Festive Names and Forecast Games

Episode Summary

Executive Summary: Holiday episode of Inside Economics featuring Northern Trust chief economist Carl Tannenbaum. The panel reviews his career, the 2023 banking scare, persistent non-bank financial risks, Treasury market liquidity, and why the U.S. avoided recession. They also debate the Fed’s path, inflation progress, and recession odds for 2024, while using the show’s statistics game to illustrate resilient growth and cautious optimism.

Main Topics: Holiday banter and introductions (Priority: 2/5): The episode opens with light holiday chatter, nickname jokes, and name-based Christmas puns before welcoming Carl Tannenbaum as guest. Carl Tannenbaum’s career path and perspective (Priority: 4/5): Carl traces his path from bank risk management and economics to the Fed during the financial crisis and then to Northern Trust, emphasizing the link between economics and risk. Banking crisis and financial stability (Priority: 5/5): The hosts discuss SVB and broader lessons from the 2023 banking stress, with Carl arguing the root issue was known and that banks have been more tightly supervised since. Non-bank financial system risks (Priority: 5/5): Attention shifts to private credit, leveraged loans, non-bank mortgage lenders, and other lightly regulated channels that may now carry more systemic risk than traditional banks. Treasury market liquidity and market structure (Priority: 4/5): The panel debates whether post-crisis regulation and reduced dealer balance sheets have impaired Treasury market liquidity or whether volatility is mainly fundamental and policy-driven. Why recession did not arrive in 2023 (Priority: 5/5): Carl says the labor market was the main reason the economy avoided recession, with strong wage income, constrained labor supply, and firms reluctant to lay off workers after hiring difficulties. Fed outlook, inflation, and 2024 recession odds (Priority: 5/5): The group discusses the Fed’s updated forecast, three projected rate cuts, improving but still elevated inflation, and differing views on recession probability and key downside risks.

Key Arguments: SVB was not a complete surprise; warnings existed in mid-2022 and both the bank and regulators could have acted sooner on interest-rate risk. Traditional bank credit is now only part of financial intermediation; roughly three-quarters of capital needs are met through markets and private capital, limiting the macro effect of bank tightening. The biggest hidden vulnerability may be in private credit and other non-bank pools, where rapid growth and opaque reporting could conceal interest-rate and leverage risks. Treasury market liquidity concerns are real but may be overstated; the Treasury market remains deep, and recent volatility appears more tied to fundamentals and shifting rate expectations than dealer shortages alone. The labor market’s strength was the key reason the economy avoided recession in 2023, because wage income supported consumption even as inflation and rates rose. Firms avoided layoffs because they expected any slowdown to be short and did not want to lose workers they had struggled to recruit and retain. Inflation is still not fully beaten, but the latest three-month core PCE trend is close enough to target that the Fed may want more confidence before cutting rates. The Fed’s historical fear of repeating past mistakes makes it likely to remain cautious and hold rates steady until it is convinced inflation is firmly contained. A recession in 2024 is possible, but the main risks are a financial accident, an oil price shock, or a policy mistake by the Fed; an upside scenario would be continued productivity and labor-force gains. Conference Board and University of Michigan sentiment diverge partly because the Michigan survey’s political identification question makes responses more partisan.

Data Points: Bank failures in the 1980s: 4,000 institutions - Carl cites widespread failures in the 1980s tied to poor interest-rate risk management. SVB growth: Almost doubled in six quarters - Used as evidence of rapid growth that should have triggered more scrutiny. Private credit market size: About $2 trillion - Carl’s estimate of corporate and consumer loans made by private capital pools. Bank balance-sheet loans: About $16 trillion - Comparison point for private credit scale relative to regulated bank lending. Non-bank private credit: $1.6 trillion - Mark’s estimate of private credit lending by funds and related vehicles. Leveraged loans: $1.6 trillion - Part of the leveraged/non-investment-grade corporate credit stack. CLO exposure: About $1 trillion - Portion of leveraged loans securitized into collateralized loan obligations. Junk corporate debt: $1.2 trillion - Lower-rated corporate debt included in the non-bank risk discussion. Share of non-financial corporate debt: About one-third - Mark’s summary estimate of debt tied to below-investment-grade borrowers and opaque lenders. Core services inflation: 3.9% year-over-year - Mentioned as a sticky component the Fed is watching closely. Three-month core PCE inflation: About 2.3% annualized - Carl says this is an acceptable recent trend and closer to the Fed’s comfort zone. Q3 GDP growth: 4.9% - Final revision for the third quarter before the Q4 tracker discussion. Moody’s/Mark Sandy Q4 GDP tracker: 2.4% - Current-quarter estimate based on incoming data, especially retail sales. Fed projected rate cuts: 3 cuts of 25 bps - Baseline FOMC forecast discussed after the December meeting. Rate-cut timing in Carl’s forecast: After the middle of 2024 - Carl expects cuts but later than markets appear to price. Recession probability estimate: 20% - Marissa’s 12-month recession probability assessment. Recession probability estimate: 37.7% - Chris’s recession probability, presented humorously as his batting average reference. Recession probability estimate: 30% - Carl’s internal forecast for recession next year. Recession probability estimate: 25% - Mark’s estimate of recession risk for 2024. Unemployment rate: 3.4% - Referenced by Carl as an unusually low level that supported the no-recession call. Unemployment rate range: 3.6% to 3.7% - Mark notes how small recent increases still leave labor markets tight. Missing immigrant labor: 1.5 million people - Carl estimates workers who would have immigrated during 2020-21 but did not because of border closures. Pandemic deaths of working-age people: 250,000 or so - Carl cites mortality as a labor-supply hit. Long COVID prevalence among survivors: 5% to 10% - Carl says lingering symptoms may reduce work capacity. Fourth-quarter 2023 GDP outlook from another estimate: 1.7% - Mark says Moody’s forecast for calendar-year growth is around this level. Calendar-year 2023 Blue Chip consensus at start of year: 0.5% real GDP growth - Carl says forecasters underestimated 2023 resilience. Blue Chip recession calls: More than a dozen - Carl notes many forecasters expected recession at the start of 2023. Leading Economic Index change: Down for two years - Mark argues the LEI has been signaling recession for a long time without one materializing. Conference Board vs. Michigan confidence differential: 41.3 points - Chris’s statistic on the gap between the two consumer sentiment measures.

Pivotal Quotes: "If something grows quickly, it's probably a weed." — Carl Tannenbaum: Used to describe rapid balance-sheet growth and the need for skepticism around fast-growing institutions. "I do not think so." — Carl Tannenbaum: His answer when asked whether more bank failures with the same root cause are still likely after the March banking crisis. "The labor market was the main reason." — Carl Tannenbaum: Carl explains why he expected no recession in 2023 despite aggressive rate hikes and high inflation.

Implications: Listeners should expect continued Fed caution, modest but positive growth, and lower recession odds than earlier in 2023. The main watchpoints are opaque non-bank leverage, potential Fed error, and any energy shock that could re-ignite inflation or hit spending.