if you had 0.25, you round up to 0.3, that would have been...

the headline coming out of the Bureau of Labor Statistics, but we ran it down to 0.2. Okay. 0.23. Okay. All right. So give us a more color, you know, granularity what's going on. Why, why, why did it come in a little bit softer than expected?

In general, characterizing a good report, especially after a scary one in January, it's what everybody wanted. January, was it seasonality? Was it just some other weird stuff? I don't know. Let's wait till February. Now we got February. It's pretty good. Why was it softer? Another downshift in shelter inflation. That's a huge component. Energy prices had been rising over a percentage point on a month-to-month basis for two months in a row. Slowed

significantly in February, 0.2% growth. Food inflation cooled after being pretty hot for a while, not egg prices, but everything else pretty mild. Grocery store prices for the CPI for food at home was flat in the month. That's after 0.5% growth in January. That was one of the key things to look at and be kind of spooked by last month. And we see a nice moderation in February.

Vehicle prices, a little bit more of the same. New vehicle prices kind of flat. Used vehicle prices rising pretty swiftly. Seems to be a demand story there. Wholesale prices are relatively flat, but once they get to the dealers, dealers seem to be having a lot of people coming to buy and they're able to lift prices and drop incentives, which is an effectively, you know, is a price increase. So some kind of cross-current stuff there. But all in all, you don't have the big

you know, random jump, something like motor vehicle insurance, another month where it stepped back after 2% rise in January. And then you get,

a 0.3% rise in February. It would be nice to see some declines given the increases we've seen there, but when something like that, which is a big part of households budgets, when that jumps 2% in a given month, that's enough to kind of change, at least at the margins, the characterization of a report. So it was good that that slowed.

Broadly, core goods. So if we're trying to squint to see any tariff pass through. This would be early for it to show up, right? It is. And a lot of it, like last month, you look at vehicle prices and tariffs aren't here yet, but we know they're coming. So our price is starting to rise preemptively. The core goods category, it rose 0.2% in February. That's down from 0.3% in January.

but still now the second highest month since 2023. So core goods prices had been falling, led mostly by vehicle prices declining, but you've now clocked the second, two strong months in a row. So if it's there, that's your story, but I would not argue that that's anything conclusive yet.

Anything on the housing side? Is that still moderate coming in? Oh, we are. Owners equivalent rent 0.28%. So that's second lowest we've had in a month since 2021, since prices really started going to the skyward. So some good moderation there. Year over year growth for just total shelter is getting closer and closer to 4%. We thought we would have been there

at the end of last year. So we're there. It's just been a story of delay, but we still expect some of that to continue in the coming months. But this is all happening in a context where goods prices given trade policy are really, really tough to predict. But what we have predicted and then feel comfortable about is shelter continuing to moderate, at least in the near term here.

Tenants' rent, same kind of thing, just slowly coming down 0.28% increase in February, which is just below the 0.3, the 0.4, 0.5 that we saw throughout 2024. It's just kind of sliding down. Yeah. The narrative around our forecast had been, look, the inflation is kind of stuck a little bit above the Fed's target. So on CPI, Consumer Price Index, it's around 3%. So even with this

Data point we got today for February, year over year, we're 3%, give or take. And that's kind of sort of where we've been for the last, I don't know, six, nine, 12 months, you know, something like that. And before the tariffs, our thinking was, well,

that's going to slowly but steadily come in back to the Federal Reserve's target by spring-summer, and that would be on the CPI 2.5%. CPI by construction is about a half a point higher than the consumer expenditure deflator, the PCE, so-called PCE deflator, which is the 2%. That's what the Fed targets for 2%, so 2.5%. Now our forecast is

3% is about the bottom. That's where, at least in the foreseeable future, because of the tariffs, the tariffs now start kick in and that pushes up goods prices. And, you know, inflation expectations, we talked a little bit about that are a little hot. And so maybe it translates through to, you know, wages and other prices, but,

But we stay around three and start – we see no progress, maybe even a little bit of a migration up depending on how high the tariffs go here and how fast they get there. But ultimately, you look towards the end of the year going into 2026, the price effects start to fade because the tariffs are more one-off than they are persistent.

the growth effects kick in, we get a weaker economy, and demand starts to soften. And that now puts downward pressure on inflation. And we ultimately get back to the Fed's target, not in 2025, not the spring of 2025, but maybe the spring of 2020. I'm making this up, but roughly speaking, the spring of 2027. Does that sound right to you, Matt?

Yeah, it does. And returning to client questions and what everybody's concerned with, it's that balance, that growth slowing dynamic and the inflationary dynamic from these tariffs, which kind of win the day or which way does the balance of risks get pulled or pushed when it comes to the Federal Reserve and what they do? Our baseline is that the growth slowing is what eventually the Fed has to react to. But that's the timeline that I think makes the most sense. And it's

Different than what we thought six months ago, but it's where we are. Yeah. Marissa, what do you think about that? What's my characterization of the previous forecast and now the current forecast? Makes sense? Yeah, it makes sense. But I think the risks are rising and certainly I think markets are becoming increasingly...

maybe worried that the Fed might act sooner because of the growth concerns, right? That if in fact the economy is weakening and we start to see it in the hard economic data, we're seeing it in confidence measures and financial markets and things like that right now. But if you get, as you said, get a bad jobs report, if you get some other negative data, bad Q1 GDP report,

The Fed could act quicker than we're expecting simply because they're afraid of the economy going into a recession and less worried about inflation. Right. Chris, what do you think? Yeah. Reasonable view. Boatload of uncertainty around that forecast, of course. Boatload. Boatload. Boatload. Where have I heard that phrase before? I don't know. It's getting in my... It's like a brain virus here. Right.

Interesting. Markets are pricing in higher probability, to Marissa's point, a higher probability of a cut by June now. So 56% chance of a rate cut by June versus a month ago was like 30%. So clearly that growth scare is... And three or four this year, right? I mean, even the number of cuts I think has risen pretty materially too. That's right. So clearly...

markets are spooked markets are spooked okay well we're going to keep this podcast short because we taped another bonus podcast with our colleague uh over in the insurance part of our business around climate the impact on insurance markets in the industry and premiums and the economy and folks might find that of interest but uh

We're going to abridge this because it's a companion to that bonus episode. But anything else you guys want to add before we call this a podcast? What happened to eggs? 10% increase in February. And if I am correct, that's now 58.8% higher than a year ago. So it's up in 53%.

So what do you pay for eggs in California, Marissa? Do you know? Yeah. Well, you asked me that last time and I wasn't sure. So I looked this time. I paid $9 the last time I bought eggs. $9? Wow, $9. And PA, what are folks paying? Do you know? I think it was like five something. I bought 56 bucks. Yeah. But I buy the fancy eggs. You buy fancy eggs? Okay. Yeah. Yeah, the fancy eggs. Everything she buys is fancy. Can't you tell? I mean, she's...

I'll stop right there. I may have to rethink that given the economic uncertainty ahead. That's the message I would be sending. Yeah, I think I might have to trade down to the non-fancy eggs. The non-fancy eggs. Buy a chicken. Buy a chicken. No, thank you. I don't want H5N1. You mean buy a chicken to produce eggs? Is that what you're saying, Chris? Oh my gosh. You have chickens?

I wouldn't know. No, but she's got some, I could see her, uh, her space. It looks like she's got some space back there for a chicken dining room. No, behind there. It's like a little, a little area. I could see a coop going in. All right. Well, with that, we're going to call this a podcast to your listener. I hope you enjoyed it and we will talk to you next week. Take care now.