Can America Resist a Global Recession?

With evidence of a global recessionThe US economy is by all measures strong, but is it strong enough to resist a global recession? That’s exactly what we’re unpacking today. As many other international economies struggle, America appears to be holding steady. But with recent news about deep seek and other foreign market updates, could that be about to change? And if the global slowdown does finally hit our shores, what does that mean for jobs, for growth, and for your investments? I’m Dave Meyer, and in today’s episode of On the Market, I’m joined by Mark Zandi, chief economist at Moody’s Analytics to break it all down, let’s jump in. Mark Zandi, welcome back to On the Market. Thanks for joining us,Dave. It’s fantastic to be with you. Thanks for the opportunity.This is a treat for us. We talk a lot about the housing market on this show, but I am excited to just talk more broadly about the economy. So maybe Mark, we could start there and you can tell us a little bit about your view of the American economy right now. Trump just took over second term. How would you describe the economy at this pivotal point in the American society?Exceptional, at least in the aggregate, all the numbers look about as good as they get, right? Strong growth. GDP jobs, low unemployment. We’ve been at 4% ish for three years, which is just amazing across every demographic, so forth and so on. The one blemish had been inflation, but that’s kind of sort of back in the bottle. And we can talk more about that. Stock markets at a record high, pretty close housing values at a record high crypto’s at a record high. I mean, you can find issues and problems. There are definitely things to think about, but President Trump is inheriting a fantastic economy from President Biden.Well, that’s always reassuring to hear. Is it something that you think is sustainable? It feels like we’ve had such relatively good macroeconomic numbers for a while. You alluded to some concerns, but any big concerns about the overall macro environment?Well, I think it should continue unless we screw it up or something happens that you just can’t predict. A shock, a major shock like a pandemic, I mean something like that. But policy, we can make policy mistakes. I’m less worried about the Federal Reserve making a mistake at this point. I think they on the right track cutting interest rates. Of course today they met and decided not to, and I think that probably was a good decision given everything. But I think they’re on the right track. I worry mostly about economic policy coming out of the new administration and Congress. I’m not a fan of broad-based tariffs. I think they’re a pretty bad idea and I understand the need to secure the southern border. I think that’s a national security issue. Obviously I’m talking about immigration, but I do worry about mass deportation. I think that can be highly disruptiveTo labor force.Absolutely. I mean, one of the reasons why the economy has been able to grow as fast as it has without generating inflation, while with inflation, moderating is strong productivity growth, but most importantly is very strong labor force growth. And that goes to the surge in immigration. Most of those immigrants of working age that come here applied for work and they got authorization and they went to work. And that’s been very helpful in allowing the economy to grow power forward without wage and price pressure. So yeah, I worry about those policies.Got it. Okay. And the primary concern, I assume with both is that they could lead to inflation?Well, there are negative. What economists jargon, here’s a bit of jargon. Negative supply shock leads to higher inflation and it diminishes economic growth. And obviously that’s one of the reasons why the fed’s now on hold in terms of interest rate policy because what do I respond to? Well, first of all, there’s a lot of so much uncertainty. They got to wait to see what the new president has in mind and let the dust settle a little bit. But both the tariffs and the deportations, assuming President Trump follows through on those things to a meaningful degree, he may not, which is a whole nother set of issues around uncertainty that it’s creating. But assuming he does, they lead to higher inflation and they diminish economic growth and the Fed doesn’t know how to respond to that. Do I raise rates because of the higher inflation or do I cut rates because of the weaker economy? The answer is, I don’t know. Therefore, I’m going to sit on my hands. I’m not going to cut rates. So those are pretty bad policies in terms of what that means for the macro economy.What about the logic that implementing these tariffs would lead to a boost in domestic manufacturing or demand for American goods? It sounds like you don’t buy that as a reasonable offset to the price of inflation.It’s not going to happen. I mean, go back to the tariffs that were imposed in President Trump’s first term, very clear research academic from the Federal Reserve System from Columbia University. Anyone who took a look at it came back and said, this cost us jobs because it’s not only about the tariffs that we’re imposing, which obviously are hard on companies that import things that they need to produce whatever they’re producing from machine tools to computer equipment, they’re paying more for those things. But the retaliation, it’s not like the rest of the world’s going to stand still, especially China. They’re going to retaliate in kind. And when they did that in his first term, it cost the manufacturing and agricultural sectors dearly. They were in recession by late 2019, and I’m stretching here, but I would go so far to say that even without the pandemic, 2020 would’ve been a pretty tough year for the economy of those tariffs. It just got all masked by obviously the pandemic, which was devastating.You alluded to this, but it seems that Trump’s threatening a lot of tariffs, but we don’t know what he’ll actually implement. Are there any levels of tariffs that you would feel comfortable with or that you think are appropriate?Yeah, so-called strategic tariffs. I mean, if you’re focusing on specific products, specific countries sending a very clear message like Biden imposed tariffs on 18 billion worth of imported stuff from China, EVs and batteries, and a number of other strategic kind of goods. And that’s to send a signal like, Hey guys, you’re not playing fair. You’re cheating and you can’t do that. So we’re going to impose these strategic tariffs. But when you have these broad-based tariffs, you’re shooting yourself in the foot, what is it? You’re cutting your nose off to spite your face? I was going to use another metaphor, but we’ll just use that one. That works better to what end? Yeah, I wouldn’t rule out using tariff as a policy tool, but I don’t think of it as a way to exact broad-based economic hurt on the rest of the world or as a broad based source of revenue to fund the government. Very regressive. I mean, the tariff burden falls mostly most heavily on lower middle income households. They spend a larger share of their budget on imported goods than high income households do. So it’s just a very regressive, just a bad way of raising revenue.All right. Well, thank you. We’ve been hearing a lot that economists don’t like the idea of terrorists, so thank you for explaining your view of this situation.I’m sure there is an economist out there somewhere, Dave, that would take the other side. I’m not sure who that is, but I’m sure you can find them.It does seem sort of across the board, at least the economic sources. I read that pretty much every economist agrees with their sentiment. So we’ll see what happens here. And there’s a ton of domestic questions that I have, and we might get back to this, but I’d like to turn just for a minute to sort of the rest of the world. As you said, you described the US economy as exceptional, and I think it’s a good choice of the word because it does seem to be the exception out of the rest of the economy, the world where we see a lot of economies slowing or approaching recession. And I’m just curious, first of all, what do you make of that? Why is the US so well poised to outgrow the rest of the world right now?Well, we got the right set of companies and industries. These tech companies are juggernauts. I mean deep seek, not withstanding, they’re leading the way on the most critical new technology to come around and seemingly in decades, maybe generations. So we’re fortunate that we have those companies here Now, they’re not here by accident. They’re here because of the way we’ve organized our economy and because we’ve allowed a lot of immigrants to come into the country, highly skilled workers from the rest of the world. I mean, go take a look at the folks that are managing these companies. These are immigrants, first and second generation immigrants. So our liberal immigration policy has been very, very significant to our economic success. But there’s a gazillion stuff. Our financial system is designed to help finance new innovation and technology. The rest of the world has a few big banks. Each country has a few big banks that dominate their financial system. And of course those big banks are going to cater to the big companies and not provide resources, financial resources to the new startups. Bankruptcy law, you can fail here and you can go off and start a new company. In fact, if you haven’t failed, you haven’t tried hard enough. So go fail somewhere else. Go fail in China, you end up in jail.That’s so interesting. I never really thought about that. The bankruptcy systemOr just the culture. I mean, look at the folks that are revered here. They’re not the people with old money. These are people that are newly minted entrepreneurs. Yeah, they’re entrepreneurs. And I can go on and on and on, but these are the things that the rest of the world’s trying to figure out.We’ve got more to discuss with Mark, especially how the global slowdown could ripple through the US job market. But first we got to take a quick break. Welcome back to On the Market. I’m Dave Meyer here with Mark Zandy. Let’s pick up where we left off. I was talking to Jay Scott, who’s another real estate investor, but really knowledgeable about the macro economy. And he was saying, despite the US doing so well, he has fears that the rest of the world will drag the US into a recession because if Europe and China and all of these other big trade partners go into a recession that would hurt our exports and that could lead us into a recession. Do you think there’s any credibility to that theory?There’s scenarios, but I think they’re low probability scenarios, certainly in the foreseeable future. I mean, the US is powering economic growth globally, and there’s nothing at this point, except again, going back to if we screw it up, we should be fine. We do a lot of trading with the rest of the world, but we’re a very insular economy. If you look at our trade as a share of our economic activity and output, it’s actually quite modest, very small. And the other thing that happens when the rest of the world gets into trouble, capital comes flowing into the United StatesBecauseWe’re the AAA credit on the planet. We got our problems, but the rest of world’s got much bigger problems. So ca comes flowing here and is a tremendous benefit to our economy.So that’s really helpful to know. And so it sounds like you think us still extremely well positioned.Yeah, I would say if we got into a scrape with China over Taiwan and now we’re in that kind of negative shock, that surprise like the pandemic, if you had to attach a probability of that happening at this point it’s very low. But if that were to happen, then yeah, the rest of the world could reverberate back on us and take us down into recession. But again, I think those are low probability events. It certainly in the next foreseeable future, the next 1224 months.Well, if they’re low probability, I’ll stop thinking about them. So that’s good enough for me thinkAbout it. But yeah, I wouldn’t worry about it.No, no. I thought it was an interesting hypothesis. I was just curious what you thought, but the data just suggests that everything in the US is going so well. In fact, that’s sort of another avenue I wanted to pursue here with you. Mark was about the stock market that seems to be doing so well. I wonder if it’s too well for our audience, our audience is mostly real estate investors. I’m assuming many of them still invest in the stock market, but you look at the price to earnings ratio, which is a way of valuing stocks, it’s extremely high. I think it’s that 28 or 29, and usually that is a predictor that returns in the s and p 500 are not going to be great over the next decade. How do you evaluate the stability of the stock market rightNow? Yeah, this is my biggest worry. It’s asset prices writ large stock prices at the top of the list. But it’s not just stock prices. I mean housing values. I mentioned crypto prices, gold prices. When you see the Trump coin go to whatever it was, 70, 75 bucks, the market cap is 13 14 billion. And that’s a meme coin that has no, there’s nothing there, it’s, it’s just nothing. It’s just the greater fool theory.
And then you look at bond market, look at corporate credit spreads. They’re as narrow as they have ever been, ever, ever, ever across all types of bonds, just across the board. Mortgages aside, but I’m talking about corporate bonds. CMBS spread, commercial mortgage backed security spreads, a BS spreads, high yield corporate debt spreads. I mean, there’s a lot of good news built into these and then some built into these asset prices. And I think they’re quite vulnerable, particularly in a rising interest rate environment. So if you think tariffs and deportation and deficit finance tax cuts are going to lead to higher inflation and bigger deficit debt, that’s one reason why long-term rates have gone up. Key reason why long-term rates have gone up, we’re looking at a 7% plus fixed 30 year fixed mortgage rate at this point in time. You can make a really reasonable case that rates are going to go higher, and if they do, it knocks the wind out of these very highly richly valued assets from stocks to crypto. And you can also make the case that the US is very dependent on the consumer
And particularly the high end consumer, the wealthy consumer, the well to do. And those are the folks that own the stocks and they’re the ones that own the bonds and the crypto and everything else. So if you see asset prices go sideways or down, I think could be a real threat. And if I had to pick one thing that I’m most worried about, what could do us in, I said economic policy, but the link from economic policy to the real economy will run through the financial system and through those asset prices. Does that make sense?It does. It does make sense to me. And just to make sure everyone understands, I just want to summarize and maybe ask some qualifying questions here. So you were saying the shock that could tip this off could be higher interest rates, right? Does that mean you think the Fed might raise the federal funds rate or that the bond market may react in a way where long-term rates go up?The latter bond market is very fragile. The treasury market is very fragile. I mean, if you look at the volatility in the market, it’s extraordinary. Another reason why mortgage rates are so high because of the value of the prepayment option and the mortgage related to the volatility. And that goes to some fundamental problems that are issues in the plumbing around broker dealers and their balance sheets and so forth and so on. We could talk about that for a whole nother podcast. You’ve got deficits in debt rising. You’ve got these policies that are going to lead to higher inflation and higher deficits, tariffs and deportation and deficit finance tax cuts. You’ve got the Fed exiting through quantitative tightening, they’re allowing their holdings to roll off to mature. You’ve got the Chinese leaving the bond market for obvious reasons. The Japanese are the biggest global investors, overseas investors, they’re more cautious. They can now get a reasonable interest rate on their own bonds. The JGB
Is one and a half percent on a real basis that they could make some money and they don’t have to take any currency risk. And then banks are leaving because of last year’s, the two years ago, the banking crisis, and you’re left with these hedge funds that are filling the void. And obviously they’re there in the good times and they’re out instantaneously if things don’t go in the right direction. So yeah, I can go on. But yeah, I worry that we might see a bond market kind of throw up, and particularly if you get into a debt limit battle or look at the dysfunction in Washington,
I mean
One day they’ve got a freeze on funding for various parts of the government the next day they take it away. I mean, it’s just chaotic. And investors are going to say, Hey, are you going to pay me on time? Really? Are you sure? I mean, I know you can afford it, but are you really going to mess it up and not pay me on time? So those are the kinds of things I worry about. We get into that kind of scenarioReally. Yeah. So you’re concerned that the credit essentially of the United States is in jeopardy,Not the credit. I’d say the better word is credit worthiness. I mean, because it’s not only about the ability to pay on your debt, it’s the willingness to pay on your debt. And if I’m an investor looking at what’s going on, I go, really? You might take me over the ledge on the next X date related to the debt limit,AndYou need to pay me a lot more in interest to compensate for that risk.I’m just trying to understand this because actually I’ve heard people talk about this, but I just want to understand what you’re saying is that if investors, because you’re saying it’s fragile, basically they might get to a point where even if debt is being paid on time, they’re just get tired of the wondering if they’re going to get paid and they might not want to buy bonds at the same rates, which would push up yields.All the Tinder is there for the bond market to lose its mind, for interest rates to jump, you need some match.So those are just examples. I see. Okay. Okay.But it’s not hard to come up with matches. It’s easy to come up with matches. And again, there’s plenty of tinder there that’s going to go up very quickly if one of those matches is actually lit.And just for our audience, I want to make sure everyone understands what Mark is saying, that we’re talking about bond yields right now, which as you all probably know from listening to me, regurgitate this on every episode, are much more closely tied to mortgage rates than the federal funds rate. But Mark, I’m curious if you think bond yields could go up. It sounds like yes, but I just want to make sure I understand. Despite that the Fed may either keep rates steady as they did today, or choose to lower rates throughout this year, the bond market could basically revolt against that. I’ve heard the term BOD vigilantism thrown out there sometimes. We actually had an episode for everyone listening. James brought an article about this on one of our recent panel shows. So we’ve heard that term thrown out there. That’s essentially what you’re saying, right? Even if the Fed decides to cut rates, Trump has said he wants rates lower. Even if those things happen, the bond market goes its own way. They don’t have to do what the fed’s doing. They don’t have to do what Trump wants to happen. And that could move interest rates higher regardless of what policy makers or the Fed wants.Yeah, you got a great example of that in the last 3, 4, 5, 6 months, right? I mean, the Fed has cut interest rates a hundred basis points, one percentage points since last September. Since last September, the tenure treasury reel has risen by a hundred basis points. So they’re related, but they’re not tied at the hip. It certainly, and the bond market has its own set of dynamics that are independent of what the reserve is doing. So yeah, I think that people need to keep that in mind.And if that happens, if yields go up, I can see a scenario where that trickles through the stock market and the housing market. Because frankly, I think most people have been pretty surprised by how resilient the housing market has been despite higher mortgage rates. I could see that the price resilience cracking a bit if mortgage rates go up, not necessarily due to affordability, but just I think mentally people are, I don’t know how many people are going to want to be in the housing market if after we tell people mortgage rates are going to go down and then they just shoot back up again. One more time. I don’t know how psychologically people will handle this.Well, it’s supply and demand. So the one reason why prices have stayed where they are is going back to interest rate lock, no supply.
And
In the physical market you have no supply. The vacancy rate for homeowner vacancy rates record low for affordable housing. But you’re right, I think there’s no more damage you’re going to do to supply that’s done. So if you raise rates some more here, it’s going to come out of demand. And that feels like to me, if rates do jump, the consequences is going to be lower prices, kind of sort of what happened back in 2022. Remember when the rates took off from very low levels and they took off prices actually weakened hit demand harder than supply. You didn’t have that interest rate rate lock at that point in time. So I suspect you’re right, but the interest rate lock and the low vacancy rate makes it unlikely that you would see big price declines in a broad based way. I don’t think that’s the case.Yeah,Agreed. But stock prices, they can move pretty fast and they can go down a lot. And they’ve been driving the train in terms of consumer spending. The consumer spending being done by the high net worth individual is more tied to the stock market than to their home. But by orders of magnitude,I just want to emphasize something you said, mark. When I say I could see it softening, I do think prices could soften. I think they’re going to be relatively flat this year anyway, but I think prices could soften in the housing market if we saw rates go up. But the one thing that does bode well for some stability in prices in housing is that we just don’t see distress with American home buyers. Delinquency rates are so low and foreclosure rates are still well below pre pandemic levels despite all the government programs being lifted. And so I do think that just our audience is very interested in the housing market. Just want to reemphasize that there is, I dunno, I think of it sort of as a floor for how far prices may drop because the majority of homes are owned by owner occupants who are paying their mortgages on time.I will say though, if you mixed in high unemployment, if you actually did get into a situation where unemployment started to rise, I mean it would take a bit because you’ve got so much homeowner’s equity that has been built up with the price increases, but you could see more damage than one might think given all the equity that’s out there for sure. Which I agree with you fundamentally. I agree with you.We’re going to take a quick break, but don’t go anywhere. Welcome back to On the Market. Let’s jump back in just this past week, we saw a pretty significant one day dip in the housing market due to one Chinese company, deep seek coming in and introducing a product that sort of upended what seems to have been this investor philosophy for the last couple of years or months at least, that the US was sort of running away with the AI race. It sort of felt like that anyone who wanted to compete was going to be dependent on Nvidia chips that Meta and Amazon and Google had all this advantage. And then it seems like Deepsea coming out and replicating a product similar to chat PT at what sounds like a lower cost and more efficiently has sort of changed that idea. And so I’m just curious, one, to me, it showed a little bit of volatility and a little bit of weakness in the stock market in general and valuations. But I think more importantly, just long big picture, how do you evaluate the potential impact of AI on the American economy? Because a lot of people think it’s going to be this amazing thing for all these great companies, but on the other hand it could be replacing jobs and weakening the labor market. So how do you think about it?Well, let me preface my answer by saying I do forecast many things. Some things I’m confident in, some not as much. This is the not as much.Okay, thank you for that caveat. I appreciate it.The other thing I’d say is economists do forecast based on history. We look at history using statistical techniques, but qualitatively, and we use that as a basis for trying to understand the future and when thinking about technology and its impact on the economy, go back and take a look at technologies of the past, even technologies that were very substantive in terms of their impact, electricity, internet, wireless, so forth and so on. And the lesson of history is that these technologies take a while to diffuse through the economy. Everyone can observe the technology and say, oh, I get it. But that doesn’t mean it’s incorporated into business practices quickly. It takes time and generally it doesn’t happen until new businesses form and incorporate the new technology at their core. They optimize around the technology. Legacy companies have a really hard time adjusting, adapting their business practices to the new technology.
They want to do it. And everyone’s on board with, I want to be ai, I’m doing ai. But you have to have the right people. You have to have your data set up in the right way. You’ve got to have the right computer systems. You have the right organizational structure. It’s hard. Yeah, it’s hard. It’s really hard. And so it takes time. So I suspect this is going to take longer, not months, not even years. It could take the next decade or so, but I think ultimately it will be a very powerful source of productivity gains. But I’d say bring along. We need all of that.Oh, totally.Because that drives incomes and wealth, and that’s the best way to address our fiscal problems that’ll keep interest rates from Skyward. So I think it’s more of a good thing than bad. Now, clearly, as new technologies evolve, so does our legal and regulatory system to make sure that there are guardrails and that also takes time. But I think historically we’ve been pretty good at that, at figuring that the right balance between not so much regulation that you squelch the innovation that goes back to our secret sauce, why we’ve done as well as we have. But we ultimately kind of figure out there are some things that need to be done to make sure that the problems that AI could create don’t become something that engulfs all of AI and makes it dystopic. But technology historically has always been a bright light. It’s the key to our economic growth. And so I am much more predisposed to think this is going to end up in a good place than a bad,I’m on the same page as you. I don’t know too much about it. I do have training as a data scientist and I have some understanding about how these things work. And I think there is a reason for fear so that we make good decisions about regulation. But I do, my sense is that hopefully it will be regulated and done in a thoughtful way. And I do agree. You look at some of these long-term trends like population decline and birth rate decline for the economy to keep growing, you need huge productivity gains. And this might be the answer. I don’t know, maybe I’m just optimistic, but I think about that.If you’re wrong, we’re going to both be wrong,WhichIs very possible.Yeah, of course. Yeah, I’m wrong all the time. But I think the thing that stuck out to me about this deep seek thing is that it reminds me of some of the conditions that sort of led up to this.com bubble in the late nineties because everyone sort of felt the internet big thing, it’s going to be huge, but investors didn’t know what companies were going to win or how to make money, and they’re just pouring money into stocks. And that’s sort of what made me feel like, it seems like this is happening. People don’t know exactly how AI is going to upend our economy. Don’t know which stocks to bet on, but people want to bet. And so they’re betting, but then they see these things like deep seek and they’re like, oh, maybe we are betting on the wrong thing because like you said, there’s no data, there’s no history to back this up. And so that’s just kind of what had me worried about the stock market. I was already worried about valuations, but then this week I got double spooked about it. I don’t know if you have any additional insight on that.Well, I’d say two things. One, I’m skeptical about Deepsea.You think it’s vaporware,It’s a Chinese company, and I don’t know. Let’s just see.Okay, I like that. All right. Yeah,Let’s just see. There’s no transparency. Maybe they have had some kind of breakthrough, but not to the degree that 6 million in investment would suggest. I don’t believe that I’m skeptical. But the second thing I’d say is I actually think it’s a good thing. If it’s half true, let’s say it’s 10% true, if you bring down the cost of ai, it’s like Lauren, the cost of electricity, you’re going to empower all these other activities and companies because now they’re going to have access to this very powerful resource at a low cost. So for the rest of the economy, I think it’s great.Yeah, I mean there’s going to be competition, right? The idea that a handful of giant American technology companies were going to have a monopoly on AI is insane to me. Maybe they have an advantage, but there’s going to be so much competition. This is the first of many.I worry about that. But if deep seek is again, partially true, that makes it much less likely that that’s something to be concerned about. That moat is not nearly as deep as one would’ve thought, and it opens up tremendous opportunity for the rest of the economy.Alright, well Mark, thank you so much. This has been a fun conversation. I always enjoy having these discussions and debates with you, so thank you so much for joining usAnytime. Thank you Dave,And thank you all for listening. If you want to dive deeper into any of these topics, you can check out biggerpockets.com for more resources. And as always, we would love your thoughts. So drop us a comment, share this episode and let us know how you’re preparing for whatever lies ahead. I’m Dave Meyer and you’ve been listening to On The Market. See you next time.