Moody's Zandi Discusses U.S. Double-Dip Recession Risk

[00:00:00] Speaker 1: But we want to make sense of all of the economic data points that we've gotten this week and try to anticipate what we can expect out of tomorrow's GDP report and Ben Bernanke's big speech out in Jackson Hole. Mark Zandi joins me now. He's a chief economist for Moody's Analytics. Mark, I was reading your most recent report and this line jumped out at me. You say, the collective psyche is so afraid that if anything else goes wrong, the economy will backtrack into recession. Do we need therapy or do we need quantitative easing? [00:00:34] Mark Zandi: Well, I take a lot of both. I do think that the Federal Reserve will restart quantitative easing over the next few months. I think the economy is going to be, at best, very weak, so weak that unemployment will begin to rise again. And I think that will be the signal for the Fed to resume quantitative easing. [00:00:55] Speaker 1: You do expect unemployment to continue to rise again, yet you point out infrastructure spending is just starting to kick into gear here. You don't expect job growth at this point? [00:01:06] Mark Zandi: I do expect some job growth, yes, but not enough to forestall a further increase in unemployment. Just to give you a number, we need approximately 150,000 jobs per month just for a stable rate of unemployment. Since the beginning of the year, we've been getting closer to 100K, abstracting from the ups and downs in census hiring. And over the next few months, I would expect no more than 50K, given the recent weakening in economic growth. And so that's not enough to forestall further increases in unemployment. [00:01:37] Speaker 1: Now, we have seen the Fed start to act with that $2 trillion in Treasury purchases. When you hear from the Fed chairman tomorrow, what do you expect him to say? And what does he actually need to say to put a slew of weak economic data points that we've gotten over the past few days into context? [00:01:56] Mark Zandi: Well, I think that's the first thing he needs to do is put the string of economic data we've been getting into some context. How weak does he think the recovery really is? But then I think he needs to explain more clearly the FOMC's actions a few weeks ago. Why hold the balance sheet constant? What was the logic behind that? And then it would be really very helpful if he could then give us some benchmarks for understanding when they possibly could resume quantitative easing. Let's start buying more Treasury securities and growing the balance sheet. [00:02:30] Speaker 1: You know, one of the data points that we got this morning, I wanted to point out to you, and that's that the percentage of U.S. mortgages with overdue payments has risen in the second quarter. This is the first gain in early delinquencies in more than a year. Is there more pressure on the consumer than we realize at this point? [00:02:47] Mark Zandi: Yeah, that is a bit disconcerting. You know, it's clear that the foreclosure crisis continues on. By my data, we have 4.3 million first mortgage loans that are in default or 90 days in over delinquent and thus headed to default. That's a lot of loans to work through, and many will go to a foreclosure sale. And one more reason to believe that house prices will decline. One encouraging thing was the decline in early stage delinquency, and this recent bump up is a bit disconcerting. I don't think it's the beginning of a trend. I'm hopeful that in the next few quarters we'll see that come back down again, given the tightening and underwriting and the view that we will get some job growth. [00:03:28] Speaker 1: Mark, I want to pick up on your forecast here. When we look at the possibility of tax rates going higher in 2011, I know you say it could hurt the economy if we see tax hikes now wait another two to three years before increasing them. What happens if we do see Congress go ahead and hike rates in 2011? What then? [00:03:51] Mark Zandi: Well, I don't think anyone's really seriously thinking that all tax rates will rise in 2011. [00:03:56] Speaker 1: We'll say on the top 2 percent. [00:03:59] Mark Zandi: Yeah, exactly right. Now, you know, I think if we raise those tax rates, in all likelihood, the recovery will still remain intact. But I think that's a gamble that would be unnecessary. You know, I do think it would be prudent, given how fragile the recovery is, not to raise anyone taxes in 2011. Now, in 2012, 13, 14, when the economy is off and running, raising those tax rates in upper-income households, I don't think we'll have any meaningful impact on their spending and saving it on the broader economy. And it would help with respect to our fiscal problems. But I just wouldn't do it in 2011. It's just one more thing for the economy to overcome when the economy has a lot to overcome. [00:04:37] Speaker 1: Right. I mean, when you talk about that frayed collective psyche here and anything else going wrong, you don't think increased taxes on the top 2 percent is that thing to go wrong, that thing that could tip us towards recession again. What is it then? [00:04:52] Mark Zandi: Well, that certainly makes me uncomfortable, but I don't think that's it. It could be, for example, if angst about the European debt situation were to flare up again and we'd see the equity market stock prices fall another 5, 10, 15 percent, I think that would qualify and that would certainly push us back into recession. [00:05:12] Speaker 1: So did the Irish bond sale sort of quiet some of those concerns, or is that something you're watching carefully right now? [00:05:19] Mark Zandi: Watching very carefully. You know, the coast isn't clear. I mean, the European economy is holding up better than I would have thought to this point, but it has a lot of headwinds of the fiscal austerity, the financial constraints given the problems in their own banking system. There's a lot more work to be done. So I don't think that we're through that problem quite yet. [00:05:37] Speaker 1: Now, we're waiting to see what we're going to get on this GDP front tomorrow, on this figure that is expected to cross. The consensus out there is 1.4 percent. You're in line there with consensus? [00:05:50] Mark Zandi: Yeah, I think that's about right. That would be a reduction of about a percentage point in estimated growth. Most of that because of a wider trade deficit, some of it related to less inventory accumulation, but it clearly highlights that the economy lost momentum in Q2. [00:06:07] Speaker 1: We told you at the beginning of this segment a few moments ago, you know, what we had just heard from Nouriel Roubini and him upping the chances as he saw it for recession. If, you know, it is a hypothetical at this point, but if we do see taxes go up on the 2 percent, if we continue to see data points like we saw this week, would you push your estimate up here from a 1 in 4 chance of recession? I mean, are you still holding to that projection? [00:06:34] Mark Zandi: You know, I'd put it at 1 in 3 right now. I mean, if you'd asked me 4 or 8 weeks ago, I would have said 1 in 4, 8 weeks, 8, 12 weeks ago, 1 in 5. So it is rising and uncomfortably high. I am assuming that the tax rates on upper-income households will, in fact, occur on January 1st. If that doesn't happen, then that would reduce the odds back closer to 1 in 4. But 1 in 3, you know, that is uncomfortably high. That's just too close. Particularly, you know, we're at a 9.5 percent unemployment rate. If we go back into recession, it's going to be very difficult to get out of it in any kind of graceful way. [00:07:07] Speaker 1: Right. Get to that out-of-ammunition phrase we hear so often when talking about the Fed. Yeah, exactly. All right. Thanks, Mark. Always great to get your perspective. Thanks for joining us today.