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# 									2024 Wall Street Series: Moody’s Analytics							

FPC Briefing

Mark Zandi, Chief Economist, Moody’s Analytics

Wednesday, February 28, 1:00 p.m. ET

New York City

February 28, 2024

## 								Summary							

        -  In this briefing, Mark Zandi, Chief Economist at Moody’s Analytics provides insights on the state and trajectory of the U.S. economy.       

**NEW YORK FOREIGN PRESS CENTER, 799 UNITED NATIONS PLAZA, 10TH FLOOR**

**MODERATOR:**  Good afternoon, everyone, and thank you for joining this New York Foreign Press Center briefing.  Today’s briefing is part of our Wall Street series, which provides you with exclusive access to experts on U.S. and global economies.  Today’s presentation is on the record.

It’s my pleasure to welcome and introduce our briefer today.  We are joined by Mark Zandi.  Mr. Zandi is the chief economist at Moody’s Analytics.  Mr. Zandi will share his 2024 U.S. economic outlook.  As a reminder, our briefer is not a U.S. Government official and does not represent the official policy views of the U.S. Government.

Before we get started, please take up your – take the time to rename your profile with your full name and outlet.  And with that, it’s a pleasure to turn it over to Mr. Zandi.  Welcome and thank you.

**MR ZANDI:**  Thank you.  Thank you for the opportunity to participate in today’s conversation.  I’ll take about 15 minutes, give you a sense of where I think the U.S. economy is headed, and then turn it back to the group and see where you want to take the conversation.  And we can talk about what’s going on overseas as well, so no reason to limit the conversation, but my remarks will be focused on the U.S. economy.

And let me begin by saying that I think the U.S. economy is performing well, and prospects, economic prospects, let’s say through this time next year, are good.  I’ll give you a few reasons for that optimism, and then I’ll buy it back a little bit, talk a little bit about the risks, and maybe if we’ve got a few minutes, I’ll give you a couple indicators to watch to gauge whether my optimism is coming to pass or whether the economy is going to struggle more than I’m anticipating.

And just to give you a couple – a few numbers just to give context, real GDP – that’s the value of all the things that we produce – that grew about 2.5 percent last year in calendar year 2023, which is – which is good.  A typical year would be close to 2 percent, so 2.5 percent is a good year.  And I expect growth in 2024, calendar year basis, to be about the same, about 2.5 percent.  That’ll be enough to keep unemployment low.

The U.S. unemployment rate is 3.7 percent; I expect that unemployment will remain below 4 percent throughout the year.  It will create lots of jobs; right now average monthly job growth is about 250,000, which is very strong.  I expect that to throttle back just because it would be very difficult to maintain that kind of growth without overheating; so I expect by the end of the year, it will be growing closer to 100K per month, which is kind of consistent with underlying labor force growth.

And I do expect inflation and interest rates to continue – inflation will continue to moderate and interest rates to come down, and I’ll come back to that in just a second.

Okay.  So that’s staging the numbers.  It kind of gives you context that it’s all pretty good.  Let me give you a few reasons for the optimism.

Reason number one: inflation is coming in.  It’s moderating reasonably gracefully.  There are lots of reasons why the U.S. and other global economies have suffered high inflation, demand and supply, but at the top of the list of reasons is the pandemic and the Russian war in Ukraine.  The pandemic scrambled global supply chains, labor markets; the Russian war caused oil prices and agricultural prices to rise.  And those two shocks conflated and affected inflation expectations, which began to impact wage demands.  And that’s when inflation began to metastasize more broadly around the economy.  And that’s when the Federal Reserve became – started to raise interest rates very aggressively, back in early 2022.

But good news – Pandemic/Russian war effects are in the rearview mirror, and as those shocks have faded – there’s still residual effects, but as those shocks have largely faded, inflation has come in, and without a significant weakening in the economy.  The economy has continued to grow strongly, unemployment has remained very low, job growth strong; despite that, inflation has come in, and that’s because those supply shocks have – the effects of those supply shocks have faded.

Inflation is not quite back to the Federal Reserve’s inflation target.  We’ll get another read on this tomorrow morning.  The consumer expenditure deflator will be released.  It’ll be on the hot side, a little strong, but if you take a step back and take a look at inflation over the last couple years, it’s been coming in very – in a very graceful way.  The only big difference between actual current inflation and the Fed’s target is the growth in the cost of housing services.  But there, the good news is that’s tied – the growth in the cost of housing is tied to rents, market rents.  And we know that market rents over the past year have been very soft, flat to down.  And that’ll continue for the coming year, and that goes to the fact that we now are getting a lot of supply.

I mentioned the pandemic scrambling supply chains.  It did so in the multi-family construction industry, made it very difficult for developers, builders, to get appliances and building materials, and of course the labor market was disrupted and it was hard to get labor to construct a multi-family property.  But as the pandemic has faded and the supply chains have normalized, labor markets are back to something more typical.

We’re getting those units completed, and that means that it’s causing vacancy rates in the apartment market, the multi-family market, to rise, put downward pressure on rent.  And that’s really good news for the growth and cost of housing services.  And that’ll become – it’s already becoming evident, but that’ll become much more evident in the coming year.  And I expect by the end of the year, inflation will be back to the Federal Reserve’s inflation target.  There won’t be any questions about that.

Second reason for optimism, reason number two: with lower interest rates – excuse me – with lower inflation, interest rates should decline.  I do expect the Federal Reserve to start cutting interest rates.  There’s a debate as to exactly when.  At this point I expect the first rate cut to be at the May meeting of the Fed, a quarter point, and then roughly a quarter point reduction in rates each quarter going forward until the federal fund rate target – the key interest rate the Federal Reserve controls, which is now sitting a 5.5 percent – gets back to its so-called long run equilibrium rate, so called R-star, the rate consistent with monetary policy, neither supporting or restraining economic growth.  And that’s somewhere around 3 percent.  So they’re going to bring the fund rate target down from 5.5, where it is currently, to 3 over the next couple-three years.

I don’t expect any meaningful change in the long-term interest rates.  The 10-year Treasury yield is around 4 percent.  That’s where I think it should be in the long run.  So with falling short-term interest rates, the federal fund rate target and stable long-term rates, the so-called yield curve, the difference between short and long rates, will become more normally sloped, to be positively sloped with long-term rates higher than short rates, which is really important for the financial system and the banking system, which I’ll come back to in just a minute.

Let me give you one more reason for optimism and then I’ll move on, and that’s the American consumer.  The American consumer is driving the train, not only here in the United States but globally.  I mean, American consumers are buying everything that’s produced here and then lots of what’s produced overseas thus the trade deficit.  And so unlike in the early parts of the pandemic or in the financial crisis back 10-15 years ago, when the Chinese economy led the global economy, it’s the U.S. economy, and particularly the American consumer, that’s leading the way here in terms of economic growth.

And all the fundamentals look good.  Inflation – because inflation’s back down.  Wage growth is now stronger than inflation, so people’s real wages are increasing.  Their purchasing power is improving.  That’s the fodder for more spending.  I mentioned low unemployment and jobs, all very positive.  Debt service – that’s the percent of income that consumers must devote to servicing their debt – remains very low.  It’s not increasing in any meaningful way.  And that goes to the fact that American consumers, unlike consumers in most other parts of the world, have been able to lock in the previously record low interest rates.  They’ve got long-term, 30-year fixed-rate mortgage debt, and that’s not adjusting, unlike what’s happening in Canada and many parts of Europe and parts of Asia.  So that’s insulated the American consumer from the higher rates that the Fed has implemented.

Asset prices are up.  People are a lot wealthier than they were when the pandemic hit.  Stock prices are at record highs.  Housing values – they kind of stumbled in early 2022 when the Fed first started to raise rates, but they’ve stabilized now, are starting to rise again.  In fact, nationwide house prices are up 50 percent from where they were four years ago.  And there’s still plenty of excess cash built up during the pandemic, particularly among high-income households, to a lesser degree middle-income households.  Lower-income households have struggled more.  They’ve blown through their excess saving and have turned to credit cards and consumer finance loans to help support their spending, but the bulk of the spending is done in the top part of the income distribution and in the middle parts of the distribution, and there the household is sitting in good shape with a lot of excess saving.  So everything looks good with regard to the consumer, and as long as the American consumer does their thing, the economy should be fine.

Okay, let me quickly pivot to the risks, and I will say the risks to the outlook are more symmetric than they have been in a long time, meaning yes, there are downside threats to the optimism I just expressed, but things could actually turn out better than I’m anticipating, like 2023.  That turned out to be even better than anticipated, which goes to some real improvement on the supply side of the economy – stronger productivity growth and strong labor force growth.  But I won’t focus on that.  I’ll just mention a few risks to the downside, and this is chronological, what could do us in most immediately.  And just to be symmetric, I’ll give you three downside risks.  I gave you three reasons for optimism; I’ll give you three downside risks.

First, oil prices.  I forecast many things.  Some things I’m confident in, some not so much.  Oil prices are very difficult to gauge.  We’ve been fortunate, certainly for the U.S., that oil prices have – and much of the developed world – that oil prices have remained low despite cuts in Russian production due to the sanctions and, more significantly, cuts by Saudi Arabia to try to stabilize price.  But we’ve seen a lot of oil production.  The pickup in oil production in the U.S. has been very dramatic, and that’s more than offset the reduction in supplies coming from Russia and Saudi.  And moreover, the Chinese economy has been soft, and that’s curtailed or crimped demand for oil, and so we’ve seen oil prices kind of hanging between $70-80 a barrel.  Right they’re closer to 80 than 70, but that’s kind of where they’ve been.

And in my baseline optimism, my expectation that oil prices will be in the coming year in the – more in the 80s than the 70s, but there is a risk that prices could jump higher.  There’s a lot of geopolitical flashpoints that could disrupt oil supplies around the world, the obvious in the Middle East – the Houthis in the Red Sea, potential for Iran’s – Iranian production to be disrupted given what’s going on there.  These aren’t – I don’t expect these things to happen, this is not my baseline, but obviously there’s a lot of risk around that.

And I don’t think we can count on the U.S. oil producers, the frackers, to continue to ramp up production.  Much of the increase in production was based on wells they had already drilled but had not used, and they just took them – they were dormant and they opened them and started to pump oil.  But that’s over.  There’s no more room there, and so it’s difficult to see U.S. production picking up to any significant degree.  Other countries can produce more oil, but not enough if we see some disruption, and so I would watch that carefully.

Nothing does more damage to the U.S. economy and really the – most of the global economy than higher oil prices.  It undermines people’s purchasing power, it undermines consumer sentiment.  Cost of a gallon of regular unleaded is kind of central to people’s thinking when they think about the economy, and it also affects inflation expectations of bond investors and consumers, which goes back to the Fed.  If inflation expectations increase because of higher oil prices, makes it less likely the Fed will cut interest rates or may even at some point have to raise rates, and that will be a problem.

Second reason for some nervousness is what’s going on in the U.S. banking system.  The banking system is stable but it’s fragile.  The fragility goes back to the crisis of a year ago when the Federal Reserve stepped up, provided liquidity, a liquidity facility to the banking system, and the other regulators and the Treasury decided to ensure depositors whether they’re below or above the FDIC insurance limit.  So things have settled, but the – kind of the fundamentals of the banking system remain very, very vexed.  I mentioned the yield curve earlier.  As long as the curve is inverted, short rates above long, it makes it difficult for the banking system to maintain its profitability, because it tends to fund itself short at short-term interest rates, lend long at long-term interest rates, and if long-term rates are below short rates, they can’t make money or certainly much more difficult to do that.

Loan growth has weakened because of the tightening in underwriting in the wake of last year’s banking crisis, and we are starting to see some erosion in credit quality, particularly in the commercial real estate market.  Small or mid-size banks in particular have pretty high – significantly high exposures to CRE, commercial real estate.  Across the banking system, almost 25 percent of bank assets are in CRE: mortgages, commercial mortgage-backed securities, loans to real estate companies.  Not the large banks – I’m not worried about them.  Their exposure is low and they’ve capitalize to pretty dark stress test scenarios where prices are simulated to come down peak to trough about 40 percent, which is something that’s not going to happen.

But for the smaller banks, mid-size banks with high exposure and lesser capital, we likely will see some bank failure.  And in the baseline, in my baseline worldview, optimistic worldview, that shouldn’t be a problem.  They’re not systemically important institutions.  It shouldn’t be an issue.  But depositors are on edge.  They’re cautious, they’re nervous, and you can construct scenarios where if you see a rash of bank failures, we see another deposit run, and that would put tremendous pressure on the banking system and by extension the economy, so second risk to watch.

And the third – and I won’t dwell on this unless you want to talk about it, but the third is the political environment.  We’re in the middle of an election process.  This is something that’s happening in different parts of the world, but particularly here in the U.S., and it’s very likely the election for president is going to be very close and potentially contested.  That could create a lot of volatility in financial markets and undermine consumer sentiment, and that’s an issue to watch.

And more fundamentally, on the other side of the election, this time next year, lawmakers will be faced with a number of significant issues.  They’ll have to raise the Treasury debt limit again.  The Trump tax cuts for high-income, high-net worth households expire.  Some Obamacare tax subsidies will wane.  So a lot of decisions to be made, and that’s really key – how lawmakers address those decisions is really key to addressing the nation’s long-term fiscal challenges.  As you know, the nation’s debt to GDP ratio has risen quite dramatically over the last 25 years, and all the forecasts done by the CBO, Congressional Budget Office, the nonpartisan group that does the budgeting, shows that the – if there’s no change in policy, debt loads will rise very dramatically, and that will ultimately become a problem for the economy.

Finally, let me end – give you – I’ll give you two indicators to gauge which path we’re going down.  First is consumer confidence as measured by Conference Board.  That data came out yesterday for the month of January.  At the end of the day, a recession is a loss of faith.  Consumers lose faith that they’re going to hold onto their job and they start cutting back on their spending.  It’s a loss of faith by businesspeople that they’re going to be able to sell whatever it is that they produce and they start laying off.  We get into a self-reinforcing vicious cycle.

So consumer confidence is a good measure of that faith, particularly the Conference Board measure.  Right now, good news:  It’s sitting at 106.  It’s just an index, and this is a survey that’s been done monthly back a number of decades; 106 is a little bit above its long-term average, and it’s relatively stable.  So that would indicate the economy’s just fine.  The consumer continues to do their thing, as I mentioned earlier, so no problem.  But I would watch that very carefully; if it starts to fall dramatically in any significant way, that would be a sign that consumers are losing faith, and recession is more likely than not.

And then finally, because I’m part of the Moody’s organization, we rate bonds.  The bond market is our business.  I would call out the spread between the interest rate on high-yield corporate debt – that’s corporate debt that’s issued by companies that are below investment grade, so riskier companies.  So the yield on their debt relative to risk-free, 10-year treasuries, the law – that high-yield corporate debt market, the so-called junk corporate debt market, has been around since the mid ‘90s.

Over the period since the mid ‘90s, the average spread between the high-yield corporate debt – the yield on high-yield corporate debt and 10-year treasuries is 500 basis points, 5 percentage points.  Anything above that would be sending off yellow flares: we got a problem, investors are nervous that businesses aren’t going to be able to pay them back in a timely way.

Good news: that spread currently is closer to 300 basis points, so very, very low.  No sign of a problem, but I would watch that carefully.  That would be a good indication that things are going awry.

Okay.  With that, I think I took 20 minutes, not 15.  Hopefully, you will forgive me the five minutes.  And I’ll stop; covered a lot of ground.  I’ll turn the conversation back to the group.  And by the way, I have a bunch of slides, a deck, and the State Department has them, and please feel free to distribute them if you think the group would find it useful.

**MODERATOR:**  Thank you so much for those remarks.  We really appreciate them.  We’ll turn to questions.  If you have a question, please raise your virtual hand and wait for me to call on you.  I’d ask, as a courtesy, that you would state your full name and outlet when called on, and you are also welcome to submit a question in the chat if that’s preferable.

Not all at once.

**MR ZANDI:**  What’s bugging you?  No – obviously the economy.

**QUESTION:**  Yeah.  It’s because I don’t know how to ask a question.  (Laughter.)

**MODERATOR:**  Is that Arnaud?  Arnaud, please go ahead.

**QUESTION:**  Okay.  Thank you so much.  Well, you didn’t –I’m Arnaud Leparmentier, French daily Le Monde.  I’m trying to put my video; I’m sorry.  I wanted to know:  What is your assessment about AI, artificial intelligence, on the global productivity of the U.S.?  Is it at the macroeconomic level already significant?  And second question:  How long and what will be the consequences of the downturn or the lasting downturn in China?  Thank you so much.

**MR ZANDI:**  Well, thank you for those questions.  On AI, no, I don’t think AI has played a role in impacting measured productivity growth in the U.S., at least not so far.  As you may be aware, productivity growth over the last year has picked up quite a bit.  Hard to know whether that’s cyclical, temporary, or whether that’s part of something longer term.  But I don’t think any of its related to AI.  If there is a – if you can – if we can pinpoint a reason for the improvement of productivity, it may be that goes to all the quitting that workers did back 1, 2, 3 years ago.  Many of those workers got into jobs that are much more suited to their skills, talents, and interests.  And as they’ve moved up the learning curve, they’re now at a place where they’re more productive.  So that would indicate that – that would be more of a one-time boost to productivity growth as opposed to kind of a shift in underlying trend in productivity gains.

So I don’t think AI has played a role yet.  In fact, it may be the case in the near term that it’s counterproductive for productivity growth as businesses kind of shift their business models and their business practices and make investments in talent and equipment and other things necessary to engage in AI more effectively.  That could weaken productivity growth in the near term.  So I don’t think we’ve seen any improvement in productivity due to the – to AI.

I do think it’s reasonable to expect AI to be a – to add to productivity growth going forward.  I mentioned earlier – I forecast many things.  Some things I’m confident in, like the inflation going back to the Fed’s target, some not so much.  My outlook, my expectation for AI and productivity growth is not so much.  Very difficult to gauge.  My sense is that the – it is an important technology.  It’s probably not as game-changing technology as, say, electrification back in the 1920s here in the U.S. or even the internet back in the 90s and 2000s.

More – it’s more like – the analog might be more like the adoption of wireless technology.  So it’s a plus; it’s going to add to productivity growth.  But I don’t think it’s going to be this game-changing technology that’s going to result in huge productivity gains, which on the flip side of that would mean large job losses and probably higher unemployment for an extended period of time.

In our – now, I do explicit forecasts that clients use.  Many foreign banks are clients of ours.  So I have to put pen to paper and I have to make an explicit assumption about things like what will AI do due to productivity growth.  So if you look at our forecast, the assumption is that AI will lift underlying trend productivity growth in the United States by about 15 basis points over the next decade.  That’s 0.15 percentage points per annum over the next decades.  So instead of growing, let’s say, 2 percent per annum, which would be before AI, it’s closer to 2.15 percent, which you look at – some people will look at that and say, oh, that’s not that meaningful.  But if you add up that 15 basis points per annum over a 10-year period, that’s real money.  That’s significant economic growth.  But it’s not – it’s not percent per annum or 2 percent per annum.  It’s not that.

But again, I preface all of that by saying I have this great deal of uncertainty here.  One other point about that before I move on.  The real gains in productivity from technological change occurs over time as new businesses form and optimize around the new technology.  When existing businesses take a new technology and try to change their business model, and their organizational structure, and their – the type of people that they have working, and the equipment that they have, that – that only takes you so far.  It’s very difficult to reorient big companies to a new technology and really take advantage of that new technology.

But when new companies form, they optimize around the new technology.  So new companies are – like, they’re optimizing around remote work.  They’re not optimizing around the use of an office space.  And they’re going to optimize around AI and – and so over time, we will see the productivity gains, but it will be over time as new businesses form.  It’s not – I don’t think it’s going to be a game-changing event.  But again, I state all of that with a great deal of uncertainty.

You asked in the second question about China.  Do you want to just rephrase that so I make sure I answer the right question about China?

**QUESTION:**  Yes, I wanted – I just wanted to know how do you assess the impact of the China slowdown on the global economy, and especially the U.S.?  Does it play a role or is it just an internal matter in China?

**MR ZANDI:**  Yeah, I’m of a mixed mind, I mean, at least so far.  I mean, the slowdown in Chinese growth does – China is a large economy, very important to global trade, and if the Chinese economy is soft, then that means less demand for things that are produced all over the world, including here in the United States.  So that has – by itself would be a weight on economic growth.  But at this point in the business cycle when we’re really focused on inflation and the Federal Reserve has been raising interest rates in an effort to slow growth, that may not be so bad.

I mentioned that in the context of oil prices.  I mean, oil prices are soft.  We’ve been in the 70s for a barrel of oil – of Brent, WTI – as opposed to the 80s, and that may be in large part because the Chinese economy has been kind of flat and has not – the demand for oil hasn’t picked up to the degree that it would otherwise and therefore that’s kept oil prices down.  And oil is symptomatic of other commodity prices, so generally commodity prices have remained down.  And in fact, Chinese inflation has been very weak.  We’re seeing not only disinflation but outright deflation, and that’s translating through in the form of weaker import prices here in the U.S. and globally, which has kept inflation down.  So in the current context when the issue is inflation and growth, the problem – the weak Chinese economy has not really been a significant issue or problem.  And so I view it kind of – hard to – it’s hard to say good or bad.  It’s been just more mixed.

I do think another downside – I gave you three downside risks.  A fourth downside risk, if I – if I had more time would be the problems in the Chinese economy.  It is struggling on a more structural basis.  It’s got all kinds of issues with regard to demographics.  It’s got issues with regard to issues around debt levels and leverage.  Its property markets are over – vastly overbuilt.  There’s increasing bankruptcy, default on mortgages, and other financial linkages to the real estate sector.  There’s the vexed relationship with the United States which is affecting both countries, but affecting China more because it’s a much more open economy than the U.S.  So I do think the Chinese economy is – and, of course, the – kind of the shift in kind of governance in China over the past decade is also probably playing a role in its difficult kind of economic performance.

So broadly speaking I think the Chinese economy is going to continue struggle.  And I don’t – long run I don’t think that’s good for the Chinese people or the global economy.  That’s not a good thing.  But for the immediate here and now, kind of a softish Chinese economy has kind of helped out here keep inflation under – keep inflation down and allowing central banks, like the Federal Reserve, to avoid having to raise rates even more than they have up to this point in time.

**MODERATOR:**Thank you so much.  The next question will be coming in through the chat.  It’s from Arul Louis of IANS:  “What will be the impact of (a) reshoring and the push for boosting domestic manufacturing; and (b) friendshoring to countries that are not in contention with the U.S.?”

**MR ZANDI:**Well, I think reshoring is a real thing.  It’s a very – been very significant.  And it’s kind of – the catalyst has been severalfold.  One is the pandemic and the disruption to supply chains that occurred because of the pandemic.  I think businesses recognized the kind of the risk they faced with their supply chains.  The resilience of their supply chains isn’t what it needed to be.  They were too long and complex and that has been one catalyst for kind of bringing those supply chains closer to home or bring them home altogether.

Second, I mentioned the relationship between China and the U.S.  I think that’s been problematic, and I think businesses have kind of re-evaluated what they’re – U.S. businesses have re-evaluated what kind of relationship they want to have with China, and similarly Chinese economies – Chinese businesses have re-evaluated what kind of relationship they want to have with the U.S. economy.

And then, of course, policy – U.S. has, under President Biden, implemented a number of major pieces of legislation – the CHIPS Act is the most obvious in the context of this question – and that’s reaping enormous benefit.  There’s also the IRA, the Inflation Reduction Act, around the green – the transition to green energy and the infrastructure legislation that help improve the competitiveness of businesses in their competition with global economies.  So there’s been a lot of things that have kind of come together here over the last several years that has really resulted in a significant pullback in supply chains to the U.S. and to other countries that – like Mexico would be probably the poster child.  Vietnam, southeast Asia would also be examples of this reshoring effect.

And just to give you a number to give you sense of magnitude, if you go back, say, before the pandemic – and even in – during the couple – 2020, 2021 – manufacturers in the U.S. would spend approximately $75 billion a year to build new factories or refurbish existing factories – 75 billion – which in the grand scheme of things is not that much.  Most recently, it’s on an annualized basis well over $200 billion, so that gives you a sense of magnitude and very dramatic kind of shift here.  And that’s – that’s just manufacturing.  It doesn’t – kind of facilities.  That’s the factories and other facilities.  So this dynamic is in full swing, and I don’t see this changing anytime soon.

And I do think the – one result of that is it does mean higher costs.  I mean, one reason why supply chains had extended out so far was to lower the cost of production and bringing them back in does raise the cost.  But I do think it makes our – the supply chains much more resilient and the nation from a geopolitical perspective much more secure.  And it – at the end of the day, in my view the CHIPS Act was as much about the economy as it was about geopolitical security given the fact that we were so dependent on Taiwan for all the chips that are produced and consumed here.  So this is a dynamic that is going to continue and play out here going forward.  Will raise costs to some degree, will add to inflationary pressures at least on the margin, but on net, I think is a very positive development and something that had to be done.

And it also benefits, as I mentioned earlier, other countries.  Mexico’s economy is doing very well.  In fact, you may know this factoid.  The imports to the U.S. from Mexico surpassed imports from China last year in 2023 for the first time in, I believe, 20 years.  You have to go back 20 years ago when China entered into the World Trade Organization.  So that kind of gives you a sense of how dramatic the shift has been and how important it’s been.  Been very helpful to Canada.  I mentioned Southeast Asia.  All these economies have benefited – Korea, maybe to some degree Japan have benefited from this shift in production.  And, again, I don’t really – I don’t see that changing here anytime in the near future.  That – this is a train that’s left the station and will continue going down the tracks here for a while.

**MODERATOR:**Thank you.  The next question comes from Mr. Liu from Xinhua of China:  “Hi, my question is, once the Fed starts to cut rates, do you see the possible spillover effects, especially via the U.S. dollar exchange rate, could be any difference in time and compared with previous cycles?  Could this be different in” —

**MR ZANDI:**Yeah, I think the dollar will – the dollar, as you know, has been strong. It’s not – it’s come off its highs, pandemic highs, but on a broad trade-weighted basis it’s kind of in the upper – I’m speaking from memory, but I’d say the upper quintile of the distribution of – if you look over time, so a relatively high value of the dollar.  And that goes to the relative strength of the U.S. economy.  That goes to the aggressive – relatively aggressive tightening in monetary policy by the Federal Reserve.  And while I do think the dollar will come down in value on a broad trade-weighted basis over the course of the next year or two as the Federal Reserve engages in interest rate cuts, as I articulated in my presentation, I don’t think it’s going to come down a lot.  I think it’s going to remain relatively strong, certainly stronger than the average level of the dollar on a broad trade-weighted basis through history.

And the reasoning is that, again, the U.S. economy is relatively strong and other developed economies not – it’s going to be difficult for them to approach the kind of growth rates the U.S. is experiencing.  Hard to see that happening in Europe.  Hard to see that in Eurozone.  Hard to see that happening in the UK, certainly not Japan.  The only economies that could rival the U.S. in terms of growth rates might be Australia, maybe New Zealand, maybe Canada.  So I just don’t – I just don’t see that, other countries being strong enough for their currencies to push the value of the dollar down in a significant way.

The other thing to consider is that while the Fed is lowering interest rates, so too will be other global central banks.  In fact, the European Central Bank, for example, probably will need to be even more aggressive than the U.S. Fed in cutting rates, in significant part because not only is inflation coming in the Eurozone but the economy is just weaker.  I mean, the big German economy is arguably near a recession, and the Scandinavian economies are already in recession going back to be very interest-rate sensitive.  So the ECB is probably going to start cutting interest rates even before the Fed, or if not certainly contemporaneously with the Fed.  The Bank of England might be a little bit slower.  Inflationary pressures are a little bit more persistent but only a little bit slower.

So the point is the Fed’s going to be cutting rates but so is everybody else, and the relative interest rate differentials aren’t going to be significant enough to cause the dollar to fall to a significant degree.

So I think the dollar will weaken from here, but the weakening will be modest.  In the grand historical scheme of things, the dollar will remain strong, and certainly over the course of the next year or two.

**MODERATOR:**  Thank you.  I just will –  I’m going to drop the link to the Conference Board report on Consumer Confidence that you mentioned into the chat for everyone to share.  Folks are welcome to check out the transcript from the briefing that they did with us just about two or three weeks ago to kick off this series.

The next question comes from Mark Murray, Capitol News of Guyana:  “Thank you for your informative presentation.  In relation to the U.S. oil market, can you share your perspective on the potential benefits of accessing new oil developments in countries such as Guyana through companies like ExxonMobil and Chevron?”

**MR ZANDI:**  Well, we need more oil globally.  The amount of oil globally that’s being consumed, it goes up and down depending on the global business cycle, but it’s still – and despite the transition, the very necessary transition to green energy that has to happen, the faster the better – but despite everyone’s best efforts, in a kind of a healthy, reasonably growing global economy, the demand for oil continues to rise.  So this year – I’m speaking from memory so I may not have this right, but I believe the IEA estimates – and I think that our estimates are close – that global demand will be 104-105 million barrels a day, which is up at least a couple million barrels a day from last year.

And I as I mentioned earlier, it’s hard to see U.S. frackers – and by the way, the U.S. is, I believe at this point, the largest oil producer in the world.  We’re producing a lot more oil here than anywhere else.  It’s going to be hard to see U.S. oil producers pick up production to any significant degree compared to where we are today.  We’re at 13 million barrels, record high.  Maybe they get a few hundred thousand barrels more of oil out in the coming year, but it’s going to be much more difficult to see that.

Therefore, that argues that we will need to see oil supplies coming in from other parts of the world like Guyana.  And that’s also been – at least from my perspective – a surprise in 2023, the increase in production in that country, and I expect that to – it’s important that that continues.

Now, obviously the green transition needs to continue and will continue, so ultimately oil demand will level off and hopefully start to come in, and that’s part of the problem, part of the issue, because global energy producers, fossil fuel producers – you mentioned ExxonMobil – understand that and therefore it makes them – it makes it difficult for them to make the economics work for new investments that are necessary to generate the production of oil that we need for the here and now.  So it’s a kind of a – kind of a delicate balance and another reason to be nervous about global oil markets and how sensitive they are and how prices could go up and down and all around very, very quickly.  And that’s my number one concern.  But we do need more oil from other countries.

The one other thing I will say that could play a role that might be important if global oil supplies get – markets get very tight, the Saudis do have a lot of excess capacity because of their production cutbacks.  By our estimate – I’m speaking from memory again, but I think Saudi has 4 to 5 million barrels a day of excess capacity.  There’s a little bit of excess capacity sitting in the UAE, maybe somewhere else.  So there is some room here, but despite that I think we need to see continued investment and increased production in other parts of the world like Guyana, at least certainly for the foreseeable future.

**MODERATOR:**  Thanks.  The next question in the chat is from HaRam Lim from Yonhap Infomax:  “Thank you for your presentation.  I wanted to ask if you’re worried about the possibility of a partial government shutdown this upcoming March and its possible impact on the U.S. sovereign credit rating and economy.”

**MR ZANDI:**  Well, Friday is the day, isn’t it?  I mean, we kicked the – lawmakers kicked the can down the road here to March 1st, so part of the government will shut down if there is no – if there’s not another continuing resolution or deal on the budget.  And then I believe on – one week later, March 8th, the rest of the government will shut – most of the government will shut down.

My baseline view, my optimistic view, is that lawmakers will get it together in time to avoid a shutdown, or if there is a shutdown it will only last a week or two, because the politics of this are such that someone’s going to get blamed politically and this is an election year, and whoever that is is going to get – is going to blink and we’ll get a deal.  So I don’t think even if we do get an actual government shutdown that that would last very long.  If it’s a week or two, based on historical experience, no big deal.  I mean, it’s not great.  I mean, federal government workers don’t get paid, at least not on time, if the government shuts down.  They’ll get their – once the government reopens, they’ll get back pay but that’s never a good thing.

But if it’s a week or two, no big deal.  If it’s longer than that, if it goes on for three, four weeks, five weeks, then a good rule of thumb is that for every week it’ll shave one-tenth of 1 percent off of GDP, annualized GDP growth, in the quarter.  So if it’s, say, four weeks, that’ll shave four-tenths of a percent off growth.  So that’s not – again, not great, and it’s certainly not good, but it’s not existential.

If it lasts more than a couple months – if we get into month three or four – then it becomes a deal, a big deal, because lots of things don’t work; things start to break in a really meaningful way and people get upset.  That’s one of the reasons why shutdowns haven’t lasted very long.  The longest shutdown was 35 days under President Trump, and the reason – or the ostensible reason why it came to an end is because TSA workers – these are the folks that work in the airports – stopped going to work.  They said, look, they were essential.  The government said you need to come to work, but they didn’t because they needed to – they had to put food on the table, so they started taking other jobs, doing other things, and not showing up for work.  Airports started to shut down and people really got mad, and that’s when the lawmakers struck a deal.

So it would be very unusual for it to go on for more than a month.  If it was two or three months, that’s a deal.  That’s a big deal.  And that means Q2 GDP growth in the United States would go negative and a recession would be more likely than not at that point.

So – and then you mentioned the sovereign debt rating, and I should just preface this.  I am part of the Moody’s organization, but I am not in the rating agency that makes decisions around the ratings of sovereign debt, including the U.S. Treasury bond.  That’s not in my remit and I don’t have any particular insight into that.  And I’ll just regurgitate what rating agencies, including Moody’s, have said, and they say if there’s government shutdowns, particularly if there’s problems around the debt limit, certainly if there was a breach of the debt limit – if the U.S. Treasury couldn’t make a debt payment on time – that all goes into the decisioning around the U.S. Treasury sovereign rating.

S&P and Fitch – two of the other large rating agencies – have already downgraded U.S. Treasury debt from AAA.  Moody’s has not, although it’s put U.S. Treasury debt on negative watch, and one of the reasons given was issues around governance.  And certainly, if you’re going to shut your government down on a consistent basis, that doesn’t augur well – that doesn’t reflect well on governance, how you govern your government, and makes it less – makes it more likely that there would ultimately be a downgrade.  So certainly not a very positive thing.

But again, the most likely scenario here is that lawmakers in the next few days, certainly the next week or two, will come to terms and avoid a shutdown, because I think politically that would be pretty problematic for whomever gets blamed – and someone will get blamed.

**MODERATOR:**  Thank you.  The next question in the chat is from Angelika Ahrens from Falstaff Magazine.  She asks:  “A cybersecurity incident caused, for example, Henry Shine – Schein, sorry – to take some of its systems offline last year, could continue to affect the medical devices distributors’ financial performance in this year.  This is just one company.  What do you expect for this year in terms of cyber crime?”

**MR ZANDI:**  Well, I should say thank you for the question and I have a bit of an advertisement.  I have a podcast every week called “Inside Economics,” and I had a – I’m bringing this up because I had a podcast maybe a month ago with a number of colleagues in the rating agency and in the economics team on cyber threats, cyber risk, and the macroeconomic consequences, and we talked about one potential scenario where cyber – a cyber attack on the financial system could become a broader macroeconomic issue.  So it’s certainly a concern, an issue, and a potential threat.

You saw what the administration did recently – I think it was last week – around cranes, Chinese-manufactured cranes that are ubiquitous in seaports around the country – worried, nervous about the cyber risk there.  So I think there’s a lot of reasons to be nervous and cautious about the cyber threat, particularly in the context of artificial intelligence and what that – that empowers hackers and makes them much more threatening.

Now, having said all of that, I do think it’s important to acknowledge it is very, very hard to construct a scenario where cyber actually rises to the level – a cyber attack is disruptive enough that it rises to the level that it becomes a macroeconomic event, meaning it shows up in – nationally in jobs and GDP and inflation and all the measures we look at.  You can do it, but it’s very, very hard to do.

And I think that goes to kind of the fact that these systems are very disparate; they’re not interconnected to – they’re disconnected enough that this does – it’s not – it’s hard to see a cyber attack becoming more widespread, and companies and businesses and government are also increasingly good at and investing in cyber defenses.  And so it’s a bit of an arms race.  It is an arms race between the hackers and everyone else.  But I think at this point government and businesses are doing a pretty good job kind of navigating that risk and managing things when there is an actual attack.

So certainly a threat or risk, but again, I think it’s hard to construct – you can, but it’s hard to construct scenarios where that becomes a broader macroeconomic problem.

**MODERATOR:**  Thank you.  The next question is from Soo Kim from Donga Ilbo, Korean newspaper.  “You mentioned not being over – you mentioned being overly worried about the commercial real estate issue, but do you think there’s no risk of it spreading to other banks in Japan or Europe?  Also, you mentioned political events as a risk to the economy.  Can you be more specific what concerns you the most?”

**MR ZANDI:**  Yeah, in terms of the commercial real estate spillover to other countries, I think that’s a relatively small threat.  Maybe individual foreign institutions that are exposed, significantly exposed, but I think in the grand scheme of things that exposure is small.  I don’t think it’s a systemic risk.

Most of the problems in the commercial real estate market are these large office towers sitting in big urban centers in the U.S., so New York, Washington, my home town of Philadelphia, Chicago, Seattle, San Francisco, L.A.  That’s where remote work has done the most damage to occupancy, where rents have been weak, where prices are down and you’re going to see more mortgage defaults.  But my sense of it is that most of that exposure is domestic.  Some of it’s in the banking system, some of it is other institutions – life insurance companies, some pension funds, sovereign wealth funds.  But I don’t – I’m not aware of any major global banking institution that is highly exposed to CRE in the U.S. or, more specifically, the office market in the U.S.  So I would be surprised.  Certainly I could be surprised, I mean, because the data is not timely and somewhat opaque.  It’s certainly a possibility, but I would be surprised if we saw a significant problem there.

I think most of the – as I mentioned earlier, I think most of the risk is to smaller, mid-sized U.S. banks who have a significant share of their assets exposed to commercial real estate and have not – unlike the big institutions that stress-test their portfolios against pretty significant declines in CRE prices because of regulation, they don’t need to do that, so they’re not as well capitalized and not as well prepared.

So we could see – and I would expect more failure there, but I’d be surprised if we saw large U.S. banks or large international financial institutions run into trouble here.  There may be some idiosyncratic problem out there that I’m unaware of, but I’d be surprised if that’s the case.  But I did include that in the risks of concerns, and I did that because there is a lot of opaqueness here, a lot not very transparent, hard to gauge.  This thing could go in lots of different directions.  So I don’t want to dismiss it as a threat, but I think it’s a threat, it’s a risk, it’s not the most likely kind of scenario.

On the politics – just to be more explicit, I do think the election between, in all likelihood, former President Trump and current President Biden will be close, that – in the last election, President Biden won with 306, I believe, electoral votes.  He needed 270 to win, and it was—it boiled down to a couple states going one way or the other.  We currently do a lot of modeling of the election, presidential election, at the Electoral College level.  In fact, if you’re interested, you could Google “Zandi presidential election model” and you can kind of see the work we’re doing here.

And based on that work, the election really boils down to one state, the state of Pennsylvania, my home state.  And it really boils down to turnout in parts of the state, particularly around Philadelphia.  And again, that’s exactly where I live.  And if the election is that close, if it – if it’s going to pivot based on one or a couple of states, given the political environment, not – would not be surprising if there’s – it’s contested.

And if it’s contested, there could be social unrest.  There – these are all risks.  Again, not my baseline, but there could be social unrest.  It could undermine consumer sentiment.  I mean, sentiment is already very fragile and very impacted by people’s political thinking and persuasion.  And financial markets could be roiled if that becomes – if there is social unrest if the election is contested, and that could become a macroeconomic issue.  So again, that’s not my baseline view.  That’s not – I think that’s much less likely than likely.  But it’s certainly a threat, a risk in the context of the kind of the – the very difficult political environment that exists today in the nation.

So that’s what I meant by that.

**MODERATOR:**Thank you.  We have one last question, and it’s Arnaud.  Arnaud, can you enable your video this time and ask your question?

**QUESTION:**Yes, thank you.  You didn’t speak so much about the fiscal deficit, which has almost doubled last year, if you take off the student debt story.  How long can it last?  Nobody cares?   You don’t care?  Nobody speaks about it.

**MR ZANDI:**The – Arnaud, the fiscal – the U.S. federal government’s fiscal situation?

**QUESTION:**Yeah, yeah.

**MR ZANDI:**Well, I did mention that as risk number three.

**QUESTION:**Yeah, (inaudible).

**MR ZANDI:**Yeah, and I do consider it to be a risk.  I mean, just to give you a sense of the numbers, the nation’s federal debt to GDP ratio is just about 100 percent, double what it was, say, 25 years ago before the financial crisis.  It’s the highest it’s been since coming just out of World War II, and if there’s no policy change, if there’s no change in fiscal policy – tax or spending policy – according to the CBO, debt to GDP ratio will be – I think it’s 116 percent 10 years from now and 180 percent 30 years from now.  And that’s when their forecast ends, but you can do your own forecasts at that point.

The amount of money that’s – that needs to go to paying interest will rise very dramatically.  Already I think we’re pretty close to interest expense outpacing the amount we spend on our own defense, on the defense budget.  Not quite there yet but headed quickly in that direction.  And I think in that period of time, I think the deficits and debt are more corrosive on the economy as opposed to some kind of cliff event.  I don’t think it’s like everything’s okay and we go off a cliff.  It’s one of these things where interest rates rise a little bit over time and those higher interest rates undermine investment and spending and economic growth and productivity and all the things that we’re striving to improve, so it’s kind of a weight on the economy, a corrosive on the economy.

But at some point, investors are going to be – particularly in the – if it’s in the context of governance issues, like shutting the government down and/or the – having brinkmanship over the debt limit, or certainly if we breached the debt limit, then interest rates will rise a lot more and it becomes more of a cliff event.  We – it goes from being a corrosive on the economy to being an event that – a crisis, and requires some pretty draconian changes to the way we operate.

So no, I think it’s an important – a very significant factor.  It’s not something that’s – when I laid out the risks, I said I kind of did them chronologically, which could do us in first and which could do us in over time.  That’s why I started with oil prices first and ended with the fiscal situation.  I think it’s a real threat long run.  And by the way, it’s not – the other thing to consider – and this is I think critical – is the U.S. sovereign debt problems are evident all around the world, right?  All sovereigns, except for a few, a handful, have much higher debt limits than they have historically, and this is going to be a problem for them at some point going forward long before it becomes a problem for the United States.

But let me end this way.  We’re at the end, right?  This is – that was the last question?  Okay, I’m going to end on an optimistic note.  I’m not going to let you drag me down.  So – and I’m going to butcher this a little bit, and because you’re foreign correspondents, don’t laugh at me, but Winston Churchill said something to the effect – and this was back around World War II, when he was trying to convince Franklin Roosevelt to get U.S. into the war fighting Nazi Germany and the Japanese.

He said:  Look, Americans, they try everything and anything, and then ultimately do the right thing.  And I think that will apply to our fiscal situation.  We’re going to do everything we can not to address that problem, but when push comes to shove or when it looks like we’re going to be spending more on interest than on our own defense – and we can – and lawmakers can connect the dots in the minds of the electorate that if we don’t do something, interest rates are going to rise and they’re not going to be able to ever be a homeowner or buy – even buy a car, then we will do the right thing.  That’s been our history and I expect that to be our future.

So – well, on that optimistic note, very U.S.-centric – I’m sure the State Department appreciates that ending.  I’ll stop right there.  (Laughter.)

**MODERATOR:**Well, Mr. Zandi, you’re right; that was last question.  You’ve been very generous with your time.  Thank you very much for sharing your insights.  To everyone who joined online, thank you.  Today’s briefing was on the record.  As a reminder, our briefer is not a U.S. Government official and does not represent the official policy views of the U.S. Government.  That concludes today’s briefing, and good afternoon.

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