Poor Policy, Plunging Home Prices, and a Plummeting Pound

Episode Summary

Executive Summary: The episode reviews major economic updates: GDP/GDI revisions that left first-half 2022 growth weaker than hoped and core inflation slightly hotter, a still-positive but soft Q3 tracking estimate, the economic damage from Hurricane Ian, a sharp drop in UK markets after the Truss fiscal package, and falling US house prices amid high mortgage rates. The hosts stress that revisions, labor data, and market stress all point to slowing growth and sticky inflation.

Main Topics: GDP, GDI, and annual benchmark revisions (Priority: 5/5): The hosts analyze BEA revisions that raised GDP levels but lowered GDI, shrinking the statistical discrepancy and leaving first-half 2022 growth weaker than previously thought. They debate whether the economy already met a recession rule-of-thumb, while noting labor-market data do not yet confirm recession. Inflation revisions and Fed policy implications (Priority: 5/5): The core PCE deflator was revised upward, reinforcing a hawkish Fed stance. The discussion links the higher inflation reading to methodology changes and suggests it could require additional rate hikes to cool inflation. Current-quarter GDP tracking and business investment (Priority: 4/5): Ryan reports the Q3 GDP tracking estimate at 1.0% annualized, nudged up by stronger durable goods orders. Business investment in equipment/software and intellectual property is still holding up, though leading indicators suggest moderation ahead. Hurricane Ian economic impact (Priority: 5/5): The hosts estimate Ian caused $7–10 billion in lost economic output and $50–60 billion in damage, making it one of the costliest hurricanes on record. They explain how power outages, business closures, and later rebuilding/insurance flows offset part of the loss in GDP terms. UK fiscal turmoil, bond market stress, and sterling weakness (Priority: 5/5): Mark provides a detailed critique of the UK government's unfunded tax cuts and energy support plan, arguing it is pro-inflationary and destabilizing. The Bank of England’s emergency bond purchases are discussed as a temporary fix to pension-market stress and a sign of policy credibility issues. US housing slowdown and regional price divergences (Priority: 4/5): The panel highlights a 0.6% monthly fall in the FHFA house price index, the largest since the 2007 housing downturn, and discusses how high mortgage rates and affordability are pressuring demand. They also compare weaker California markets with stronger Florida markets. Household savings as a cushion and a risk (Priority: 4/5): Ryan’s statistic of a 3.5% personal saving rate leads to a discussion of excess savings, which peaked at $2.7 trillion and have fallen to $2.2 trillion. The panel weighs whether these savings cushion the economy from recession or delay needed demand cooling.

Key Arguments: Annual GDP/GDI revisions suggest the economy was weaker than initially believed, but not yet enough to definitively confirm recession. The statistical discrepancy between GDP and GDI has normalized, implying measurement issues are narrowing and the average of the two is a better guide. Core PCE inflation was revised higher, supporting the Fed’s hawkish bias and implying more tightening may be needed. Q3 GDP is tracking around 1% annualized, with durable goods and business investment providing some support despite softening new orders. Hurricane Ian will subtract materially from regional output in the near term, but rebuilding, insurance claims, and federal aid will partially offset the loss in GDP accounting. The UK’s unfunded fiscal package is viewed as highly risky because it adds inflationary pressure, weakens credibility, and forces the Bank of England into emergency action. US housing is cooling sharply as mortgage rates remain elevated; wide mortgage spreads make the market worse than treasury rates alone would suggest. Households still have substantial excess savings overall, but lower-income households appear to have depleted theirs and are relying more on credit. Regional home-price performance diverges because expensive, tech-exposed California markets are more vulnerable, while Florida has been supported by migration and wealth inflows.

Data Points: GDP revision: Level now 1% higher than previously thought - BEA annual benchmark revision for 2017–2022 GDI revision: Revised downward - Annual benchmark revision narrowed the gap with GDP Statistical discrepancy: Back to historical norms - Difference between GDP and GDI normalized after revisions GDP/GDI average, Q1 2022: -0.4% annualized - Average of GDP and GDI after revisions GDP/GDI average, Q2 2022: -0.3% annualized - Average of GDP and GDI after revisions Core PCE deflator, Q2: 4.7% annualized - Revised up from 4.4% annualized Q3 GDP tracking estimate: 1.0% annualized - Ryan’s high-frequency model estimate for third quarter growth Q3 GDP tracking estimate last week: 0.8% annualized - Earlier estimate before stronger durable goods data Hurricane Ian lost output: $7–10 billion - Estimated lost economic output in affected counties Hurricane Ian damage: $50–60 billion - Estimated physical damage; one of the costliest hurricanes on record Households without power after Ian: Over 1 million - Power outages expected to disrupt business activity FHFA house price index, July: -0.6% month over month - Largest monthly decline since the start of the 2007 housing crisis Personal saving rate, August: 3.5% - Very low by recent historical standards Excess savings peak: $2.7 trillion - Peak level reached in December 2021 Excess savings current level: $2.2 trillion - Down about $400 billion from peak UK 10-year gilt yield increase: 130 basis points - Rise over the last month amid fiscal turmoil UK 10-year gilt yield: 4.08% - Yield after market selloff and BoE intervention US 10-year Treasury yield increase: 54 basis points - Rise over the last month for comparison UK polling gap: 30 percentage points - Conservative Party trailing Labour in polling Mortgage spread vs 10-year Treasury: About double normal (~300 bps vs ~150 bps) - Explains unusually high 30-year mortgage rates Monthly existing-home sales lead indicator: Pending home sales down 24% y/y - Signals further weakness in future existing-home sales

Pivotal Quotes: "the level of GDP is now 1% higher than it was previously thought" — Ryan Sweet: Explaining the BEA benchmark revision to GDP "we're talking about $7 to $10 billion in lost economic output" — Ryan Sweet: Estimating Hurricane Ian's near-term output loss "this fiscal policy is bad policy" — Chris Dorides: Discussing the UK government's unfunded tax cuts and spending plan

Implications: Expect slower growth, sticky inflation, and more policy tension in the US; housing likely weakens further, hurricane effects distort near-term data, and UK market volatility shows how risky unfunded fiscal expansion can be when central banks are tightening.