Latest / Market Pulse / Decoding Economic Uncertainty: Fed Moves, Budget Deficits, and Global Risks

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Decoding Economic Uncertainty: Fed Moves, Budget Deficits, and Global Risks · Market Pulse

• Tom Aliff (00:03): Welcome to the Market Pulse Podcast. I'm your host Thomas Aiff, member of the Equifax Risk Advisors team. This group identifies economic considerations, leverages data analytics to translate into industry insights and recommendations ultimately, to support our clients during economic uncertainty, while uncovering growth opportunities in consumer credit risk. I'm pleased to have an opportunity again to meet with you know, our esteemed colleagues, the economists Amy Cutz, Rob Westcott, and Mark Zandi. How's everybody doing today? Rob Wescott (00:34): Good, good. Doing great. Amy Crews Cutts (00:36): Glad to be here. Tom Aliff (00:37): Awesome. So, we've we, you know, of course, there's many, many questions that we could you know, you know, have, you know, the opportunity to, you know, to, to ask you. But why don't we just, you know, dive in and get started. And, and maybe I'll throw this one out to Amy first is, you know, can you talk about the relationship and impact of budget deficits to interest rates and expectations for what it means short and long term? I think that's a you know, a question that that often floats around, and there could be some potential you know, clarifications that could be made. Amy Crews Cutts (01:09): So just start with a question that we could talk about for about six weeks and, you know, 5,000 dissertations to be written on. So this is kind of a debate about sometimes what they call modern monetary theory which kind of posits that deficits don't really matter that much. And others who think that that, you know, the, the government and the budget deficits are squeezing out private investment and how that impacts interest rates. I don't think we're yet at a place where those two are, are commingled. And fortunately we've been lucky that you know, the last two years we've been okay on the budget. When I say the budget, the the debt ceiling that we're not threatening to default on on that. So, so the markets have been somewhat stable. So right now, what interest rates are responding to are more about possibilities for economic growth, both domestically and globally, as well as what the Fed might do. So that's my take on it, that it's not so much driven by deficits today. Potentially, you know, if, if we don't do something about it, it could have an impact, but not yet. Rob, what do you think? Rob Wescott (02:17): You know I spent part of my career at the International Monetary Fund in the research department, and a couple, couple of my colleagues there Ken Roff and Carmen Reinhart got a lot of publicity about 10 years ago writing a book about the link between debt levels and, and economic growth. And I think many economists at the time and, and, and for forever have thought that these two are inversely related, that if your debt goes too high, it'll hurt economic growth. They had a little problem that their numbers weren't run quite carefully enough, and they were kind of lampoon for having done this analysis. They said that if your debt to GDP ratio got to 90%, you know, it was the road to ruin. And I don't think it's anywhere near as simple as that. At its core, though, I think the two things are related. Rob Wescott (03:09): Countries that run persistently large budget deficits and have growing debt levels they do put themselves at risk of lower economic growth. Think I, I think of it as like skating on ice and you're on a pond, and if you have a high debt level and high budget deficits, the ice is getting thin, and you don't know exactly when you might break, break through. You might do fine for a year, three years, five years. But I think that higher debt levels and higher, higher deficits do raise the risk that you could break through. And I think that's, I think most economists still very much accept that view. I love that metaphor, Rob. I, I, Mike, can I use it? Can I use that metaphor? You c you can you'll, you have to ro you'll pay a little royalty, but , I'll, I'll, I'll give that to you like a good business person. Mark Zandi (04:01): Yeah. Just my, my, my 3 cents on it a good rule of thumb for every percentage point increase in the nation's debt to GDP ratio adds a basis point, maybe two basis points to long-term interest rates. By the way, that's an estimate from the congressional budget office, CBO, the, the guys that do this for a living, and very consistent with our modeling. So just to give you a sense of what that means, if you take the CBO forecast for the debt to GDP ratio, assuming no change in policy, the, it goes from a hundred percent, I'm rounding obviously a hundred percent debt to GP today to 160% percent 30 years from now. And by the way, that assumes the Trump tax cuts expire which they won't regardless of who wins. But let's just go with that. That's a 60 percentage point increase. Mark Zandi (04:54): Let's just say it's one basis point for every percentage point that's 0.6%. The 10 year treasury yield will go from today it's sitting at three, what 90. It'll be, you know, do the, you can do the arithmetic, I mean, much higher. And it, it's, it's not linear. It's not like, you know, I, I'm, it may be one basis, two basis points today, but if you're out with a debt to GDP ratio of 150 or 200 percentage percent 20, 30, 40 years from now, the impact on interest rates could be even higher. Final thing I'll say is because it is nonlinear, there will be a point at some, you know, somewhere down the line, probably centered around what Amy brought up with the debt limit or some other issue with regard to governance, where investors begin to think, oh, these guys aren't gonna pay me back in a timely way. And then you get a crisis and interest rates spike, and you may, may, maybe that's what's ultimately necessary that that crisis, that ensues, that's necessary to generate the political will to make the hard choices that we're gonna have to make here to address that long-term fiscal situation, which means we're gonna need higher taxes, and we're gonna need spending restraint both of those things to reign this in. Amy Crews Cutts (06:05): One thing, Tom? Tom Aliff (06:06): Yeah. Oh, go ahead, Amy. Amy Crews Cutts (06:07): So one of the, excuse me, starting in about 20, I don't know, 15, 16, there's, there's a pretty nice, maybe not quite linear relationship, but similar to that of the debt to GDP ratio and the unemployment rate. And so you sort of think of it as that, as we get into recession, we increase fiscal policy responses, we spend more money deficits go up, but then as the economy grows, the unemployment rate drops, the economic engine then pays back that, that deficit and things reduce. And it kind of goes on this nice little curve. But starting about, I don't know, 20 16, 20 17, it broke out from that. And we've been in this very low unemployment rate situation with deficits growing, which is not typical. And, and maybe that's a little bit more of the concern, is that, you know, when it was that nice kind of automatic stabilizer, we didn't worry too much about that. And that's certainly what we learned in, in graduate school, you know, spend money in recessions and save money in non-res recessions. But we're not acting like that right now. And it's interesting you brought up the tax cuts because, you know, that was kind of a, a giveaway from the standpoint of if, if, but if you really care about deficits, that was not the way to go. But now, you know, it's gonna enter a political aspect of it, not just the, the balancing budget. Tom Aliff (07:28): Well, thanks. Thanks, thanks everybody. So I guess, you know, you, you offer your 3 cents just a minute ago, mark maybe you couldn't offer four on the next topic. 'cause This is one definitely n for Rob Wescott (07:37): You, Tom, for Tom Aliff (07:39): You . Yeah. This is, this is definitely the topic of, of interest for, you know, a lot of a lot of our audience. And you know, of course I really want to hear all of you weigh in. But what are your thoughts the potential fed rate actions for the remainder of 2024? We know that they're expected to be in session in mid-September. And I guess on the tail end of that is do you believe, you know, knowing that there's, you know, we're hearing like, you know, two thirds likelihood there might be cut, you guys might have different estimates of that at this point from whatever consensus you, you may have around that topic. But the, the question is, is it a quarter point? Is it, you know, 50 basis points? Is it nothing? Is it and have they waited too long even to make those decisions? Mark Zandi (08:24): Well I think they should cut rates, and I think they will cut rates at the September meeting of the FOMC. I, the, we got the minutes from the last meeting in July yesterday, and it was very clear that a, a a, a majority of the members are ready to cut rates assuming nothing completely unexpected happens is between now and the September meeting is a really a debate of a quarter point or half, I'd say a quarter. I, I think the Fed probably would keep a half point cut would only do a half point cut if there was some kind of severe financial market volatility. Something was kind of, felt like it was going off the rails more of an emergency, which, you know, if you go back a couple weeks ago, there was that period when we saw the stock market, correct, Japanese stock prices fell the kind of the unwind of the carry trade. Mark Zandi (09:15): And there was a lot of volatility, and there was a lot of handwringing that, you know, that this was gonna bleed out and we're gonna have a, a real problem in financial markets. Didn't happen. The financial markets have settled. So I, I think at this point, they go a quarter point and probably a quarter point or so every quarter going forward until they get back to the what I would call the equilibrium rate. That rate at which monetary policy is neither supporting or restraining economic growth. It, that's, you know, I'm not, it's unclear where that is, but it feels like it's somewhere around 3%. So I think, you know, it'd be cutting rates pretty steadily all the way through 2026. And they should, they should have been, in my view, been cutting long ago. I mean, I think they've achieved their goal. Mark Zandi (09:57): They have two goals. One is full employment check, you know, the unemployment rate's 4.3%, and actually that's been moving north here. And at the high is at the high end of what you would consider to be full employment and may become, you know, in consistent with a, a, the job market that's on the soft side and on inflation, you know, they, they have a 2% inflation target. But, you know, in all intents and purposes, they're there. And if you throw out o owner's equivalent rent, I wanna go into the details, but you should, and there's a lot of evidence that, that, that, that they should be doing that we're well below the 2% target. So if you're, if you're, if you buy into the view that the Fed has achieved, its, its, its objective, its mandates then why a five and a half percent funds rate target, you know, that, that no one considers that to be the equilibrium rate, well above the equilibrium rate. Mark Zandi (10:44): And you're taking a big chance with something break breaking in the labor market, in, in the financial system. So they will cut rates in September, barring some really unforeseen events that should cut rates consistently after that about time. They should have been cutting rates, you know months ago. Hey, Tom I've been kind of a bear on inflation. I was for the last, you know, couple of years. But the data, just looking at it objectively, the last three or four months to me is really showing a deceleration of inflation. I'm really getting comfortable with that, with that development. One thing that I we've been looking at is unit labor costs. So wage demands are down, and that unit labor costs are basically wages. And then you subtract away productivity, you actually divided it away. But anyway, think of it as subtracting away, productivity growth and wage demands are down. Rob Wescott (11:40): They're now in the mid threes, productivity has been hanging up there in the, in the second quarter, productivity growth was, was 2.3% in an annual rate. So unit labor costs are coming down really low. And they, they set the pattern of where inflation will be. And I'm convinced now that these numbers are, are, are, as Mark says are, are now asso toting into the into the 2% range. So I agree with Mark, they will cut, I could have accepted a rate cut even in, in, at their median late July, July. And I think that, you know, the, the markets are betting there'll be probably three rate cuts by the end of the year. That feels comfortable to me. The one thing that is mark said, as long as nothing else happens and they, they're going to be on their toes you know, if we see another really weak system for manufacturing, for example, like that, the last number was 46.8, which is a bad number for manufacturing. If we see a softer, even employment number that we get in early September you know, these would be, and if inflation comes in even lower, you know, like those, those could push more toward the 50 basis point cut in in September. Even. Amy, what do you think? So, Amy Crews Cutts (12:55): I, I would just add to that, that the latest blue chip economic indicators gave a 93% probability of a rate cut in September that was up from below 50% just a month or two ago. And that their pricing in a 69 basis point cut. So you know, that's, there are three cuts, basically, that's of 25 basis points each. But in some other conversations I've had with Fed economists, not members of the FOMC, but staff economists who, who perhaps have their ear, I was a little taken aback by, you know, the minutes that that mark just talked about indicated you know, a good portion of the voting members saying July could have been a, a good time for the rate cut, but they ultimately came around and said, okay, we'll wait till September. But I, I got sort of a sense from, from these folks that they're the, at least maybe publicly, they're still very much saying, well, we're waiting for the data and, and that sort of thing, and don't wanna make a mistake and come in too early. Amy Crews Cutts (13:55): But even if they start cutting, and, and I guess part of this is that it's a policy change. It's not just the action of cutting the rates, but it's a commitment that they're gonna, you know, be moving in that direction for the foreseeable future. I just kind of get the sense that they don't wanna indicate that there's leaning or commitment that way, which is a little surprising to me given, you know, where the data is. I follow the same things you do, Rob. I've been watching in National Association for credit management indexes as well, and there's a lot of weakness in the business sector. A lot of businesses not getting paid you know, accounts going into collections. A lot of business bankruptcies are back up to pre pandemic levels, perhaps exceeding that. You know, we won't have the data for a few more weeks. Amy Crews Cutts (14:35): But, so I kind of look at that and I see a lot of signs of, of weakness, maybe not full on recession, maybe we're at that soft landing, a little bumpy. But I think if they delay much longer, then they're gonna have a heart landing. And the other thing to pay attention to is that a 25, 50, a hundred basis point cut doesn't have a material impact unless the markets do something unexpected to interest rates for consumers. So, you know, again, maybe a little really fun mortgage, but when I say a little, very little because of the market's already priced it in, you don't see that big reaction. And it's not gonna impact credit card rates. It's not gonna, you know, the auto loan rates haven't really trended with the tenure treasury. So I don't see that as being an immediate plus for consumers, maybe a little relief on banks, maybe a little relief on some businesses that have to renew some lending, but it'll be a while for that to trickle through. Tom Aliff (15:34): Yeah. Just a a quick follow up on that. How long do you think it typically takes for things to trickle through? That where, you know, I guess, you know, there's some immediate things people might see with just like interrace on like CD accounts or, you know, things like that. But as it moves through like things like mortgage auto, like how, how delayed is that? Rob Wescott (15:53): Well, I would say typically six to nine months. And now when everyone knows the fed's gonna cut rates, mortgage rates are already down like a hundred basis points. Mm-Hmm, . So the market is pulling a little, some of those expected declines are being pulled forward a little bit, but it's not one month or two months. It's the benefits that you start to see are probably gonna be more like early 2025 would be my, my thinking. But we should see immediate relief, right? I mean for the small businesses, they have primary rate bank loans, prime rates tied to the funds rate that should come down. Consumers have credit card rates that are tied to short term interest rates, home equity lines of credit, consumer finance loans, they should start to come down. You know, it, it, mortgage rates are fixed. Mark Zandi (16:46): Mortgage rates are down because markets are, the 10 year treasury yield is down to 3.9, and that's anticipating what the fed's going to do. Auto loan rates should are starting to come in. So you know, and, and another reason why the stock market's at a record high, right? I mean, and housing values are as high as they are. So I, I agree there's a, there's a lag here, but I, I would expect to see immediate relief you know, for, for consumers, particularly lower income households who've taken on a lot of debt, credit card debt, consumer finance debt when inflation was you know, particularly high. Amy Crews Cutts (17:22): Yeah, I don't, I don't mean to imply there's no effect, but I think if your interest rate on your credit card's, 25%, 24 and three quarters is not a lot of relief. Rob Wescott (17:30): I'll take it, . I'll take it. I mean, I'll take it. Amy Crews Cutts (17:33): Yeah, yeah, I know. I mean, it certainly matters, but I, you know, if you sort of, and the other thing is that they don't always go down in the same way that they go up. That's true. The market responses aren't there, but to your point, Tom CD rates have already come down. So my family just renewed a, a cd a seven month cd, and it was already down one full percentage point from where it had been. Oh, wow. Rob Wescott (17:54): So, Amy Crews Cutts (17:54): You know, the banks are already preparing for that. And so, you know, we'll see some movement there, but it's gonna take a lot of rate cuts for us to all go, wow, this is really different. So Rob Wescott (18:06): What is that, what is the really different rate cut that you see? Amy Crews Cutts (18:10): Well, I think that's what Rob was talking about, is, you know, we to, we see that in early 2025, so if it's 25 basis points each meeting, it's every six weeks we see 25 basis points. And, you know, once it gets to a hundred basis points, 150 Rob Wescott (18:25): In Amy Crews Cutts (18:25): Auto and things like that, that might make, you know, a big difference for somebody. Mark Zandi (18:29): You know, one thing to point out is credit card loan rates, you know, last a look, 22% that, that's on cards that are paying interest, that's a record high. And that's the spread between that and, you know, any measure of cost of funds is as wide as it's ever been. So in the current political environment with a focus on pricing, I, I wonder, you know, whether credit card companies might not be a little quicker to bring in those rates than they typically have in the past, I wonder. Amy Crews Cutts (18:58): Good question. We'll get that experiment. Yeah. Yeah. Rob Wescott (19:00): That's all this is. It's gonna be a really interesting thing to watch because it's been a long time since we've had sustained rate cuts in America. So we're gonna, we eCommerce can be updating our calculations after, as we see what happens. One, I, I agree with Mark, some of the, some interest rates are just gonna fall immediately and, and costs will come down. That's great. I'm, when I'm talking about six to nine months, I'm thinking more about like, you know, car new car loan rates drifting down a little bit. It takes a while for like married couples say to start debating. They have a, you know, 8-year-old car, can they afford a new one? It's kinda like, well, I don't know, they were getting really expensive. Maybe we, maybe now we can start thinking about looking for a new car. You know, it, it, it's some of the, the, the effect of lower rates takes a while to work its way into consumer decisions, especially on major purchases like that. Mark Zandi (19:53): So you know, Rob, I might take the other side of that disco ran, we, again, it will be very curious to see how it plays out, but you know, vehicle prices are falling really fast, right? Yeah. So you can get this, this combination of falling vehicle prices, lower interest rates, and in fact, I've observed that people are putting off purchases, vehicle purchases 'cause they know the Fed rates are coming and they know the vehicle price is gonna fall even more, and they're kind of waiting for the bottom. So, you know, we might be getting a, and gas prices are back down, we're back down to three buck 40 for a gallon of regular and Lud, we may actually see, you know, vehicle sales, sales pop here more than anticipated, but really would be really interesting to see how that plays out. I, I'm, I'm really interested in that, by the way. Rob Wescott (20:30): I'm waiting for a, a, a car to come in, so I'm in that market and thinking about these calculations, just like you're talking about. And so this , are you waiting, are you waiting for vehicle prices to fall further? I'm waiting for supply to come in. Oh, supply to come in. Yeah. So even now there are still some supply problems, but I, I do think, we'll, we'll start to see some, this will be a pretty interesting case to see how quickly people respond and how quickly it works his way into decisions. So, yeah. Tom, we have to do this six months from now, we'll see whether Mark's more right, or I'm more right. Okay. We'll, Tom Aliff (21:11): Well, we'll, we'll definitely have to do that. Yeah, so I, I did have a question about that though. 'cause You know, I, I did, I did buy my son. So I, I'm someone who bought a car for my son, right? So he's you know teen driver needed a car before August. And you know, 'cause he, he started his school and you know, with, with our situation, it's just much more convenient 'cause he could take the little brother out to baseball, all that stuff. Right? so the, the question I have with vehicle v I guess prices dropping you know, through those situations and potential interest rates, you know, you know, falling as well, knowing that the interest rate that I had, I qualified. Well you know, you know, fortunately oh, good. I, I have fairly, I have Okay. Credit , Rob Wescott (21:49): Maybe you said talk to good employer if you didn't, anyway. Tom Aliff (21:52): Yeah, yeah. But the question I have is like, where, like, what's gonna happen, especially if anyone who purchased a vehicle like that, if, if the values drop over time, what happens with, you know, loan to value relationship in terms of the underwriting and the interest rates you know, you know, situation. Does that, does that create any form of lever or, you know, tipping point potentially in auto? Mark Zandi (22:14): Hey, can I just say, does he look like he can have possibly have a teenage son? I'm like, I don't, are you wondering the same thing? I'm wondering what's that all about? Well, Amy Crews Cutts (22:23): Those Gen Xers, you know, we're all over the map here. Tom Aliff (22:26): So , I have, I, I have I have, I have two kids that are over the age of 20 . Rob Wescott (22:33): Oh my gosh, that's not Tom Aliff (22:34): Even my, that's not even my oldest. Rob Wescott (22:35): I, I gotta, I gotta figure out what you drink. You know, , Tom Aliff (22:41): I'll take, I'll, I'll take you out some time and we can talk about it. . Mark Zandi (22:47): Well, well, I think you make a great point, especially with used vehicle prices. You know, they have come down, I, I'm speaking from memory, so I might not have this exactly right, but from more than in the past year, they've been steadily declining. Obviously they took off during the pandemic surge 'cause of the the shortages that existed. I think their mind is 10% year on year right now, mark. Yeah. So they're down quite a bit. So I do think that is starting to put some some pressure on auto loan quality, and it's one of the reasons why auto delinquency and repossession rates are up as well. So I do think you're, you're right, you're making a good point. But a lot of these folks, when they bought cars, when prices were high and got loans with long maturities, I mean, as long as seven years in some cases, I think they're, they're now struggling with that in the context of these falling prices, so much more likely we'll see more repossessions as a result of the lack of equity in these cars. Tom Aliff (23:40): Hmm. Amy Crews Cutts (23:42): But the thing about a car being underwater, and, and this was true, true of mortgages, even in the, the financial crisis, people don't get rid of the car because the loan to value is under water. You know, if they gotta get to work and they can afford the payment, yeah. So it has a lot to do with the cash flow. But, you know, mark, you're right, when the prices were jacked way up and interest rates were high people needed cars and perhaps got into cars they really couldn't afford. It's most recent vintages that are really struggling, and I know it's brought up the total delinquency rates, but it's, it's really focused on recent vintages. So that kind of ties into that story pretty nicely. According to Jonathan Smoke at our, you know, our friend at Cox Automotive? Yeah. He was saying that they've worked through kind of the leasing, you know, leasing didn't really happen a lot during the pandemic time. Amy Crews Cutts (24:31): And the, the car rental agencies got rid of their fleets. So now they're in sort of rebuilding all of that. The leases are coming, are growing again. But that's a lot of pressure off of used cars. So he doesn't anticipate, at least my reading of what he said, doesn't anticipate falling prices for much longer, that we're kind of now at that steady state. For used cars, new cars seem stuck at 15.5 million units. That's kind of where we've been all year. So maybe a little interest rate relief would help spurred demand. You also noted that in Colorado you can lease a new EV for 50 bucks a month by the time you take into account all of the incentives. Wow. Rob Wescott (25:13): Is that right? Amy Crews Cutts (25:13): I mean, practically giving the things away. So, you know, there's, there's a lot of reasons why we should be more optimistic about autos, and yet the data just is pretty boring. Mark Zandi (25:22): Yeah, I I, I think that goes back to my, the people are just holding off. They're waiting, they're just waiting. It's a deflationary kind of psychology, right? If prices are falling, you just wait, you know, just wait, wait. Amy Crews Cutts (25:32): Yeah. And I wonder if we're gonna see that with mortgage. If if I think that the fed's going to engage in a period now of cutting rates and the market rates are gonna follow, then I might not wanna, this is assuming that you have a mortgage from the past couple years that you might wanna wait and not jump into the refi market as soon as you're maybe a hundred basis points down. But maybe wait for that as well. So we'll have to see how sensitive consumers are to that refinance. They can refinance their auto loans too, provided they've got the, the cash flow and the, and the equity in the car. Tom Aliff (26:07): All right. So let's let's pivot and go macro, macro, go a little global here. So when we think about, you know, what's happening, there's, you know, some turmoil or activity, we can call it activity in many geographic regions you know, that, you know, outside of the us what are some of the biggest concerns that you see potentially impacting the US economy? And let's, let's start with you on this one, Rob. Rob Wescott (26:30): Yeah, so I think everyone is kind of cheering a little bit that Ukraine has had this incursion into Russia and they've got whatever, 400, you know, square kilometers of, of territory and so on. I guess that warms people's, the, you know, some, and it makes people feel like, oh, the bully's taking a, you know, a kick in the knee. But that's one that does concern me. It, because Putin is, you know, he's clearly not about to be embarrassed or he's going to, you know, lash out even harder because he's being embarrassed. So that's one that we're looking at really closely. And I'm going to pull in in a few weeks. I'm trying to get closer to the action to kind of get a sense of what's going on there on, on in Ukraine. But so that's one that I'm worried about. Rob Wescott (27:25): The other one of course, is, is China's aggressiveness with Taiwan. I don't think they're, they're on the verge of trying to attack Taiwan, but I think they're doing kind of a a squeeze play on Taiwan, and I think it's gonna be a persistent squeeze play. And so those are, those are risks that we need to watch. And, you know, there it, it's gonna have implications for some American companies and some European companies that have heavy investments in China, because if there is a some event with, with Taiwan is going to greatly change the, the nature of European and Western firms doing business in China. So those are a couple things we're looking at pretty closely. And I haven't even got to Gaza and, and Iran and so on. So I'll stop there and let these other folks comment. Amy Crews Cutts (28:15): So I'll note that, you know, there's a lot of small things that are, that add up to consequential ones and you know, this so direct impact on, on us. You know, the HT rebels attacking ships in the Red Sea. There's no European or, or United or North American ships flag ships going through the Sue Canal because they can't get insurance and the insurance markets for some of these hot areas. You know, the Red China Sea, China's been doing a lot of military drills and, and building up military bases there. And places like that can go from being, you know, operation normal to completely falling apart simply because there's risks in insurance markets and you can't send ships through there. So we're already sending ships around Africa because of the drought in the Panama Canal. We're sending ships around the Panama Canal, excuse me, around South America. Amy Crews Cutts (29:07): So, you know, those kinds of things. They can be seemingly small kind of events, but they start to add up. Now we've got the railway strike pending in Canada. I think it goes into effect tonight, unless they, they reach a last minute deal. So, you know, just without even thinking about like nuclear safety, right? So Rob, that was kind of implied with Putin, maybe being embarrassed is just questions of, you know, supply chains breaking and or costing a lot more. And again, that kind of goes against what the Fed's trying to do to get demanded supply imbalance. But if we hit supply chain problems, again inflation will, will rise, not because of demand, but because of supply constraints. So those are some sort of smaller risks that I see that, that certainly are playing out right now. Mark Zandi (29:57): But just take two things. One there's always geopolitical risk there. There's never a time when there isn't. And I'm not so sure it's higher today than it has been in times past. You know, it, it could very well be the case that because media, the media is on all of this immediately, it's, you know, we're seeing it immediately in our social media and on, and, you know, the information feeds that we get, that it just feels like there's more risk out there. I'm not sure that there is I think it's, it's equally unsettled overseas as it always has, and in other times, been even more unsettled than in times that exists. I, I remember when I was a kid, we would run drills where we'd run under our desk 'cause in preparation for a nuclear bomb landing on us, talk about geopolitical risk , that, that, that felt like a bigger deal. Mark Zandi (30:48): The other risk is anything that caused the, the, the key channel back to the United States of geopolitical risk in most cases is just oil prices. You know, if something upsets oil oil supply across the globe disrupts it, and oil prices go higher even though we produce a lot of energy oil here you know, it still does a lot of damage to our economy very quickly. Nothing does more hurts lower income households faster than having to pay more for a gallon of regular unleaded. Then they have to make some really hard choices. Do I pay my credit card? Do I, you know do I pay em all on my auto loan or do I, you know not put groceries on the table? So I, I think that, so that means for me, anything that's going on in the Middle East is probably the most significant serious, you know, potential geopolitical threat. Thomas, are you there? Yeah, Tom Aliff (31:48): I'm, I'm still here. Yeah. Okay. Yeah, I, I was just waiting to see if anyone else wanted to weigh in. Oh, anymore. Great. Additionally, yep. Yeah, yeah. That's the power of the pause mark. Yeah, yeah, Rob Wescott (31:58): Yeah, yeah. You look frozen, so that's why I thought maybe you had Tom Aliff (32:01): No, I was, I was, I was frozen with the the insights that you guys have. Oh, there go, been providing me . Rob Wescott (32:07): The one thing I would just say just to is actually the economic slowdown in China, I think is greater than people realize. And I think one of the reasons why our inflation is coming down so much is because we are seeing softening of, of construction in, in China, and commodity prices are coming down. And, and so, but that does have a, a, a feedback mecca feedback loop back to President Xi. And you know, for the last 30 years, China's been growing rapidly. And so they could you know, they were basically playing their waiting game in the world and, and seeing rising living standards and everything. And now we have a, a pretty clear economic slowdown and, and falling population and a number of other factors that make China suddenly nowhere near as as me as anywhere near as optimistic about China's prospects now. Rob Wescott (33:10): And that can have a when you have leaders for life, leaders for life with slowing economies is generally not a good combination. So, you know, I I think we do have a few new dynamics here, which is something we're seeing with Mr. Putin also. So anyway, I I, I, I think we, we are actually at somewhat more elevated risk for a possible bad, bad things. By the way, a mild international problem is actually good for American bonds and, you know, there's, it's good for the dollar and so on. So it has to be something that if, if it's just kind of a bad day or a couple of bad days, generally the world rallies and wants to buy American things. So it would, you know, it would take something more serious to you know, that actually damages America. And you look, there are a bunch of American companies that have 25% of their revenues in China, or even 40% in a, in a few cases of Fortune 500 companies. Those are the kinds of things that I, I think are you know, some risks that we need to, to keep an eye on. Tom Aliff (34:17): Yeah. So why, why don't we pull it back to the United States then, 'cause we're, you know, we're, you know, have an election coming up in the next couple of months. And so I guess, what are some potential, you know, impacts that you think consumers, businesses you know, should be, you know, aware of heading into the season, Rob Wescott (34:34): The election season? Tom Aliff (34:37): Yep. Rob Wescott (34:39): Who wants to take that? Amy Crews Cutts (34:42): You have a nice chart mark that you use with the, you know, Democrat sweep and the Republican sweep. Yeah, Rob Wescott (34:48): Yeah. Amy Crews Cutts (34:48): But you have, I haven't seen it since Biden dropped out, but I liked your chart about just thinking through the risks. Mark Zandi (34:55): Well, I, maybe I'll take a crack at it. Quick, quickly. I mean, look these, the, the visions of these two candidates are very different in terms of economic policy and which I know well, very, very different you know, president Trump. And the one thing I'll about say about President Trump, that's I think key to recognize is that whatever he says he is gonna do, he's gonna do. Now, he may not do it to the degree he says he is gonna do it, you know, maybe some of it's political po posturing, some of it might be negotiation, just trying to make a point. But at the end of the day, based on what happened back in 20, in his first term, he's gonna do what he says he's gonna do. So what does that mean? Higher tariffs, we're gonna, we're gonna see higher tariffs you know, maybe not 60% on Chinese imported product, but it's gonna be, they're gonna be higher tariffs. Mark Zandi (35:51): We are gonna see some deportation of undocumented and unauthorized immigrants, not, not 11, 12 million, but there's gonna be some of that that's going, going to occur. He's going to seriously think about how he can influence monetary policy. I mean, he said this two weeks ago, I, he's on board with the president having input into a setting of interest rates. And you know, that obviously historically has not worked out very well. He's gonna cut taxes though the tax cuts that he implemented on his first term, that for individuals that expire at the end of 2025, he'll make them permanent. And now, obviously a lot of this assumes what, you know, it depends on what the makeup of Congress is and how much latitude he has there. But a lot of this stuff he can do under executive order, he's gonna cut corporate tax rates. Mark Zandi (36:42): So you kind of add that all up. And by the way, the tax, the tariff revenue that he generates, and he'll generate revenue right from, 'cause it's a tax, it's a tax on American consumers that'll go partly to paying for the tax cuts that he's envisioning through individuals and corporations, but not all the way it will be. It'll add to the deficit. So straight up macro theory, you add that all up, tariffs labor pullback and labor supply unfunded fiscal support stimulus in a full employment economy. And that adds up to inflation. It that means higher inflation. Now, ultimately, the fed's gonna fight that. The fed's always gonna get 2%. So that what it also means is higher interest rates. So it's gonna be some combination of higher inflation or higher interest rates. So that's what we're gonna get under under President Trump in one form or another. Mark Zandi (37:33): President if it's a President Harris, again, it really does depend on the makeup of Congress. But she's going to focus on, and you, you, she came out with her plan, her plan about a week ago, more housing supply. She's gonna give tax breaks to builders to build more housing supply. 'cause We have a housing shortage. And that's created an affordability crisis. She's going to cut the earned income tax credit and the child tax credit. These are credits for low income. The EITC is for low income working Americans. She is going to keep the tax cuts for folks, make less than four oh k and allow them to rise for folks that make over 400 K and she's gonna increase corporate tax rates. She's talked about price gouging. But if you go look at that, I can't quite figure out what that means, you know, in terms of the actual, well, what does it mean? Actually, I can't figure that out. I'm, I'm, I'm not in favor of price caps or price restrictions. I don't know that she's talking about that, but it's something else that she brought up. So, in, in a, if you look at her policies, it's, it does not add to deficits. The, the tax revenue she raises more than offsets the cost of all the other things that she has proposed. So take that, those two things, those are, those are two very different visions for, for the economy going forward. Rob Wescott (38:55): So a couple of comments. First of all, we're in the short run. We're in the funny season of for politics. And so, you know, blaming food companies for inflation. You know, we all know that CPI was up 2.9% year on year in July. Food prices, food at home prices are up 1.1% in the last 12 months, July, on July. So food is actually a source of disinflation in America, not inflation. And if you really look at even the profit margins of like grocery companies, food companies of the last three years, their profits did bounce up some in 2022 prices were up sharply, food priced up 20 in 2022. But they're not really driving inflation now. So that, this is a kind of a funny season for, you know, talking about things like that. The other thing that's a funny season is talking about how we're not gonna tax tips for workers. Rob Wescott (39:54): I mean, that, that, that's just a bad policy. And you know, people say it when they go to Las Vegas to try to get votes, but it's not really a good policy. Only about I think about a third of all people working for tips don't even pay the, you know, the any federal income tax. It's more of just a talking point. I'm a little worried about like the immigration thing. If we really, even if we didn't deport 10 or, or 12 million foreign folks out of the us even if it was just two or three, we've done some modeling work on that. Even that kind of a deportation plan, by the way, you're talking about like 207 seven 30 sevens leaving every day, flying people back to Latin America. And even that, that takes like a couple of tens real easily off GDP growth. Rob Wescott (40:46): So rather than like 2.4, you grow 2.2% a year, something like that. So that, that would be a negative for, for for GDP. So I just, and I think businesses are, are concerned about that. One of the big question is what's the future of the IRA? And I think many people would say, oh, if Republicans take over the Congress, if if President Trump is is reelected the IRA will be dead. And I'd just like to point out, I don't necessarily think that's going to be true. I think some elements of IRA may go, like the $7,500 tax credit for EVs may go, but a lot of Red State governors really liked the subsidies coming from, from IRA governor McMaster of South Carolina. He, he, he keyed a, a conference here in Washington a few months ago. On the future of EVs, there's a lot of EV companies investing a lot of money in his state of South Carolina and other states, Tennessee, Ohio a lot of red states, Georgia have gotten a lot of money from from IRA. And so I, I don't think you just are gonna necessarily turn off the ira even if it's a, even if it's President Trump. Amy, what do you think? Amy Crews Cutts (41:59): So I would add to that, that, you know, it's all nice for political rhetoric to say that you're gonna get rid of all the undocumented workers in the United States, but there's a whole lot of businesses including Republican owned business, you know, where the business owners lean Republican where that labor supply is incredibly important. And you get rid of all those workers and suddenly we don't have anybody to pick our strawberries. We don't have anybody to, to do a lot of the things that have to get done. The National Association for Business Economics just surveyed probably the three of us participated in that, the made policy survey. And one of the things that came up in there was, was well north of 70% of economists say we need to increase both visas for high skilled workers and for low skilled workers. And, you know, one of the reasons why we end up with so many undocumented ones is we don't make it possible for them to be here legally through the visa programs. So I think, you know, we'll see how that, how this all plays out, but I don't see how, other than, than sort of spiteful rhetoric the deportation of our labor supply is a good idea. And I would even imagine that that we might see some pushback from businesses on that. Tom Aliff (43:12): Cool. I, so I, I know, mark, you had to, to go here in a second. So what I wanna do, maybe I'll just pop into the last question and if we want to weigh on anything else, and then you can drop when you need to. Okay. Yeah. So you, I, I guess, and then, and we can come back and add anything else on that. The last question if, if anyone wants to so I guess is where, you know, considering, you know, you know, the economic factors that do get a lot of attention and some that don't get a lot of attention, you know, one, one example, you know, I was always remarked by the, you know, Robert f Kennedy's things that he said about GDP years ago where it doesn't necessarily count for the health of our children, the quality of our education, joy of play, or the beauty of poetry. Like, you know, things like that. If, if they are, you know, receiving additional i, I guess merit, what is not getting a lot of attention today. Amy Crews Cutts (44:02): Oh, wow. So did we, Tom Aliff (44:04): Did we lose Mark by the way? Amy Crews Cutts (44:05): I I think we lost Mark. He had to go. Oh, okay. So, you know, I think that we talked a little bit earlier about when budgets start to get tight and what do you have to cut? And, you know, once again, at least in my area, starting to hear talks about how we don't need arts education. And I keep thinking about, there's a lot of conversation about the value of a four year college and, you know, people should be going to trade schools. And my son just started high school and, and one of the things I remember back to the time that I was in high school was taking shop class. And you might say, well, why would I do that? Well, if you're going to be an engineer, you need to know how to build stuff. It is not enough to know math and physics. You actually have to know how to work with steel or wood or those kinds of things. And so as we talk about getting rid of arts education, and again, some of these trade school applications in schools, because we're all focused on academics I think that that is very shortsighted and, and undercuts the productivity of our labor. Rob, what do you have to say? Rob Wescott (45:12): So one thing that we've been paying a lot more attention to is I'll call it America's Forgotten Counties. And there are about 3,200 counties in America, and we've looked at and, and there's more economic research being done on forgotten counties. Many people are defining a forgotten county as counties that have go over the last 20 years, they've had less than half the population growth of the overall country, and less than half as much median household income growth as the rest of the country. And the way we look at the numbers is about 970 counties that could be called America's Forgotten Counties. So these are counties, they're, they're, many of them are rural and they have, they had a terrible 20 years from 2020 to 2022, they actually have gotten a revival. Covid in some ways helped them quite a bit. Rob Wescott (46:09): They got people working remotely could move to rural areas. They got stimulus checks. And in a lot of these rural counties and and forgotten counties, a a $1,200 stimulus check actually was a big benefit. One other thing that they've been getting is IRA funding. A lot of the subsidies for semiconductor plants and battery plants and all this are going to rural counties. So I think that's, they've kind of fallen off our radar screen. And I actually think that we are seeing signs of revival in, in America's Forgotten counties. They're not all just Appalachia, by the way, they're, a lot of them are in, in Illinois and in Ohio and in Michigan and in Indiana. And and so they're, they're a part of the country that I think is is, is, is is still under stress and they're still not doing as well as the urban areas and the, the higher growth areas. But I think the big question is gonna be what kind of support does America give to these counties? And, and this gets to the election and is it child tax credits? Is it earned income tax, you know, expanded earned income tax credit? Is it continued like IRA funding? So anyway, I think, I think that there's gonna be more focus on America's Forgotten Counties. And I think there probably needs to be more focus on American's forgotten counties. Amy Crews Cutts (47:37): So Rob, I would I was just up in, in Washington County, Maine, which is one of the poorer counties in, in that neck of the woods. And it's, you know, when you talk rural Maine, when they're, when their third or fourth biggest city is 35,000 people, it's Maine is a pretty big area with not very many people. And one of the interesting things there is their dedication to land trust and, you know, to preserving the forest and whatnot. But one like little tiny boost that comes from some of the greener initiatives is the carbon offsets. And a lot of these counties are benefiting from that. If, if they have forest land, of course. But that's a small little boost that that comes from some of the green initiatives in an area that, you know, is trying hard to preserve that way of life. So yeah, kind of a little bright spot on that. Rob Wescott (48:25): Yeah, so I grew up in Maine, and my family's been from Maine since 1680 from Hancock County, just next to Washington County. But so Maine has you're, you're correct, there is a lot, there are a lot of green activities in Maine and governor Janet Mills at the nominating democratic National Convention the other night, she, she bragged about Maine's green activities. So that was a big thing during the the, the, the DNC the other night. But they, they, we basically have stagnant population there. And so the, the population, Maine isn't very different now than it was in 1820 when America joined the United States. So it's like 1.2 million back then, it's like 1.4 million now. Back then it was like a 10th of everyone in America lived in Maine. Now it's like a third of 1% of Americans live in Maine. So they, we, we do have kind of a an issue there, but green has basically been a, has been a plus for the main economy. You're correct. Tom Aliff (49:25): Okay. Well, it looks like we're out of time for today. You could obviously, you know, continue talking to, you know, the three of you for you know, as, as you said, you know, 20 minutes you know, a couple days we could, you know, spend a week together. But I wanna thank you Amy, mark and Rob for joining me today. To our listeners, I hope you enjoyed today's topic as much as I did. If you have any questions or suggestions for FU future podcasts, please reach out to us at Risk advisors@equifax.com. We look forward to hearing from you.