What’s the Biggest Threat to the U.S. Economy’s Soft-Landing? — ft. Mark Zandi

26:19So I view this as a very serious problem. I will say, Scott, though, I don't know that it's a problem for next month, next quarter, next year, maybe even not the next decade. But all the trend lines here, if they don't change, then at some point in our future, we will have a day of reckoning. Bond investors, the people who are investing in that debt will say, no more, I'm not going to buy that debt until you pay me a much higher interest rate. And that will be the crisis that we face. But that's probably further down the road here. But no doubt about it, that is a significant threat to our prosperity in the long run.

26:59Just going back to the idea that we have reached the soft landing, that number that we saw in that jobs data, which was, as I said, it was a great number. But I think back to a couple months ago when we had a couple pretty bad employment reports and jobs reports, and the stock market reacted pretty terribly. I mean, the NASDAQ had one of its worst days in a few years, same with the S &P. I thought it was sort of a buying opportunity because my sense is that it's very month-to-month and it's very sporadic. And I was thinking that we'd probably see a resurgence and that it's a little bit more random.

27:43This probably isn't as structural as we think. And, you know, I thought that we'd see a rally in the markets and we'd see a change in the numbers. And that's what happened. Having said that, I look at this number here and I'm wondering, you know, how seriously should we take these numbers when we're seeing 115 ,000 in one month and then suddenly it's up to 250 ,000? Why wouldn't it just swing right back? Well, it might. I mean, I do think that argues for not getting caught up in the month-to-month movements in the data. Try to get to the underlying trend. You know, one simple way of doing that is just take a three-month moving average, six-month moving average.

28:25Take the past three months, take the past six months, divide by three or six, and that gives you a sense of underlying trend. And I think that would give you a much better sense of what's going on here. And if you do that, it says the economy is creating 150K, 175K per month. And I think that's reality. That's roughly where we are. Having said that, though, you bring up kind of a broader point, and that is the quality of the economic data that we're looking at to try to make really important decisions around monetary policy interest rates, you know, what the kind of tax and spending policy should be, is eroding because response rates to the surveys that the government uses to collect and produce this data are falling, like all surveys.

29:14I mean, you can see it in the polling related to the election, you know, marketing polls or surveys to try to get a sense of what consumers are thinking and what they like and don't like. the response rates to those things have fallen very sharply since the pandemic and becoming increasingly difficult to get good quality data, at least in a timely way, which is what we really need to make good policy decisions. One thing I wanted to bring up are these revisions that we're seeing from the government, especially that one back in March, I think it was, where the government, the Bureau of Labor Statistics had overestimated the jobs data by 818 ,000 jobs.

29:56And it's become a big talking point in politics. And it's become a criticism against the government. One, that, you know, perhaps the government and these numbers, perhaps the numbers are fake, perhaps the government is lying to us. Or two, you know, if they're swinging this much, perhaps they're just meaningless. And in fact, Trump actually brought that up in one of the debates, not very coherently, but he mentioned that number, 818 ,000. I don't think the government is lying, but I do think that it's a fair argument that what are you supposed to do with those numbers if you can't trust them, especially for you as an economist?

30:33I'd just love to get your take on how you grappling with the pretty important issue you just brought up. I mean, that 818 ,000 job number was no surprise. I mean, we've had these revisions since the beginning of time, right? These are surveys. The government's going out surveying businesses in this case, and the economy's a big place. So the survey isn't going to be a picture-perfect representation of the reality of what's going on in the entire economy. So there's always revision. But that one was the biggest ever, right? And I think that would be the criticism. Yeah, but you get really big revisions when the economy's moving up or down in a big way, In this case, it's slowing down by design.

31:17The Federal Reserve raises and slows. So you would expect a downward revision of the data and a pretty big downward revision. So no surprise there. The other thing that's going on is the economy is being buffeted by all kinds of massive shocks that are disrupting. I mentioned the pandemic. But the other thing that's going on is a surge in immigration that we've experienced that's finding its way into the surveys in different ways. And that's also complicating things in terms of measurement. But regardless, you know, no one's making up anything here. I mean, because there's an army of people that are involved in making – coming up with the estimates, doing the calculations and making sure the surveys are done properly.

31:54And that would be a conspiracy on the grand scale of mankind if that were happening. So I'm not at all fearful of that. And at the end of the day, we are going to get actual employment counts based on unemployment insurance records, which are not a survey, a sample survey based on the entire population of workers out there. So it's all going to ultimately be represented accurately. But having said that, I do think we need, if I were king for the day, I would be investing a few more dollars in trying to improve the way the government collects the data. Because, again, we're making very important decisions based on this data.

32:34And the better the data you have, the better the decision you're making. And the other thing is it's important to start using other private sources of information and data. Because of the changes in technology, we are now collecting lots of information all over the economy in the private sector. And we can use that. So, for example, I get all the credit files in the country from Equifax every single month, you know, anonymized, obviously. But I know exactly how many credit cards are out there, who's borrowing, how much, you know. And I actually can see based on that information where people are living and where they're moving to.

33:08So how many people are moving from, you know, a zip code in New York City to a zip code in Miami? I can tell you that almost real time. So there's a lot of other data information out there that I think is available and the government is starting to avail themselves of that and trying to understand what's going on. And I think that's entirely appropriate and prudent in the context of the information that is available out there in the private sector. You brought up immigration. I want to put forward a thesis and get your response. I believe the reason that we haven't been able to solve this problem is that we don't want to.

33:40And that is, while I believe we shouldn't have open borders, I believe we purposely don't get serious about addressing it because while immigration has been arguably the secret sauce of America, the most profitable part of immigration has been illegal immigration. in that we have this flexible workforce that doesn't call on social services, arrested at a lower rate than domestic citizens, typically don't stick around for Social Security, don't call the police department, don't call the fire department, yet pay taxes. And when the crops are picked or that industry declines, we have this flexible workforce that just melts away.

34:20Have we purposely avoided addressing this problem because illegal immigration is just too damn profitable? No, I don't think so. I mean, if you go back, you know, prior to this post-pandemic surge in immigration, we were getting about a million immigrants, legal plus illegal or undocumented immigrants a year. A little stronger in some years, a little weaker during the Trump years, but about a million per annum. the surge took off post-pandemic. And I think, you know, that was created in part by the pandemic dislocation and other things coming, other factors coming together. And then our, you know, our asylum laws and rules are, you know, very difficult to navigate around.

35:13and immigrants took advantage of that. So of the fact that we really had nailed down, you know, the asylum process. So I don't think it was intentional. I think it was a matter of circumstance. And I do think there's a great deal of interest, both on the Republican side and the Democrat side to address this. And in two ways, one, control the flows of people coming across the southern border. In fact, Biden's executive order that he put into place around asylum seekers back a few months ago appears to be working. The number of immigrants coming across the border has fallen off quite sharply. But we do need to address the flows across the southern border.

35:56And I think there's a consensus that that's now a national security issue, and that has to be done. But the other aspect of it is actual immigration reform. And Scott, we got really close to that Back a few months ago, you remember Senator Lankford from Oklahoma, a very conservative Republican, fashioned the bill in cooperation with other Republicans and got Democrats on board. And it looked very likely we were going to get a reasonably good immigration reform bill. Of course, President Trump put an end to that and said, I don't want to do that for various reasons. But that the fact that we got that close, in my mind, suggests on the other side of this election, depending on the makeup of government, there's a reasonably good chance we're going to get substantive immigration reform.

36:42And by the way, you said it and I agree with it. Immigration is the secret sauce. That is what is critical to driving growth in this country, both in terms of just workers, but also in terms of productivity, because immigrants tend to be best and brightest. Yeah, they tend to be entrepreneurial. They're risk takers. They start businesses at a higher rate. And ultimately, they're key to underlying productivity growth. So just as it relates to the presidential election, as an economist, when you look at the economic plans proposed by both campaigns, if you were to guess which most likely results in the greatest economic growth and the greatest economic health in the United States over the next several years, is there one campaign that stands out to you or the best the other?

37:28Well, we've run a bunch of scenarios, and I'll have to say the scenario where Harris wins the presidency and the Congress is divided, in all likelihood, that would mean the Senate goes Republican, the House goes Democrat. And that, in my mind, is the most likely scenario. That's the policy status quo, right? That means the policy we have today is roughly the policy we're going to have going forward. It doesn't help us with those deficits and debt that we were talking about earlier, but it will result in policies that are consistent with the economy that we're experiencing today, which, going back to Ed's first description of the economy, pretty good.

38:06In my mind, that is the best outcome because that'll lead to an economy that is performing like the one we've got now, and that's a pretty good economy. You mentioned earlier this idea of recession tail risk and that that was pretty related to what's happening, what's going to happen with the election. Can you describe how those are linked? I assume what you might be saying is that if Trump wins, there's a greater recession risk, but maybe not. How are those two linked? Yeah, I worry about three things. One is this election is going to be really close. I live in suburban Philadelphia. I think this is ground zero.

38:47I think my street is going to determine who's the president. Maybe my wife is going to determine who the president is. It's going to be that close. It's going to be PA. And by the way, in PA, we don't count mail and ballots until the day of election. So we're not going to know who, probably not going to know who the president is for, you know, at least days, could be weeks, could be in the court system. There is absolutely no upside to that. There's nothing but downside. So I worry about that in the context of the fragile collective psyche and the political fracturing that, you know, that we're living through today.

39:17The second thing is in that status, in that Harris divided government scenario, the status quo, the next thing that's going to happen on January 1st, 2025 is the debt limit is going to be reimposed. The Treasury is going to run out of cash by summer of 2025, and we're going to have a doozy of a debt limit battle. And I've seen a lot of debt limit battles over the years. Each one feels scarier than the one before it. And, you know, because we think there's no big deal here and we get closer and closer to the so-called X date when somebody is not going to get paid on time. And that's a big problem.

39:46And the third thing, this goes back to Scott's question about deficit and debt. We're not going to address deficits and debt here. We're not even talking about that. Nobody's talking about that. And that's just going to get worse. And by the way, I'm just going to put a stake in the ground so you heard, say, if this happens, I heard this from Zandy first. Liquidity in the bond market, the treasury market and the corporate bond market is very, very tenuous. The big – this is a little bit in the plumbing of the system, but the big financial institutions, broker-dealers, the JP Morgans of the world that make markets, the treasury market, their balance sheet has not grown consistent with the amount of debt outstanding.

40:26So they're having trouble making the – it's because of liquidity requirements and capital rules that just make it uneconomic. Then you throw into the mix that the Federal Reserve is, through quantitative tightening, allowing, is pulling out of the Treasury market. And the foreign investors are not coming in. China is pulling out. And it's hedge funds that are coming into the market. They're very price sensitive. They're there when things are good. They're out when things are bad. You throw that all into the mix in a debt limit battle, that's the prescription for some kind of financial event. And, you know, that could be something that happens in 2025.

41:04So, yeah, in my mind, the number one threat to my optimism about the economy, about the soft landing, is that we screw it up. That, you know, that lawmakers just make a real blunder here and the election undermines confidence and we go over a recession. I think that's the biggest threat to the economy here in the next 12 to 18 months. Stay with us.

41:58We'll be right back. on your first campaign and get a free$250 credit for the next one. Get started today at linkedin.com slash campaign. Terms and conditions apply. Tuesday on NBC, Jimmy Fallon and Bozema St. John host the highly anticipated new competition show. I hired 10 creatives from all walks of life. They will be battling it out to see who can impress the world's biggest brands. This is a huge opportunity. This is the battle for the next big idea. This is not play play. We're spending millions of dollars. I'm so excited to embark on this adventure with all of you. May the best I do win!

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43:12we're back with prof g markets so i mark i think of you as one of the brighter minds around the housing market everything is a crisis but i generally think it's fair to call the housing situation in the U.S. or crisis, affordability crisis. And by most metrics, housing prices are at historic highs. Only one-third of Americans can afford a home, whereas not that long ago, it was two-thirds of Americans. What is your best guess as to what you think is going to happen to housing over the next 12 or 24 months, residential and commercial? And obviously, talking about housing in America is like talking about housing in Africa.

43:49There's a lot of different sub-markets. But we'd love to get your general view on state of play and housing, your predictions for which sectors and markets are most vulnerable or most resilient. Well, Ed, when he said you're one of the brightest minds, I go, oh, if he just stopped there, I would have taken that. But he goes, brightest minds on housing. That wasn't enough. Just one of the brightest minds ever. I'll take it. I'll take it. I'll take it. I'm just joking. I'll take it. I got to stay humble. I totally agree with you. I think this is a massive crisis. I mean, housing is the single largest budget item in nearly every American household, right?

44:30I mean, rent or the mortgage payment that people are making and then all the costs associated with maintaining a home and living in a home. So this is vitally critical. And we've got two big problems. One is so-called interest rate lock. You have a lot of homeowners that refinance their mortgages when rates are very low. They've got a mortgage with an interest rate of 3%, 3.5%. Market rates are now a lot higher. They're 6.5%, 6%, 6.5%. So it doesn't make sense for those folks economically to sell their existing home and get another home with a new mortgage at a higher rate. The monthly mortgage payment rises to such a degree.

45:11It just doesn't work. Too difficult. So people aren't moving. Second, and by the way, that becomes an increasing problem over time because life happens, you know, divorce, death, children, job change. So increasingly, people are living in homes that aren't suited to their housing needs, and that's a big deal. Second problem is we just have not put up enough homes since the financial crisis, you know, given demographics, given the number of households that are forming the population growth, given obsolescence, given, you know, you see these hurricanes and storms are wiping out a lot of housing stock.

45:44You know, this is where people live. And, you know, the result is we have a very severe shortage of housing, not at the high end, you know, not for luxury apartments, because you've seen big towers go up in my hometown of Philly or L.A. where you are. If you've been to Miami recently, there's apartment towers everywhere. But in the affordable part of the market, the lower end of the market for lower and middle income households for renters and for people who are trying to buy a home. So really severe shortage that's been created since the financial crisis for lots and lots of different reasons.

46:20The solution to the problem, in my mind, is we got to build. We need more housing. And, you know, in fact, going back to Harris, you know, she does have a, and I recommend people go take a look at it, a plan to incent builders to put up more homes, to incent the private sector to put up more affordable rental and more starter homes through tax subsidy. And by the way, this was kind of a really key lesson we learned from the Biden policies, like the Inflation Reduction Act and CHIPS Act. If you incent the private sector to go do something with tax subsidy, they do it. I mean, look at all the chip plants that are being built.

46:58Look at all the EV stations that are being put in, the transition from clean, from fossil fuel to clean energy. That's the private sector on steroids juiced up by the, by, by federal tax subsidy. So I think this, if I were going again, again, going back to being king, I, I would, I would spend resources there. That's where I would focus, you know, my energy. Because, by the way, if everyone doesn't believe the economy is any good because of their cost of living, here's the way to reduce the cost of living. Get the cost of housing down because that's, again, the number one budget item for most Americans.

47:34As you look at the global economy, what do you think the U.S. is doing right that the rest of the world isn't? You know, at the end of the day, we attract the best and the brightest from all over the world. You know, I travel the world. Everybody ultimately wants to come to the United States. You know, it's just a place where there's a rule of law. Historically, there's been a rule of law, a well-functioning capital market. If you have a good idea, you can find capital. There's the capital that will come to you to help you work through your idea. We have laws that allow for failure. Our bankruptcy laws are very different from the bankruptcy laws around the world.

48:20When people fail, they can get a clean slate and they can start again. And that's exactly what you do. If you're an entrepreneur, if you're an innovator, you're going to invariably fail by definition because you're swinging for the fences. And that's okay because you can write yourself, clean your balance sheet, and start all over again and go try swinging again. And that you don't see anywhere else on the planet. And we've got, I think, a culture of innovation entrepreneurship. We, you know, I have my son who's now an innovator and entrepreneur. You know, he reveres the people that have succeeded here and he values what they say and he listens to what they say and he takes it in.

49:08And, you know, that's who his heroes are, the people that are innovating and trying to advance the ball here in technology. So we have a culture of revering that kind of risk-taking and taking those chances and trying out new ideas. You know, every culture is a little bit different, but I don't sense that in much of the rest of the world. I sense that here in the United States. So I think, you know, going back to my fundamental optimism, as long as we are able to continue to attract the best and the brightest from all over the planet, we will be just fine. We will solve a lot of problems. And by the way, going back to Scott, going back to the question of deficit and debt, the easiest way out of that problem is immigration.

49:52You allow immigrants into the country, let them do their thing. You do it in a rational way. We need to make sure we have a rational immigration policy and system so that we bring in the people that have the right skills and talents that we need, which, by the way, is across the skill spectrum. We need low-skilled workers in agriculture and leisure and hospitality. We need high-skilled workers. We need CEOs. We need everybody in between. But if you allow that to happen, we're going to get 1 % to 2 % more GDP growth every year. And I assure you that makes that deficit debt problem look a lot less daunting going forward.

50:25And just to wrap up on that, Mark, we always talk about a younger generation being entitled. I feel as if Americans are entitled in the sense that we have our problems. 190 nations, I feel like 189 would kill for our problems. So let's just talk about the economy. Is there any economy in the world that is performing better on a balanced scorecard to the United States of America right now? I'm hard-pressed. I don't know a whole 189. but let's say i know the top 89 it's not china it's definitely not europe there's nobody there's nobody but you know scott it's okay if we were unhappy with that and not and we're we're dissatisfied with that that's exactly the state of mind we should have right because it's only with that state of mind that we were that ensures that 10 years from now we're still the top dog out of the 189 countries that are out there you got to run scared and run nervous and i think that's the That's the place where we should stay, that we should not be satisfied.

51:33We got our problems. I mean, a lot of issues we got to grapple with, so we shouldn't be satisfied. But I totally agree with you. Hard-pressed to find anyone else on the planet that's performing nearly as well as we are. 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, this was really great. Thank you for joining us. Hey, anytime. I really enjoyed it. Thanks for letting me get on my soapbox.

52:03Great to see you, Mark.

52:13Algebra of Wealth. Scott, Mark said something interesting about the U.S. economy, that we are the best performing economy in the world, but one of our strengths is this certain level of paranoia that things aren't good enough and that we need to keep improving. I'm wondering how you balance that paranoia in your personal life when you're building your own level of wealth. How do you balance feeling grateful, but then also thinking it's not enough? I would flip it. The rubric, and I'm not sure this is how most people feel, I guess it's a part of paranoia. It was a mix of insecurity and fear, especially once I had kids that I wouldn't be able to fulfill my obligation as a good provider.

52:58I had tremendous anxiety around that because especially when they were little in the great financial recession, I wasn't in a position to support them or create the lifestyle I wanted for them. And for me, it was very shameful. It felt like I'd failed as a father. That was literally the first emotion I felt when my son came marching out on my girlfriend, like day one, that I'd already failed him because my companies weren't doing well and I'd taken all these big risks and I hadn't paid off. The thing that really drove me, though, was ambition. And that is I wanted to have a certain life, a certain level of influence, a certain level of recognition, quite frankly, that involved in a big part of that was a number.

53:38And that number was my wealth. And at some point, the terrible thing about numbers is you can always imagine a bigger number. And what you need to do, and this is a good problem. Once you get to a certain level of economic security, realize that money is the ink in your pen, and it can write certain chapters that might not otherwise be written. It can make certain chapters burn brighter, but it's not your story. And as soon as you have some level of economic security, maybe before that, you need to find where you get reward, what makes you feel better about yourself, what makes you feel better about others, what makes you a kinder person, what gives you fulfillment, what gives you happiness, and start to focus on things other than that hamster wheel.

54:19I have been so focused on career success and economic security that I kind of woke up in my late 40s and early 50s and said, I'm going to die with a lot of money and never really have enjoyed any of it. And my relationships will have suffered. And I would have never been in the moment. I would have never really lived my life. And so in a society that encourages you to stay on that hamster wheel and go hard and go constant, always can imagine more money. You get to X, I can imagine 2X. Well, imagine what I could do with 10X. At some point, taking pause and saying, if I have enough money to support my family, if I have enough family to absorb a healthcare risk, have a nice home, take nice vacations, give some money away, and by the way, that's a lot of money, then you really need to slow down and say, how do I focus on my relationships?

55:11How do I focus on the things that really give me reward? Because it's easy to get caught up into this very American hamster wheel of more money, more ambition, more innovation, more power.

55:30This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producer is Catherine Dillon. Mia Silverio is our research lead, and Drew Burrows is our technical director. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on the markets on Monday.

55:54Lifetimes

55:59You have me In kind reunion As the world turns And the dark flies In love