Best.Economy.Ever.

Episode Summary

Executive Summary: The episode argues the U.S. economy is exceptionally strong: inflation is cooling toward the Fed’s 2% target, GDP/GDI revisions suggest faster underlying growth than previously thought, consumer balance sheets improved, layoffs remain very low, and profits are healthy. The hosts also discuss policy risks from tariffs, immigration restrictions, and interest-rate caps, while reflecting on criticism of Mark Zandi’s forecasting and his election model.

Main Topics: Inflation and PCE Deflator Update (Priority: 5/5): Matt reviews the latest PCE inflation data, noting headline PCE rose just 0.1% in August and annual inflation fell sharply, supporting the Fed’s recent rate cut and easing concerns about reacceleration. GDP/GDI Revisions and Stronger Underlying Growth (Priority: 5/5): The annual revisions showed GDI was revised up materially, narrowing the gap with GDP and implying the economy has been growing faster than previously understood, with some recession-era declines revised away. Consumer Saving, Spending, and 2025 Outlook (Priority: 4/5): Revisions lifted the personal saving rate from roughly 3% to about 5%, suggesting households are in better shape than thought and have more spending firepower, though lower-income consumers remain more constrained. Labor Market Resilience and Low Layoffs (Priority: 4/5): Initial UI claims and the Conference Board labor-market differential indicate the labor market is cooling but remains resilient, with layoffs still exceptionally low despite softer hiring. Corporate Profits and Productivity (Priority: 4/5): Revised profit data were still solid, reinforcing the idea that firms remain healthy, margins are holding, and productivity gains may be helping offset wage costs and support employment. Election Forecasts and Media Criticism (Priority: 3/5): Mark, Chris, and Marissa discuss a Wall Street Journal opinion piece criticizing Mark’s forecasting history, arguing it was politically motivated cherry-picking meant to discredit his Harris election model. Policy Risks: Tariffs, Immigration, Rate Caps, and Industrial Policy (Priority: 5/5): The group critiques proposed tariffs, immigration restrictions, and credit-card rate caps as economically distortive, while acknowledging some strategic value in targeted manufacturing support amid China-related national-security concerns.

Key Arguments: Headline PCE inflation is now close to the Fed’s target, and core inflation is also trending lower, making a renewed inflation surge hard to see. The Fed’s official 2% target is on headline PCE, not core PCE, though core is useful as an underlying trend measure. GDP/GDI revisions imply the economy’s actual growth has been stronger than previously measured and that the post-pandemic recovery has been unusually robust. The rise in the saving rate to around 5% means households are healthier than previously thought, which should support consumption in 2025 even if spending growth slows. Low UI claims and strong profits indicate firms are not under pressure to lay off workers, supporting labor-market stability. Sentiment surveys can look weak even when the hard data are strong; therefore, claims and payrolls matter more than confidence readings. Tariffs and rate caps are viewed as inefficient, capricious policies that raise costs, distort markets, and can produce unintended consequences. Immigration restrictions could reduce future labor-force growth and damage long-run U.S. growth potential. Targeted manufacturing subsidies may be defensible for national-security reasons, but broad industrial forcing is viewed skeptically. Mark’s election forecast and prior economic calls were defended as generally accurate when judged in context and over turning points rather than isolated misses.

Data Points: Headline PCE inflation (August, month-over-month): 0.1% - Matt said headline PCE rose 0.1% from July to August. Headline PCE inflation (year-over-year): 2.2% - Annual PCE inflation fell from 2.5% to 2.2%. Core PCE inflation (month-over-month): 0.1% - Core PCE also rose 0.1% from July to August. Core PCE inflation (year-over-year): 2.7% - Core PCE ticked up from 2.6% to 2.7%. Fed target: 2% - The discussion clarified the Fed targets headline PCE at 2% over the medium term. GDP vs GDI revision: GDI revised up significantly - Annual revisions narrowed the gap between GDP and GDI and implied stronger growth. Year-over-year GDP growth through Q2 2024: about 3% - Used in discussing the economy’s strong post-revision pace. Year-over-year GDI growth through Q2 2024: over 3% (about 3.5%) - After revisions, GDI was described as above 3%, roughly 3.5% year-over-year. Implied potential growth (Okun’s Law arithmetic): close to 4% - Derived from GDP growth and rising unemployment over the last year. Unemployment rate: 4.2% - Described as elevated from a year ago but still consistent with a strong economy. Unemployment rate increase over the period: 6-7 tenths of a percentage point - Used to infer higher labor supply and stronger potential growth. Personal saving rate (revised): around 5% - Revisions lifted the saving rate from about 3%. Personal saving rate (pre-revision recent reading): 2.9% - Referenced as the prior observed August reading before revisions. Pre-pandemic personal saving rate: 6-6.5% - Described as the approximate equilibrium saving rate. Average saving rate by income distribution: Top third drives roughly 55% of spending - Used to explain why higher-income households matter most for aggregate consumption. UI claims four-week moving average: 225,000 - Marissa’s stats-game number; described as consistent with an exceptional economy. Corporate profits growth: 2.96% quarter-over-quarter - Chris’s stats-game number; after-tax corporate profits growth in the GDP accounts. Corporate profits growth before tax: 3.17% - Mentioned as the before-tax counterpart to the 2.96% after-tax figure. Conference Board labor market differential: 12.6 - Matt’s stats-game number; lowest since 2017, suggesting cooling labor demand. Conference Board confidence index: 98.7 - Described as near its long-run average and still supportive of consumer spending. Conference Board confidence index prior month: 105.3 - Used to highlight the August decline in confidence. Gas prices: around $3.20/gallon - Cited as helping consumer sentiment and reinforcing the favorable inflation backdrop.

Pivotal Quotes: "The economy is objectively as good as I've ever seen it." — Mark Sandy: Mark summarized his view that the U.S. macroeconomy is unusually strong across growth, labor, inflation, and markets. "The Federal Reserve's target is 2% on the consumer expenditure deflator, not the core PCE, the actual PCE deflator." — Matt Collier: Used to clarify the Fed’s official inflation target during the PCE discussion. "We don't see layoffs in the economy." — Marissa Di Natale: Said while discussing low UI claims and the resilience of the labor market.

Implications: Listeners should expect continued moderate inflation, solid growth, and low layoffs into 2025, though consumer spending may cool modestly. Policy debates on tariffs, immigration, and rate caps could materially affect growth, trade, and labor supply.