Dreadful Debate, Good Data

Episode Summary

Executive Summary: The episode opens with reaction to the Biden-Trump debate, but quickly pivots to a deep dive on recent U.S. inflation data and the Fed’s policy stance. The hosts argue inflation’s surge was driven mainly by the pandemic and Russia’s invasion of Ukraine—not either president—while noting the Fed likely stayed too loose too long. They also discuss strong consumer/income data, cooling housing signals, and rising concerns that keeping rates high for too long raises recession risk.

Main Topics: Debate reaction and the absence of economic substance (Priority: 4/5): The hosts briefly discuss the presidential debate, describing it as somber, disappointing, and light on meaningful economic policy content. They note Trump’s inflation attacks and references to Nobel laureates, but little substantive discussion of economics. What caused the inflation surge? (Priority: 5/5): The group strongly argues that inflation was primarily caused by exogenous shocks: COVID-related supply chain and labor disruptions, followed by Russia’s invasion of Ukraine and the commodity spike. They reject the idea that Trump or Biden can be directly blamed. The Fed’s policy mistakes and higher-for-longer risk (Priority: 5/5): While absolving the presidents, the hosts say the Fed may deserve criticism for waiting too long to raise rates and for continuing asset purchases into early 2022. They debate the risks of keeping rates high despite inflation nearing target. May inflation and income data were encouraging (Priority: 5/5): The PCE report came in stronger than expected, with headline inflation flat and core inflation easing. Real disposable income and consumer spending also looked healthy, reinforcing the view that the inflation spike earlier in the year was largely a measurement issue. Housing and consumer sentiment are diverging (Priority: 4/5): Housing shows cooling through discounts to asking price and slowing price growth, while consumer sentiment measures diverge sharply between Conference Board and University of Michigan surveys. The hosts trust the Conference Board more than Michigan. Recession risk remains a live concern (Priority: 4/5): Despite solid data, the panel sees growing recession risk from prolonged restrictive policy, debt rollover, and potential market repricing if investors stop expecting imminent rate cuts.

Key Arguments: Inflation was largely driven by pandemic shocks and the Russia-Ukraine war, not by Trump or Biden’s policy alone. The Fed did too much stimulus support and waited too long to tighten, especially by continuing long-term security purchases into early 2022. The May PCE report supports the view that early-2024 inflation reacceleration was mostly measurement-related rather than a new inflation trend. Real disposable income growth and consumer spending remain solid, suggesting the economy is still healthy for now. Housing is cooling, which is healthy for inflation, but the housing market remains constrained by high rates and low mobility. The University of Michigan sentiment survey appears distorted by methodology changes and political sorting, while the Conference Board survey better matches actual consumer spending behavior. Keeping rates high for too long creates long and variable lags that may already be weakening housing, business investment, and debt-servicing capacity. If the Fed waits for obvious deterioration before cutting, it may be too late to avoid a downturn.

Data Points: Headline PCE deflator, monthly: 0.0% (technically -0.01%) - May inflation reading; flat month-over-month and slightly negative at the third decimal place Headline PCE deflator, year over year: 2.6% - Down from 2.7% in April Core PCE deflator, monthly: 0.1% (about 0.083%) - Fed’s preferred inflation gauge for May Core PCE deflator, year over year: 2.6% - Down from 2.8% in April Shelter/housing component in PCE: 0.4% monthly - Housing-related prices continued to rise, though moderating Healthcare prices in PCE: 0.7% monthly - A notable acceleration and one of the few concerning components University of Michigan 1-year inflation expectation: 3.0% - Down from 3.3% in May Real disposable personal income: 0.5% monthly - A strong June/May reading highlighted in the stats game Real consumer spending: 0.3% monthly - Used as a clue in the stats game; strong spending performance Conference Board consumer confidence: 100.4 - Near its long-run average University of Michigan consumer sentiment: 68.2 - Well below historical average and more pessimistic than the Conference Board Moody’s Analytics repeat-sales HPI: 0.2% monthly; 5.77% year over year - May house price growth, still elevated but decelerating Redfin typical homebuyer discount to asking price: 0.3% below asking - First discount since the start of the pandemic New home supply: 481,000 homes - A 16-year high in available supply Fed funds target range: 5.25% to 5.50% - Held for nearly a year at the time of the episode Unemployment rate: 4.0% - Used to argue the Fed has arguably achieved full employment Peak inflation during 2022 spike: about 7% - Referenced as the inflation high-water mark after the Ukraine war and commodity shock Recession probability estimates: Chris 33%; Matt 30%; Marissa 25%; Mark 25% - Panelists’ current subjective recession probabilities Consumer spending growth benchmark: 2.45% year over year - Mark noted current real consumer spending growth matches the post-pandemic/pre-pandemic eight-year trend

Pivotal Quotes: "I have a deep sense of existential dread now." — Marissa Di Natale: Reaction to the tone and substance of the presidential debate "I don't think it was either one of their faults. I think it was these exogenous forces, both the pandemic. And then you have geopolitical things happen that contributed to inflation." — Mark Zandi: Core explanation for the inflation surge "I think the Fed's playing with fire here, and the heat is starting to build with each passing month." — Mark Zandi: His warning that higher-for-longer policy could trigger economic damage

Implications: Listeners should expect disinflation to continue, but the Fed may still be too cautious. High rates are increasingly pressuring housing, debt rollover, and investment, so recession risk could rise if policy stays restrictive too long.