US Risks Talking Itself Into a Recession, Moody’s Economist Says

Mark Zandi, who has been an economist for more than three decades, has never seen so many people think a recession is imminent.

Sentiment is so poor that it poses its own risk, which is a sort of self-fulfilling recession prophecy. The chief economist at Moody's Analytics joined the "What Goes Up" show to discuss his outlook after government data showed the highest level of inflation in almost four decades.

The highlights were lightly edited. You can subscribe to "What Goes Up" on Apple's Podcasts or wherever you like.

The GDP outlook for this year and next year has been changed. Real growth is expected to be 1% this year and 2% in 2023, compared to previous predictions of 2% and 2.5%. What will happen over the next two years?

I have no recession according to his predictions. When inflation is so high and the Fed is on DEFCON 1 and rightfully focused on getting that inflation down by jacking up interest rates, sentiment is miserable, that's when recession risks are high.

I talk to people who think we are going into a recession. I have never seen something like that before. A lot of business cycles have happened to me. No one knows when a recession will occur. Everyone is expecting a recession. It won't take much to push us in when sentiment is so fragile. We are going to be able to avoid a recession with a little bit of luck and good policy making by the Fed. I don't say that with much confidence.

We don't need a recession to get inflation back in The price of oil is going to go down. The price of natural gas will fall. As supply-chain issues iron themselves out, vehicle prices will come down. Goods prices will come in.

Do you think the economic expansion will continue? Were you thinking about that?

The most comforting thing that I can think of is that the American consumer is in a good position to weather the economic downturn. We will avoid a recession if the American consumer continues to spend the way they have always been spending. The global economy will continue to grow if the American consumer hangs tough. Some parts of the global economy will go in, but the US consumer is driving it.

The American consumer is in great shape. They are getting hammered by the high inflation, but they have a lot of excess savings built up during the Pandemic and it is available to everyone.

As of June, the average American household had between $7,000 and $8,000 in excess savings. You can do the math if I pay $500 more a month for inflation and I have thousands of dollars in excess savings. I get a little bit of time with that. I can use the excess savings to make up for the effects of inflation.

The debt is not very high. The debt service burdens have never been as low. People have locked in historically low interest rates. They are not exposed to the higher rates. Stock prices are down but house prices are up. Today, people are wealthier.

I wonder if we are going to see a cooling off of the housing market. It is one of the most important parts of the economy. In the next couple of years, what will housing look like to you? What effect does it have on the economy as a whole?

It's cooling off. It went into deep freeze very quickly here. The mortgage rates were almost double what they were last year. The monthly payment for a first-time home-buyer is $500 to $600 more now than it was a year ago, because of the higher interest rate and higher house price. That's too much.

First-time home buyers are out of the market. Trade-up buyers are locked in. The average rate on outstanding mortgages is between 3% and 4%. You will go from four to six if you sell your home and buy another one. The increase in payment is large. People won't do that.

Home sales are coming down and listings are starting. I can feel it when I get listings in email from different markets. Six months ago there was no inventory. The list has gotten longer and longer. I think house prices will fall in parts of the country that have been hardest hit by the swine flu.

I think prices will decline nationwide. We might be able to sneak through with prices going flat for a few years and letting household incomes and rents catch up. That's assuming no recession. If we get into a recession, I think that will have a negative effect on house prices.

There are two things I will say about this one. This is done by design. The Fed is trying to slow the growth of the economy. The most rate sensitive sectors of the economy are where that happens. The housing sector is sensitive to interest rates. This isn't a big deal. You would expect that.

The mortgage lending that has been done since the financial crisis and the collapse of housing back over a decade ago has been great. I am on the board of directors of MGIC and I am also the chair of the risk committee. Since the collapse, it's been pristine. It is a 30-year, 15-year fixed rate mortgage with no frills.

I don't think the stresses here will lead to a big decline in prices. Prices are going down in a fair share of markets. I would think that would happen. That is what the Fed would like to see.