In short
After Trump’s nuclear threat and a subsequent “two-week ceasefire” with Iran, Mark Zandi argues the economy isn’t truly saved; oil and inflation risks persist, and uncertainty raises recession odds.
Guest
Mark Zandi, chief economist at Moody’s Analytics; previously served as an advisor in economic policy roles and hosts Moody’s “Inside Economics” podcast.
Key claims
- Markets are “sticking to script,” but the situation isn’t resolved: Strait of Hormuz remains jammed and Israel/Hezbollah strikes continue.
- Iran’s alleged $2 million per-ship fee and sovereignty claims over the strait will keep oil prices structurally higher via higher insurance and risk premiums.
- Oil could settle around ~$80 by year-end (ceasefire oil ~$95; earlier ~$110 and peaks near ~$150).
- Higher energy costs will feed into gas, diesel, freight, groceries, and airline pricing; inflation expectations matter most for the Fed.
- Fed likely pauses due to uncertainty and mixed growth/inflation signals; recession risk is near-term.
Notable examples
- Brent crude fell below $100; S&P futures jumped.
- Gas pass-through rule: +$10 oil sustained ≈ +$0.25 gasoline; Zandi estimates ~$3.75–$3.90 gas after oil stabilizes near $95.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOUnderstanding the Ceasefire and Market Reaction
0:45 to 3:32
Discussion on the recent ceasefire with Iran and its immediate market implications.
“S &P futures jumped, signaling a sigh of relief.”
Long-Term Economic Implications of Military Threats
3:32 to 7:01
Exploration of the long-term consequences of military threats on the economy.
“But this so far feels kind of sort of what investors have expected.”
Oil Prices and Their Impact on the Economy
7:01 to 13:32
Analysis of how rising oil prices affect inflation, consumer goods, and the economy.
“They're not cliff events per se, but they're corrosives on economic growth.”
Inflation Insights Post-Ceasefire
14:00 to 14:24
Exploring the impact of current economic factors on inflation rates.
“but the competition will take a while to kick in.”
Fed's Dilemma: Inflation vs. Growth
18:13 to 27:00
Analyzing how inflation impacts the Fed's decisions and potential recession risks.
“When you do anything that increases inflation at a structural level, which seems has happened here, it's almost like you're testing the consumer.”
Navigating Economic Uncertainty
27:00 to 28:00
Discussing the uncertainties in the current economic landscape and their implications.
“And that's the part that is so interesting watching investors and watching the markets try to price that in.”
Insurance Premiums and Market Uncertainty
28:00 to 31:07
Discusses the impact of insurance premiums on pricing due to geopolitical uncertainties.
“And I wonder if, I think you make a good point about the insurance premiums in the Strait of Hormuz and the way that that will affect prices moving forward.”
Analyzing Job Market Trends
33:30 to 37:11
Explores the current state of the labor market and implications for the economy.
“I do want to also get your reactions to some of the jobs data.”
Inflation Trends and Economic Concerns
37:11 to 42:00
Examines factors contributing to inflation and its implications for consumers.
“How do we explain the lack of hiring in the U.S.”
Inflation Drivers and Economic Impacts
42:00 to 43:03
Understanding the multifaceted causes of inflation and its effects on living standards.
“And the direction of travel is not encouraging.”
Show all 14 chapters
Household Expenditures and Wage Growth
43:03 to 44:12
Exploring the rising costs for households and the implications of wage growth deceleration.
“The fact that the cost of living was so high that people just felt like they couldn't afford a reasonable standard of living for everything from groceries to housing to health care to child care to electricity.”
Key Economic Indicators to Watch
44:12 to 45:40
Identifying critical economic indicators that may signal a recession.
“Now, you know, wages are up too, earnings are up too, but even there, you know, there's reasons for concern.”
Layoffs as a Recession Signal
45:40 to 46:45
Discussing how layoffs can indicate economic downturns and their measurement complexities.
“And, you know, there's different measures of layoffs.”
Analyzing Unemployment Insurance Trends
46:45 to 47:16
Examining the significance of unemployment insurance claims in assessing economic health.
“Anything closer to 250K on a kind of a four-week moving average basis to smooth out the volatility, pay close attention.”
Transcript
Automatic transcript. May contain errors.0:12Mark Zandi:Welcome to Prof G Markets. Scott is off for spring break, but he will be back next week. In the meantime, we have a big episode to share with you today with one of our favorite Prof G Markets guests. So let's get right into it. President Trump issued an unprecedented threat against Iran on Truth Social Tuesday, warning that a whole civilization will die tonight. Hours later, he announced a two-week ceasefire. As part of the agreement, Iran said it would reopen the Strait of Hormuz, but would impose a fee of$2 million per ship to help fund its reconstruction efforts. The market's reaction was immediate.
0:50Mark Zandi:Brent crude fell below$100 a barrel. S &P futures jumped, signaling a sigh of relief. And on Wednesday, Defense Secretary Pete Hegseth declared, quote, decisive military victory over Iran. But General Dan Cain said the U.S. is ready to resume attacks if the ceasefire falls apart. Meanwhile, Israel continued its Hezbollah strikes and the Strait of Hormuz remains jammed. So the situation is not resolved. And the economic impact is now coming into focus once again. The conflict is expected to push inflation higher. with Bank of America projecting the Fed's preferred measure, PCE, could approach 4 % this quarter.
1:28Mark Zandi:So for investors, the big question is, how do you navigate this kind of uncertainty? Here to help us answer these questions, we are joined by the chief economist at Moody's Analytics, Mark Zandi. Mark, good to have you on the program. So at the beginning of the week, the question was, are we going to bomb Iran? Are we going to nuke Iran? Was actually a question that a lot of people are asking. The answer is no. But I think the question becomes now, have things changed because of the fact that we made this threat? Now we have this ceasefire, which is kind of a ceasefire. Not really. We can get into the details.
2:06Mark Zandi:But I guess, how has this adjusted your views of what's going to happen in the markets and perhaps in the economy in the U.S.? It feels pretty close to script, more or less. You know, the president has gone down this path in other ways. And when push comes to shove, when markets start to react, when stock prices are down, when interest rates are up, and in this case, when oil prices are up, he figures out a way to pivot, to stand down and to declare victory and hopefully move on. And if this go around, that's been more difficult than with other similar events. Greenland comes to mind most recently.
2:46this one's been more difficult just because of the Iranians leverage over the over the strait. But nonetheless, that feels like where we're headed here. And that's kind of sort of what I think markets have been anticipating. You know, if you look at stock prices, for example, as a benchmark, you know, even at the worst of the angst around what was going on in the Middle East, they were down on the S &P five to 10 percent. So not even a typical correction. So I think investors were expecting the president to do something like this. And in fact, that's now what he's done. Now, clearly more script to be written here.
3:20We'll have to see how this plays out. You know, hard to imagine that it's all going to go forward without any difficulty that feels like there's more problems dead ahead. But we'll see. But this so far feels kind of sort of what investors have expected. It's close to, as I said, pretty much sticking to script.
3:40Mark Zandi:I mean, one thing that has changed from before, I mean, I would argue that once you threaten nuclear warfare, the whole world has changed for various reasons, though maybe we can't see them. But one thing that is a legitimate material change that has happened as a result of these, I guess, negotiations is that now Iran is charging$2 million for every ship that passes through the Strait of Hormuz. And they have said in the agreement that they have full sovereignty over the strait. And now they're going to charge people for moving goods through it. So I guess the question is, one, do you think that that holds?
4:17Mark Zandi:And two, how significant is it from an inflation perspective? Because it seems like that is, yes, ships can pass through, but now there's a toll. And it's quite significant. And perhaps that will increase prices on oil or maybe on gas down the line even more. What do you think? Yeah, I think prices are permanently higher. I mean, when I say permanent, nothing's permanent, but at least in the foreseeable future this year, next year, the year after, you know, there's no going back to the 60, 65 bucks a barrel we were paying before all this mess. You know, there's the points you're making about the Iranians charging a fee.
4:54We'll see if that sticks or not. At this point, feels like that's probably the path forward here. That's the one way the president can stand out and declare victory, move on, even though it's, you know, a victory only in name. You know, all we need is for the president to use that as a way to extricate himself in the military from all this. But you're still left with a fee that's not inconsequential. And then, of course, insurance companies are going to demand a higher insurance premium for insuring the traffic that moves through the strait, because, you know, who knows what will happen in the future.
5:31And then traders are going to demand a risk premium. They're not going to hold oil prices without a premium thinking that, you know, again, the Iranian regime is still in place and can still create havoc and more than likely at some point will. Therefore, you know, you've got to pay me a higher fee. So if you told me after everything kind of normalizes, winds down, hopefully that's by the end of the year, that oil prices are at 80 bucks a barrel, you know, that sounds about right to me. So we were at 60. You know, we got as high as 110, you know, before the ostensible ceasefire. With the ceasefire, the oil is now trading at 95.
6:06And if you told me at the end of the year, it's 80. I say that sounds about right now. You know, for the U.S. economy, that's obviously not good that, you know, we're paying more for oil and other products that are coming from the Middle East. the agriculture chips, aluminum, you know, lots of different commodities. So it adds to inflation, it weakens growth. It adds to the ill effects of the tariffs, which do the same thing. They raise inflation, weaken growth. But, you know, the economy can navigate through without an economic downturn. It's much diminished by what's happened and what's going on, but it's not pushed under by what's going on.
6:46Now, I'm just obviously focused on the very near term, next month, next six months, next year. There's other longer-term consequences of all this. And you mentioned about the implicit threats around using nuclear weapons. Those things have consequence, I think, in the long run. They're not cliff events per se, but they're corrosives on economic growth. It just creates general angst, uncertainty, and that's just not good for business in the long run. Yeah.
7:13Mark Zandi:How does that play out, those long-term consequences? because I feel like we're so focused on direct effects right now because we're talking about guns and missiles and nuclear bombs. And it seems almost ridiculous to try to map out, what are the second order effects going to be of dropping a nuclear bomb or not? It's like, whatever, you dropped a bomb. But what are some of those second order effects here? I mean, How do you think that this ceasefire that was preceded by very, very scary threats and that may not really last, at least that seems to be the situation right now, how would that affect our economy further down the line?
7:57Yeah, I view this as a part of a broader, very corrosive trend. And that's the deglobalization of the economy, that the U.S. is pulling away from the rest of the world very quickly. I mean, tariffs, immigration policy, what we're doing geopolitically. And then, of course, now the rest of the world is pulling away from us very, very quickly. And when he makes, you know, raise the specter of military action and even implicitly make reference to potential use of nuclear weapons or other weapons of mass destruction, it just makes everyone nervous about your ability to lead and the stability of your leadership and what you have in mind.
8:43And I think it means that the rest of the world is going to be looking for different partners to do business with. And, you know, the U.S. is a big economy. It's the largest on the planet. So, you know, it's still going to play a very central role, but increasingly less of one as we move forward. And if that's the case, if we are deglobalizing, and this is just one more thing that will cause that process to continue and potentially even accelerate, that has all kinds of corrosive effects. You know, the nation has benefited enormously from the globalization process and the fact that the U.S. is central and the U.S.
9:20dollar is central to everything that goes on in the world. And that is now going to be under pressure. It's under pressure before all this. It will be under even more pressure going forward. And, you know, again, it's not one of those things that manifests in a particular event. It could, but that's unlikely. It's one of those things that just plays a role longer on in markets. So, you know, for example, we're going to have to pay higher interest. And you can kind of see it in the current context, right? I mean, historically, you might have thought if we had this kind of event and a risk-off environment and people are nervous and scared, the capital will come flowing into the United States, interest rates would decline.
9:57But that's not what's happened. Interest rates actually have increased. You know, the 10-year treasury yield before this, all this was below 4%. We got as high as 4.5%. Today, we're sitting at 4.25%. You know, that's indicative of things moving in a direction that's very unusual, unexpected. It may go there may be lots of reasons for that. But one of the reasons may be, I think, that the safe haven status of the U.S. is under pressure because of events. We're no longer deemed to be the rock, the place you go when things are going bad. And we're going to pay a price for that in the form in many, many ways.
10:34But it's most manifested most immediately in the form of higher interest rates.
10:37Mark Zandi:So higher interest rates, higher gas prices long term, I assume, is the trajectory. I mean, I guess one question is oil prices surged above 100. They were approaching 150. And now they're coming back down. And your suggestion is that if things remain as they are, which is like there's a little bit of a ceasefire, but bombs here and there, but the strait isn't completely closed, then maybe we'll hit 80. I guess the question is, does the fact that oil was at close to 150, does that trickle through down to gas prices in the long term in any way? And what is the overall trajectory of gas prices at this point?
11:24A good rule of thumb for U.S. gasoline prices, the cost of a gallon of regular iron leaded is that for every$10 sustained increase in oil price, you get 25 cents increase in a gallon of regular iron leaded. So if we were 60 bucks before this all started, we kind of peaked out on a weekly basis around 110. I'm rounding, obviously, to make the arithmetic easy. That's a 50-buck barrel increase. So that would say gas, which was just under$3 a gallon before all this, will settle in at four and a quarter. That's where we were headed, to four and a quarter. Now with the ceasefire, we're down to 95 bucks a barrel.
12:04Let's just assume, for sake of argument, that's where we stay for a while for the next week or two, which is obviously very tenuous. I mean, the ceasefire, who knows how that's going to play out, but let's just say it does. That's an increase of$35 a barrel. You can kind of do the arithmetic. We'll settle in at somewhere around$375,$380,$390, something in that order of magnitude. So, well above, below three where we were, but not four and a quarter. that's kind of sort of where we'll settle in. Obviously, it's not just gasoline, it's diesel, right? That's the other thing. Diesel prices have gone up even more and jet fuel, but diesel prices have gone up quite a bit more.
12:45And that is critical to things like groceries, you know, because a big part of the cost of getting food on the store shelf is trucking it from the farm or the port. And so we're going to be paying more for groceries. And obviously, Americans are already very upset about the high grocery prices they're paying for lots of lots of other reasons it affects everything that's delivered uh at your door you know amazon uh ups fedex the u.s postal service now has a surcharge so you'll be paying more for that and then every airline now is figuring out trying to figure out ways to raise prices for tickets and other ancillary services to compensate for their higher jet fuel costs.
13:24So the effects of those, the run-up in oil prices is going to be felt for quite some time. The other thing I just, as a point of interest, economists have this old adage, prices go up like a rocket, they come down like a feather, right? Because especially in the current context, I've been very surprised by how quickly the pass-through has occurred, particularly the gas prices. It's very rapid, almost like as soon as he went up a dollar a barrel and he showed up at our local gas station. But they'll come down more slowly. They'll come down because of competition, but the competition will take a while to kick in.
14:02So they'll take a longer to come in. So I think we should, you know, you mentioned, I think it was JP Morgan at B of A, 4 % inflation in the current quarter, analyzed. That sounds about right. That's what we're going to get, despite the ceasefire and despite the pullback in oil prices that we've seen over the last day or so.
14:23Mark Zandi:We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify, or wherever you get your podcasts.
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18:12Mark Zandi:We're back with Prof G Markets. When you do anything that increases inflation at a structural level, which seems has happened here, it's almost like you're testing the consumer. Are you down to pay this much? And then when the consumer does pay, largely because, what, you're going to not pay for gas at this point? I mean, most consumers need to pay for gas. And it's like, oh, they can afford it. They're good. the consumer is spending, which is obviously going to make the inflation even stickier. I think the big question then becomes, what does this mean for the Fed? And I mean, coming into 2026, what was so striking was that investors seem to recognize, yes, there are some headwinds here.
18:57Mark Zandi:Yes, we're worried about the AI story. It might be a bubble and that's causing some concern, etc. But generally, the story which I even bought myself and said on this podcast was, yes, but we are entering a rate-cutting environment. And so the idea of betting against the stock market in a rate-cutting cycle is pretty bold and maybe one that you should second-guess. And now, inflation's rising again. We've had tariffs plus this, and it appears as though the Fed might be interested in even hiking rates. That is increasingly becoming a probability. What do you think this means for the Fed and the Fed's decision, and how might that affect asset prices moving forward?
19:44I mean, I think the Fed, for the foreseeable future, at least next couple of three meetings, is on hold, that they're just going to sit on their hands for two reasons. One, they don't know how this is all going to play out. You know, What exactly is the ceasefire? Is it going to hold? What does it mean? Where are oil prices going? I'm giving you my forecast, but I say it with no confidence. So reason number one for doing nothing sitting on their hands is the uncertainty. The other is the nature of the shock, just like tariffs. It weakens growth. It hurts the job market. And since Liberation Day a year ago, we've created no jobs.
20:25Some months up, some months down, but net-net, we've gone nowhere. And now you're throwing this into the mix. All else equal, that would say to the Fed, you should be cutting interest rates, right, because your mandate is full employment. But conversely, you have higher inflation, and your other mandate is low in stable inflation. So all else equal, that argues for higher interest rates. So the net of all that is, I don't know. I'm just going to sit on my hands. I think the deciding factor for the Fed ultimately will be inflation expectations. You know, if, in fact, investors, business people, consumers begin to believe that we're in a world of higher inflation and that shows up in wage demands and, you know, pass through and the willingness of businesses to, you know, pass through their higher costs quickly to consumers.
21:14That's when the Fed's going to say, oh, I got a problem here. I can't allow that to happen. and they'll sacrifice the economy at the altar of low and stable inflation because they realize that if they don't, that inflation will only accelerate. Ultimately, they're going to have to push the economy into recession anyway, and that will be even more severe down the road. So take your lumps right now, get inflation expectations back in. And that's kind of sort of what motivated the rate increases back when Russia invaded Ukraine and inflation took off. Inflation expectations actually did pick up. If you go back and look, lots of ways of measuring that, but you can look at five-year, five-year forwards or five-year break-evens or inflation swaps.
21:56They all show the inflation expectations were coming unmoored. And that's why the Fed jacked up interest rates in an unprecedented way. They raised them more quickly than any time in history. So if inflation expectations in the current period come unmoored, then that's what they're going to do. Now, good news, at least so far, it feels like inflation expectations are still anchored. If you look at five-year and five-year forwards or five-year tip, break-evens, they don't look like they pushed up to a significant degree, at least not yet. So that would argue that once things settle and the uncertainty fades and they got a better grip on what's going on with events in the Middle East, they'll be more focused on the job picture, the weak growth, and they will be on inflation.
22:40And again, I say this with low-level confidence, But I think the next move will probably be a cut, but not, you know, not anytime soon. At best, late this year, there's a December meeting, maybe, but more likely early in 2027 for them to start cutting rates. Now, you asked about asset markets, the other aspect of that. I mean, I think asset markets have kind of sort of bought into that. I mean, you know, it depends on the day or the minute you look at Fed futures because, you know, investors are all like you can tell I'm all over the map and how I'm thinking about this. They're all over the map.
23:13But my guess is if we look today, they'll be saying no rate cuts. Their forecast will be very similar to what I just laid out, something like that. So I suspect that if that's what we get, then you should have no, at this point, no more further bearing on asset market stock prices because that's embedded into their expectations, or at least ostensibly embedded into their expectations.
Read the full transcript
23:36Mark Zandi:The more you game theory this out and we talk about how this will affect inflation and what the decisions that this leaves for the Fed, it basically leads to recession. I mean, unless we can keep inflation under control and get prices, get those numbers downward, it does seem that that is kind of the trajectory we're headed. You said that a recession would be more than likely by the second half of 2026 unless the hostilities ended. Yeah. I guess the question is, how does what's happened this week update your recession forecast and your probability that we would enter a recession? When we started the conversation, I said things kind of stuck to reasonably stuck to script.
24:27So that would suggest that we'll come close to recession. We'll feel uncomfortable. Things are going to feel very uncomfortable, particularly in the labor market, the job market. I wouldn't be surprised if we see more consistent job loss here in the next few months. But we still will be able to kind of navigate through without an economic downturn. I mean, the one thing that's kind of saving the day is the deficit finance fiscal stimulus, right? We had one big, beautiful bill act passed last year that has tax cuts for businesses and for individuals. And the individuals are benefiting from it right now because tax refunds are larger by a consequential amount.
25:06I think the average refund check is about$350 more than it was last year. And for lower middle-income households, that goes a considerable way to cushioning the blow from paying more for gasoline and for groceries. And so if we had not—and that's all deficit finance, right? So taxpayers are paying for it. But if it hadn't been for that, then I think the odds of a recession would have been well over even. But with that, it's providing enough support at the same time that people are having to put all their hard-earned money into their gas tank that we should be able to navigate through. But it's going to be close.
25:46It's going to be very, very close. And that's what my modeling is saying. You know, different indicators of recession we've talked about, I think, in the past. And they're all basically saying the same thing. The probabilities at this point are 40%, 45%, 50%, you know, very, very close. of a recession at some point in the next 12 months. So I think we'll navigate through my kind of baseline worldview, you know, in the middle of the distribution of possible outcomes as we navigate through at this point, particularly because, you know, hopefully the ceasefire is signaling we're moving in the right direction here.
26:22But again, you know, we've got to be humble. And I do think the risks are awfully high. The final thing I'll say is on that in response is nothing else can go wrong. Nothing. Nothing. There's no margin of error here. I mean, everyone's on edge. If anything else doesn't stick to the script, and goodness knows, things are not sticking to anybody's script here for the past year. If something else doesn't go exactly right, I think recession odds are over even, and it's going to be very difficult to avoid a downturn. Right.
27:00Mark Zandi:And that's the part that is so interesting watching investors and watching the markets try to price that in. Because the way, I mean, it's almost like, I just think about the way I'm thinking now. I mean, at the beginning of the week, I didn't think we were actually going to drop a nuke on Iran. But I was like, well, it's a question that you have to take seriously. Right. Because the guy did threaten it, and he said that it would probably happen. and so i didn't actually think that but that was something that was in my head and now as we get to the end of the week i'm sitting here and in my own mind i'm just completely preoccupied with completely different things the entire conversation has changed and yet one thing that remains throughout all of this is that the uncertainty and the volatility and the erraticism of the guy remains incredibly high.
27:54Mark Zandi:And so the idea of saying, oh, okay, it's solved now, probably, slightly, that also seems crazy. And I wonder if, I think you make a good point about the insurance premiums in the Strait of Hormuz and the way that that will affect prices moving forward. It does seem like that's the business to be in right now. And that's possibly gonna put, I mean, I guess I'd pose the question, maybe the most amount of pressure on prices is as, I mean, insurance is the best example, we are going to have to price the uncertainty of this moment. Yes, maybe ships can pass through right now, but how do you price the risk that perhaps they will not be able to pass through tomorrow?
28:37Mark Zandi:And how do you put that into your model? And do you put that into your model? Those are the questions that seem to be significant and very, very hard to answer. Economists use the word uncertainty a lot. I mean, and that's what we're talking about here. you know, I talk about distributions of possible outcomes. I talk about the baseline in the middle of the distribution, but the distribution isn't a kind of a nicely bell-shaped normal distribution. It's like a fat distribution, mostly to the downside. I mean, there's just a lot that could go wrong here. And, you know, in that world, it's hard to assess risk and price risk.
29:13And therefore, you would expect higher risk premiums, which are reflected in things like higher insurance premiums. I will say, though, Ed, if you look into financial markets, obviously the equity market or even the corporate bond market, you don't see the same kind of risk premium built in. I mean, valuations are high. I mean, with this rally today in the equity market, we're back close to within spinning distance of the record high. Now, some of that can be explained by artificial intelligence and AI, and that runs its own. Dynamic has nothing to do with anything. And the rest of what's going on in the world does not matter to, you know, what's going on with, you know, these companies, hyperscalers are on a different dynamic.
29:55And they're a big part of what's going on in both the corporate equity market and the bond market. So, but even abstracting from that, it doesn't feel like investors are running for the, are pressing in that risk, which, you know, one perspective on that is, well, you know, maybe you guys are just overstating the case. I mean, you know, the uncertainty isn't as big a deal as you think it is. The other is, well, you know, markets kind of move in a very discontinuous way. They're OK until they're not, you know, and you don't know exactly what the catalyst for not is. You know, what is it going to tip the psychology in the marketplace?
30:29And everyone kind of runs for the door at the same time. That kind of feels like that, again, goes back to those recession probabilities. They're close, but they're not quite there. But, you know, if people lose faith and, you know, start running for the doors, which is a real distinct possibility, you know, that that's the fodder for an economic downturn. But that's the one, you know, hold out to the for the argument that, no, you know, this isn't great. You know, it's not bad. You know, this is not this is not no one wants to pay higher prices and see weaker growth, but we're still going to be able to navigate through.
31:01That's what the stock market is saying. That's what the corporate bond market seems to be saying, at least at this point.
31:07Mark Zandi:We'll be right back. And for even more markets content, sign up for our newsletter at ProfGMarkets.com.
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33:29Mark Zandi:We're back with Prof G Market. I do want to also get your reactions to some of the jobs data. We've been seeing jobs report for March, 178 ,000 jobs added following a very different February where we lost, I believe it was more than 90 ,000 jobs. And then we revised it further to the downside, losing 133 ,000 jobs. What do you make of the labor market right now? And how did that report adjust your expectations? It didn't change anything for me. I mean, I think the job market's like flat on its back. It's not going anywhere. I mean, some months you get a pop-up, some months you get a pop-down. I mean, the 178, as you said, came after a decline of, I think, 133.
34:11I'm getting the numbers wrong, but, you know, roughly speaking. And that goes to, you know, things like weather. I mean, I didn't experience the weather in the Northeast, but apparently it was pretty bad in February. It goes to strikes. There was a big strike at Kaiser Permanente in California. You know, a lot of technical issues involved, birth-death models, that kind of thing. So, you know, you abstract from the vagaries of the data. I just don't see the job market going anywhere, you know, since this time last year, since Liberation Day. In fact, you can do it yourself. You can do a nice chart, monthly job gain, payroll job gains, January 2024 through March of 26.
34:51You can kind of see the strong growth back in 2024, started to come in a little bit, coming into 2025, but in April of 2025, boom, you're at zero. And that's where we've been since, you know, again, up a little bit, down a little bit. So I don't think the economy is creating any jobs of consequence, you know, at this point. Now you hear the argument that, well, we, the economy can't create a whole lot of jobs because there's no labor supply, you know, because of the immigration policy, which is, you know, that's, there's truth to that. I don't, I don't know why anyone would take any solace in that, but you know, that, that doesn't sound like a healthy economy.
35:26But nonetheless, that's true. So the kind of the so-called break even monthly job growth, the amount of jobs you need to maintain stable unemployment is probably somewhere around 50 to 75K per month. But we're at zero, just around zero. And that's why the unemployment rate's been drifting higher more or less. So my sense is the job market is fragile, very fragile. One other thing about the job market that everyone knows, but I'll just stated, is that all the weakness is because of a lack of hiring. You know, businesses have stopped hiring. And that might go back to the uncertainty. That might be one of the manifestations of the uncertainty we were talking about.
36:06They're not laying off. They're sitting on their hands too, right? They're not making big moves. They're not adding to payrolls. They're not cutting payrolls. And that's the firewall between no layoffs is the firewall between the economy we have, the job market we have, which is struggling, fragile, in a recession. If we do start to see layoffs, if, for example, the higher gas prices, the higher food prices cause consumers to become more cautious, if the decline in the equity market causes high-end consumers to become more cautious in their spending, not that they'll pull back, but they become more cautious, and businesses take from that that, oh, I need to reduce my payrolls and start laying off, that firewall will come down and then we're in recession.
36:50And that's why we're so close to recession. Businesses have done everything they can to avoid layoffs. They've cut hiring, they've cut hours, they've cut temp jobs. The last thing they'll do and we're right there is start to lay off. And that's why we're so close and why recession probabilities are as high as they are, but also why they're less than even. We still have not yet seen those layoffs.
37:11Mark Zandi:How do we explain the lack of hiring in the U.S. right now? I mean, the first thing that comes to mind is AI, but maybe I'm sort of jumping the gun there. What are some of the forces that are causing businesses not to hire, do you think? Well, a very unsatisfying answer. It goes back to that word, uncertainty. I mean, that's what economists are saying, which is not satisfying because it's hard to prove. As you said, how do you build that into your models? Right. But that that's kind of what you do when you're uncertain. You just you sit on your I keep using the phrase sit on your hands. That's what everyone's been doing, sitting on their hands.
37:50And that that that would mean no hiring. I do think AI is probably playing a bit of a role here. You can kind of feel it and see it in some of the industries that are on the front lines of artificial intelligence. You can certainly see it in the tech industry. You can kind of feel it in customer support and service in the financial services industry. There's some academic research that are connecting dots using third-party data, ADP data, for example, between young people in tech sectors that are getting creamed. And hiring rates are particularly poor for entry-level younger people, which you would expect to be more likely to be affected by AI.
38:32So I think we're starting to see the early effects of it. But by the way, that's another reason for a bit of nervousness. I mean, if the AI productivity gains start to kick into a higher gear here at the same time that we're not creating jobs and we're grappling with the effects of these higher energy prices, you know, that's another reason to be nervous that we'll start to see some layoffs and that firewall will come down and go into recession. But I, you know, the other reason you often hear, I think there's some, you know, truth to it is quit rates are down. You know, people aren't quitting as much.
39:07You know, they're, they kind of settle into their jobs. Many people quit, obviously, back during the pandemic and are now kind of in the sweet spot after a move, you know, after you move through two, three, four, five years in, that's when you're, you know, really reaping the benefits of that move. And because of that, people aren't moving. And aging of the population also reinforces that. So if you don't quit, you don't have hires, and that may be, you know, part of what's going on. So I think it's a, it's not one thing, it's a melange of things. But again, I've not heard, and I have not come up with a completely satisfying answer to that question, why aren't they hiring?
39:45But equally, you know, a difficult question to answer is why aren't they laying off? You know, why aren't we seeing more layoffs? I mean, why have they responded the way they have? Historically, they have laid off. So just another, you know, question that's, you know, no smoking gun answer to that question.
40:04Mark Zandi:And then the question becomes, like, what would it take to trigger that change? And I just want to go back to the inflation expectations that, I mean, we started this with a Bank of America's expectation that inflation would hit 4 % by the end of the year. We started this year, the official numbers coming out on the CPI were below 3%. But as you pointed out, there were some issues there because of the October shutdown. So we're realistically more at around 3%. The Fed's target is 2%. We were basically at 2 % until we put the tariffs in place, which basically raised prices by a percentage point, got us to 3%.
40:57Mark Zandi:Now we've got the war and what it's doing to gas prices, which as we've all started to learn, gas or oil is sort of affects everything. It affects freight. It affects construction materials. It affects plastic. It affects literally everything. The gas that we put into our cars, obviously, which it sounds like it's going to add another percentage point. So it sounds like we have doubled prices, what prices would have been if we hadn't gotten into a conflict with Iran and if we hadn't nuked trade policy with indiscriminate tariffs on the rest of the globe. I guess put that 4 % number in context, how consequential is that from a consumer perspective?
41:46Mark Zandi:And is that something to be actually worried about? Yeah, it's consequential, particularly given that inflation has been above that target now for, what, five years? I mean, we haven't been at 2 % for a long time. And the direction of travel is not encouraging. And, you know, I'll also throw into the mix, AI is adding to inflation, right, because of electricity prices. And if you look at the cost of it, you know, all the things that go into those data centers, consumer electronics, chips, you know, the demand is extraordinary. It's jacking up prices and chips go into everything, right? So they're going into cars and everything we use.
42:25So that's adding to it. The immigration policy, that's certainly not helping either, right? I mean, because, you know, many industries, ag and construction and retailing and personal services rely very heavily on immigrant workers. And because of the heavy handed immigration policy, that's tightened up those labor markets and caused, you know, some costs to rise in those industries. So, you know, there's a lot of inflationary forces that are pushing inflation up. So, and this goes, you know, even before what happened in the Middle East, there was, you know, the discussion we were having was around affordability.
43:03The fact that the cost of living was so high that people just felt like they couldn't afford a reasonable standard of living for everything from groceries to housing to health care to child care to electricity. And you're just throwing this into the mix and make it even more difficult for folks. So I think it's consequential. I mean, I do calculate a statistic that might kind of bring it home, is that I look at the increase in the monthly bill for buying all the goods and services that the household purchased a year prior because of inflation. So you take a look at inflation. You say, OK, after a year, what how much more do I have to spend to to afford the same goods and services?
43:53And, you know, right now it's about three hundred dollars more a month. Right. Because of what's happened over the past year. And that's before this bump from the higher energy prices. So you can imagine, you know, six months from now, I'd be saying we're paying for 450 bucks. The average American household is paying for 450 bucks more a month to afford the same kinds of goods and services they were the year before. Now, you know, wages are up too, earnings are up too, but even there, you know, there's reasons for concern. Wage growth is slowing, right? I mean, if you look at employment cost index, which is the best measure of wages for lots of different reasons, average hourly earnings and other measure, the Atlanta Fed wage tracker, they're all showing deceleration in wage growth.
44:33And aggregate wage growth now is about three to three and a half percent. So if inflation goes, you know, three and a half to four, that means people's real wages after inflation are now starting going to start to decline. And I think at that point, people become really upset and nervous. You know, it makes them very upset if their wages are falling relative to inflation. And I think that's probably dead ahead here over the next six months or so.
44:57Mark Zandi:over the next six months, what is the number one thing that you think that is going to be of most consequence, the thing that you think that we should all be watching, that you will be watching most closely in terms of its impact, probably in triggering a recession? I mean, I guess there are a range of things that we can think about and be worried about or excited about. It could be AI. We could be thinking about private credit. What's going to happen in the private credit markets? What's going to happen in geopolitics? What's going to happen to the price of oil? I mean, if you had to pick one thing that you think is most important or significant right now, what would it be?
45:33Yeah, it goes back to that firewall. I think it's layoffs. I mean, our business is going to start laying off workers in the context of all the things that we are going through and what we just discussed. And, you know, there's different measures of layoffs. The one that economists tend to use is unemployment insurance claims. That's a bit vexed in the current context because changes in eligibility rules have made getting UI less attractive. The layoffs are occurring in industries where people are generally paid more, you know, technology and financial services. And so they don't want to bother with applying for UI because, you know, there's a lot of, you have to do things to get the UI.
46:13You have to prove that you're looking for work and so forth and so on. So if the amount you get from UI is not consequential enough, you're just not going to do it. And then the gig economy is also playing a role. So that's an increasingly vexed measure, but that's the measure I look at to gauge whether layoffs are picking up. And if they are, I think that firewall comes down and we're in recession. We go from less than 40, 45, 50 % probability to something meaningfully higher than that. And Weekly UI claims and employment insurance claims are running just north of 200K. That's fine. That's good.
46:48Anything closer to 250K on a kind of a four-week moving average basis to smooth out the volatility, pay close attention. Yellow flares should be going up. Anything closer to 300K, we're in recession. So that kind of gives you an order of magnitude. That's the one variable I would focus on. It comes out every Thursday morning from the Labor Department. Good statistic to watch.
47:10Mark Zandi:Mark Zandi is the chief economist of Moody's, a leading provider of economic research, data and analytical tools. He also hosts the Inside Economics podcast and serves on the board of directors of MGIC, the nation's largest private mortgage insurance company. Mark, always appreciate it. Thank you so much. Anytime, man. I really appreciate the opportunity. Thank you. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. our video editor is Jorge Carty our research team is Dan Chalon Isabella Kinsel Kristen O'Donoghue and Mia Silverio Jake McPherson is our social producer Drew Burrows is our technical director and Catherine Dillon is our executive producer thank you for listening to Prof G Markets from Prof G Media if you liked what you heard give us a follow and join us for a fresh take on markets on Monday Lifetimes
48:10You help me in kind reunion As the world turns And the dark flies In love, love, love, love
From the publisher
Ed Elson is joined by Mark Zandi to break down what the tenuous ceasefire in Iran means for the U.S. economy and investors. They discuss his forecast for inflation, what the Federal Reserve is likely to do next, and the probability of a recession.
Mark Zandi is the chief economist of Moody’s, a leading provider of economic research, data and analytical tools. He also hosts the Inside Economics podcast.
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