From Where I Sit: Episode 2 With Mark Zandi Transcript

Tom McGee: 

Welcome to From Where I Sit, I’m your host, Tom McGee, President and CEO of ICSC, the preeminent membership organization serving the commercial real estate and retail industries. Each episode, I’ll be joined by top experts to explore the trends impacting communities and commerce and the spaces where people shop, dine, work, play and gather. 

I’m excited to introduce a good friend and one of the country’s top economists, Mark Zandi, joining us today on From Where I Sit. Mark is the Chief Economist of Moody’s Analytics and one of the most-quoted economic experts in the U.S. Mark, welcome to the show. 

Mark Zandi: 

Hey, Tom, it's good to be with you. Thanks for the opportunity.  

Tom: 

Yeah, thanks. It's great to have this conversation with you. Well, we're going to have a wide-ranging conversation today, but before we get into the details of economic metrics and whether we had a soft landing or not, one of the things that struck me is, you know, coming out of the pandemic, the U.S. economy to me seems to have recovered more quickly than the rest of the world. Just your perspective about, one, do you agree with that? And secondly, you know, why, if so?  

Mark: 

Yeah, totally. I agree with that. You can see it in – pick your statistic. I was just looking at a report from Europe and they're bemoaning the fact that the U.S. productivity growth, which is, you know, obviously a key part of the growth in GDP output, in the U.S. since the pandemic has been twice as strong as in Europe. And this is the case across most every economy, particularly most developed economies. So yeah, absolutely the case.  

I think Tom, a bunch of reasons for that. I think kind of the top of the list is just the policy response to the pandemic. Our response was just so massive, not only in terms of monetary policy, which other central banks around the world followed, but really in terms of fiscal policy. You know, if you add up all of the support to the economy that was provided, beginning with the CARES Act in March of 2020, that was when the pandemic began, to the American Rescue Plan, which was March of 2021, that was early on in the Biden administration, that was five, I’m rounding, obviously, but $5 trillion worth of support, deficit finance support. And, you know, that brings up another issue. But that's 25% of GDP. That's checks, that's help for small business, that's mortgage forbearance, that's, you know, on and on and on. And that compares to an average of about 10%, maybe 15% of GDP in the rest of the world on average. No one comes close. So that got us out of the grips of the pandemic economically, you know, very, very quickly and ramped things up.  

You know, we also got a little bit lucky. The other big shock, to the economy was the Russian war in Ukraine. And of course, that did a lot more damage to Europe than to us. I mean, the Europeans, particularly Germany, was very tied into Russia, particularly for energy, natural gas. And of course, we're very lucky here in the U.S. We produce a lot of fossil fuel, never had any problem with natural gas through fracking and even oil. We've ramped up oil production here to record levels. And so that's helped to cushion the blow.  

And then the other thing I'll mention, and again, there's a long list, but I'll just want to mention one more thing. This has historically been the case, that the American economy is just much more flexible. We adjust much more quickly to shock. That's because we allow for failure. Businesses fail and those resources are freed up and go to another use and the economy adjusts and adapts and people move. Less so this go around because of the fact that a lot of people locked in low interest rates and have been very reluctant to move. But even despite that, we've seen a lot of movement of people from one part of the country to another and that flexibility allows the economy to adjust to shocks. You just don't see that in the rest of the world, you know, particularly Europe or Canada or Japan or Australia. People don't move and they're much more reluctant to allow businesses to fail and for those resources to get freed up to go to a better use.  

Tom: 

Pretty dynamic economy, the U.S., it's just so vibrant. You did mention one thing around fiscal policy, the $5 trillion, etc. I want to touch upon that because that obviously has some impacts on a government debt levels and GDP-to-debt levels and so forth. But before we get there, today, we're sitting in a, in what I would consider, a fairly solid economy. You know, there's different perspectives around the strength of the economy, but certainly, you know, GDP continues to grow. The employment market is relatively, certainly strong. What is your perspective on where we're at today from an economy perspective and what are some of the risks that are out there that could impact our continued recovery?  

Mark: 

I think we're in a great place, at least in aggregate. I think I have this metaphor in my mind of the economy as this big elephant and depending on which part of the elephant you touch, you obviously would get a very different perspective. But if you take a step back, like an economist would, and take a look at the totality of elephant. Doing really well. I'd even go so far as to use the word exceptionally well, know, strong growth. I mentioned GDP, but jobs, recruiting lots of jobs, unemployment is very low. It's just around 4%. That's full employment. It's low across all demographic groups from educational attainment to ethnicity and gender and across the country. You know, inflation had been the blemish, but even that's now back in the bottle. Stock markets at a record high. It seems like we hit one high almost every day. Housing values are at a record high. Households did a really good job of locking in the low rates, previous low rates, and have been insulated from the run-up in rates. So yeah, it's a very, very good economy.  

Now, again, I'm speaking with a broad brush and in aggregate, and you know, there are blemishes. I do think there's a distinction to be made between folks at the top part of the income distribution, let's say the folks in the top third of the distribution, they're doing fabulously well financially. And folks in the bottom third of the distribution, they're struggling because they don't have the savings, they don't own stocks, they don't, in many cases, own a home. They got nailed by the high inflation two to three years ago. They took on credit card debt, consumer finance loans, buy now pay later to help supplement their income to maintain their purchasing power, which was, you know, you could maybe manage that when rates were low, but now you're paying 22% on a credit card or a record high.  

So clearly, distinctions to be made across the economy, but in aggregate, very difficult to find other points in history where we're performing as well as we have now.  

Now, in terms of the risks, there are risks. Although I will say, Tom, the risks are more symmetric than they've been in a long, long time. I mean, they've been almost universally to the downside since the pandemic hit, but it feels like there's some opportunity for the economy to actually do a little bit better than most people anticipate. And we can talk about that. But on the downside, the kind of the catchall geopolitical threats. And at the top of that list, I would put the U.S. relationship with China. It's obviously the biggest economic relationship in the world. It's very vexed. We're moving in different directions. And that's just not a healthy place to be. And we've managed it so far, but the odds that somebody makes a mistake here are not inconsequential. And if they do, then that could certainly derail the economy. And we go from an exceptional economy to something that's much diminished. 

So we've got our risks out there, but for the moment, hey, Tom, I'd say soak it in. I’d enjoy this. This feels from a, again, from a broad macroeconomic perspective, it feels pretty good.  

Tom: 

Have we achieved that soft landing? When do we declare victory that the soft landing has occurred?  

Mark: 

I say mission accomplished. I mean, the only reason why I would hesitate is, you know, the Federal Reserve still has work to do, right? The Fed jacked up interest rates in an effort to cool things off. They succeeded. They achieved their mandate of full employment and inflation back at target. And they've now started to cut interest rates, but the federal funds rate target, the rate they control, is at 5%. It's down from 5.5%, but it's 5%. And they, they will continue to cut here, at least if they stick to their script they've laid out for us. But I don't know that you can truly exhale until the interest rates back to something that's more typical, normal. And I'd say that's probably closer to the 3%. 

So that may take a year, year and a half before we get back to that. And I think they'll get there. I think odds are very high that they'll pull this off and we should be fine. So I say mission accomplished, but I can't quite exhale yet until interest rates are back down to something that we would consider to be, you know, more typical historically.  

Tom: 

Thank you for that. One of the things that, you know, I always worry about having gone through 2008 and kind of the unexpected, the “black swan” type of events. Are there any things out there that you see and say, gosh, you know, there are some troubling signs that maybe there's this “black swan” kind of event that could impact the economy that we're not really, most people aren't talking about right now. I get the geopolitical risks. I get the election risks. But is there an asset bubble out there somewhere that, geez, if that, if something happened, that's going to really cascade the economy. You know, whether it's something similar to the housing crisis that we experienced in 2008.  

Mark: 

Well, I don't think there's anything that existential. That was pretty bad, but I'll call out something that is bothering me. I'll put a stake in the ground and hopefully it doesn't happen. But if it does, then your listeners can say, I heard Zandi say this. And be prepared. The bond market, the treasury bond market, the corporate bond market, it's not well functioning. It's kind of choppy. I mean, when I started watching the bond market, I don’t know, three decades ago, the 10-year treasury yield moved two to three basis points in a day. That was a huge deal. Now it's moving 20, 30 basis points in an hour, feels like, you know, lots of volatility. I think that partly goes to the fact that the large broker dealers, you know, the parts of big banks that make these markets, haven't expanded those broker dealers, the balance sheets of those broker dealers to keep up with the rapid growth in debt. Going back to what we were talking about earlier, all that treasury borrowing, the deficits in debt. It's also the corporate bond market, lots of borrowing. And the reason that they haven't done that is because of liquidity rules, capital requirements, that just make it uneconomic for them to do so. So the markets are just feeling a lot choppier.  

And then adding to it is, the Federal Reserve is, so-called quantitative tightening. That means they're allowing the treasury securities and mortgage securities that they bought back when they were QEing to help support the economy in the pandemic, they're allowing them to run off. So they're exiting these markets and entities that are coming in to fill the void are in other central banks like, you know, the Chinese are exiting out slowly as well. It's not even the banks themselves because they got nailed by the banking crisis a little over a year ago. It's the hedge funds. They're coming in and now becoming a bigger part of those markets. And they're very price sensitive. They're there when things are going well, no problem, but they exit very quickly if things aren't going well, for whatever reason. And they all go at the same time. And we get into another treasury debt limit battle. As you may know, the treasury debt limit was suspended until January 1, 2025, and then it kicks back on by law. The treasury will run out of cash by the middle of next year if lawmakers don't get it together and suspend it again or increase it. And you can see kind of a real political battle brewing at that point in time. And all these things come together and we see, let's call it a liquidity event, liquidity crisis in the bond market.  

Now, the Fed presumably could step in and provide liquidity, lower interest rates. Certainly could do that. It could help out the treasury market quickly, but not so much the corporate bond market. So that's the kind of thing I could happen that some kind of financial event. that, could potentially be that black swan you're talking about. Not on the par with the housing crisis, the financial crisis back a generation ago. That's a whole different ball game. That was just really credit. This is bad lending decisions. This is not that, it's just a liquidity problem, but liquidity problems can turn into solvency problems pretty fast.  

Tom: 

Let's talk about debt levels since we're on the topic and obviously debt-to-GDP ratio in the U.S. is at 120%. The trajectory is clearly going north right now. Just talk about the consequences of that. What happens at some point? What's too high?  

Mark: 

Well, as you point out, it's more than double what it was prior to the financial crisis the generation ago. And if you look at the future under current law, say policymakers don't change law, then the debt-to-GDP ratio will be 170%, 175%, 30 years from now. Good rule of thumb is for every percentage point increase in the debt-to-GDP ratio, it adds one to two basis points to the 10-year yield. So you can do the arithmetic. If we're sitting at a 4% 10-year yield today, that trajectory suggests that 30 years from now would be at 5%-ish or even higher. But the world, of course, is not that linear. It's a very nonlinear world. And so it may be one to two basis points for one percentage point debt-to-GDP ratio today. But if you're sitting at 150% debt-to-GDP, it could be three, four basis points. And then at some point, it goes parabolic. Because investors are going to rightly question, are they going to get paid on time? 

And probably, that's going to happen, that kind of dovetails with the black swan event I described earlier, that probably happens around some kind of governance issue, like a debt limit battle or government shutdown. We're just so dysfunctional. We can't figure it out and lawmakers can't get it together. Certainly if they default on the debt, that would be a catalyst for a complete mess. When that happens. I don't know, Tom. I have been thinking not next quarter, not next year, probably not in the next decade. But now I'm not so sure. You know, I do think there is a potential, under certain scenarios with regard to the makeup of government and our political situation, where this may be a bigger issue sooner rather than later. And by the way, maybe that would be a good thing. Maybe we need a crisis. We need those bond market vigilantes to come out and say, hey, I'm not buying your debt at these interest rates. You're going to pay me, you have to pay me a lot higher rate to take the risk. We need that so that lawmakers can connect the dots in the minds of the electorate that, you know, we have a choice here. We can go down the current path of large deficits and debt and look what the world looks like, or we can make the better choice of restraining government spending and increase taxes to change the trajectory of these fiscal situations. And that crisis might be the thing that lawmakers need to be able to get the political will necessary to do that. In fact, it almost feels like that's what's got to happen here, because I just don't see us generating the political will to address this unless we're absolutely forced to do it. You know, that old adage, I used to think it was from Churchill, but apparently it’s Abba Eban. You know, Americans try everything and then they ultimately do the right thing.  

Tom:  

Yes, yes.  

Mark:  

That's going to apply here. We're going to do everything we can to screw it up. And hopefully at the end of the day, we do the right thing.  

Tom: 

I thought that was Churchill who said that also. Mark, let me ask you one other question. 1-month, 3-month treasuries are offering a yield in excess of the 10-year treasury. To me, that still doesn't make sense. What's the market telling us?  

Mark: 

Yeah, well, that goes back to the question about the soft landing. Remember I said I wouldn't exhale until we're down to a 3% funds rate target? Because that would mean if the 10-year is at 4%, which I think is roughly where it should be here in the next year or so, that's 100-percentage point positive spread. And that's right. That's good. That's what we want. But right now, we've got a 5% funds rate and you got a 4% 10-year, we’re 100% upside down, an inverted yield curve. And that's not a healthy place to be. I mean, the financial system just doesn't work well when you have an inverted curve because financial institutions borrow short and lend long. Typically, they borrow short at a lower rate and lend long at a higher rate. And that interest margin is their profit margin. And that's tied right to the yield curve. But with an inverted curve, short rate is higher than long rates, it puts pressure on their net interest margins or profitability, and it makes it much more difficult for them to kind of extend credit and provide the funding that's necessary to drive the economy forward. So it's not a healthy place to be. And that's why I think it is really important for the Fed to normalize here as quickly as possible. Particularly, they've achieved their mandate. Just get that rate down as fast as you can so that something doesn't break somewhere in the economy, including in the financial system, because the yield curve is inverted.  

Tom: 

So let's get to the Fed now. So obviously the Fed just recently reduced rates. There's expectations they are going to reduce them more. Before we talk about the impact that could have on consumers, on business, etc., just how do you see that playing out over the course of the next year? I mean, the series of rate cuts, etc., the timing, size, what have you? 

Mark: 

You know, I'll give you – my explicit rate path is, they cut another quarter point in the December meeting that gets the funds rate down to 4.5%. And then they cut a quarter point each quarter until they get the funds rate down to 3%. And that's sometime in the early part of 2026. I think that's kind of roughly the path forward. They might speed things up if the economy starts to suck some wind. They might slow things down if inflation picks up. The election matters here. I mean, for example, if we get to the other side of the election and we have tariffs, that is inflationary and that might cause the Fed to slow down its rate. I don't think it causes them to raise rates because there's a lot of, it hurts the economy and it raises inflation. So they're not sure exactly what to do, but it will cause them to freeze and they'll slow down the rate cutting. So, but that path to 3%, and I think it's roughly 3%, that's an empirical question. It's open to a lot of debate. It's not written in stone, so we'll have to see. But that's my sense of things. That's kind of the path forward here. We get back to kind of a normalized federal funds rate target, so-called equilibrium, our star of 3% by early 2026.  

And by the way, I think market expectations are fully on board with that. I think markets are expecting, investors are expecting a more aggressive kind of rate cut path, but they've given up on that in recent weeks, given the stronger job data and the firmer inflation data and the market's expectations are very, very similar to the ones I've articulated for us.  

Tom: 

You mentioned tariffs, and we're going to talk about those in a few minutes. Are there any other risks out there that would allow inflation to rear its head again? Do you feel like the inflationary pressures are now under control or are there things out there that could change that? I get geopolitical risk would be one of them.  

Mark: 

I think inflation's back to target. It's low and stable. In fact, if you look at that consumer expenditure deflator, if you exclude the implicit cost of home ownership, the so-called owner's equivalent rent, that's implicit because no one pays it, because most people have a mortgage that's locked in, so their mortgage costs aren't rising. But this is a way to kind of measure the implicit cost through looking at rents. If you exclude it, which I would argue one should do in trying to gauge underlying inflation, certainly in terms of determining the appropriate interest rate, it's 1.5% and it's been there for, since the beginning of the year. So it's rock solid 1.5%. So I would argue, you know, if anything, it's below target. We're not, I don't feel like we've got, got an issue there. But you know, obviously there are things that could happen that could disrupt that. I mentioned tariffs.  

You know, the other thing I worry about is what I call Fed capture, you know, meaning that the Federal Reserve is an independent agency that sets monetary policy based on achieving its two objectives: full employment and low and stable inflation. And politics cannot, should not enter into the decision-making process. Because we know historically when that happens, there's always the incentive for the executive branch, the president, to argue for lower interest rates to keep the economy juiced. That ultimately always leads to higher inflation. So I worry about that as well.  

So yeah, I mean, I think we could see a higher inflationary environment, but that would be policy choice, you know, a mistake that we made not because of something inherent or fundamental that's going on in the economy.  

Tom: 

Obviously, commercial real estate is heavily rate dependent, the Fed reducing the rates. Although, generally speaking, commercial real estate is driven more by long-term rates than short term rates. But I would presume that you would see the lowering of rates by the Fed to be a positive for transaction volume of commercial real estate and perhaps take some pressure off the office sector, particularly. 

Mark: 

Yeah, I agree with you, Tom. I think the lower interest rates certainly help out the commercial real estate market. It takes a lot of pressure off. I mean, we were not too long ago flirting with a 5% 10-year treasury yield. Now we're down to 4%. I think that's a meaningful difference. And, you know, I think that does help valuations and it should help with the transactions, particularly in the stressed market. So, yeah, I think that's a real positive development for real estate broadly and for CRE specifically. 

Tom: 

Lower rates help the consumer as well. And one of the, one of the signs that we watch closely is just consumer debt delinquencies, which have picked up a little bit. Obviously lower rates would ease some of the debt burden on consumers or the interest burden on consumers. Does that concern you? Kind of the raising delinquencies in credit card debt or in auto debt?  

Mark: 

It does. That goes back to my point earlier about lower income households under a lot of financial stress. The good news there, Tom, is I think delinquencies have peaked or are near a peak. We get data every month from the credit bureau Equifax on all the credit cards, consumer finance loans, mortgage loans, the whole shooting match across the country. And it looks like the delinquency rate on credit cards has remained unchanged now for almost six months. And it does feel like all the trend lines here are positive. You know, most importantly, lenders have tightened their underwriting standards in the wake of last year's banking crisis. So the quality of the borrowers are higher. Actually, more like they've normalized. The quality was actually reduced in a very significant way back a couple, three years ago coming out of the pandemic because of, part of the COVID relief was that lenders should not, could not report to the bureaus if there was any delinquency on their credit. And so credit scores got inflated and that caused underwriting to weaken and thus the higher delinquency rates. But we're on the other side of that.  

And the other thing, of course, is now the Fed is lowering rates and that should start to result in lower rates on credit cards, consumer finance loans, home equity lines of credit. We should watch this, though, because, you know, the credit card interest rate, I think I mentioned earlier, is 22%. That's a record high. And it's a record spread off of banks' funding costs. So, there's some concern that there's not enough competition in the credit card market for lots of reasons. And we may not see rates come in as fast as they have historically. So I think that's something to watch very carefully. But I think rates are going lower and that should take some pressure off. So I'm hopeful that the worst of the credit problems that we've observed on cards, on auto, on consumer finance are in the rear view mirror now. We should, we'll feel a lot better about things next year.  

Tom: 

Mark, one of the things that you were talking about credit card delinquencies, auto delinquencies, etc. And I heard you recently on a Bloomberg podcast and you were talking a little bit around consumers and consumer spending on experiences. And we have seen that too, that there's a drop off in spending on experiences, obviously with the higher costs of airfare, hotels, etc. Do you see that as a short-term phenomenon, a long-term phenomenon? Is there a signal we should be seeing from that that should raise some concern around the economy? 

Mark: 

No, I don't think so. I think it might be a bit of normalization. As you recall, during the pandemic, the peak of the pandemic and the shutdowns, we couldn't travel. We couldn't go to ballgames. We diverted our spending to spending on stuff, on goods. Then once the economy reopened and we started to get going again, we could travel again. There was a lot of so-called revenge travel. People really wanted to go out and experience things, restaurants and ballgames and concerts. And now we're on the other side of that. It's starting to just normalize, get back to something that's more typical. Our spending patterns are normalizing. And that doesn't feel great when you're in the middle of that. But, you know, once we're on the other side of that, which should be by this time next year, then I think we just kind of settle in. If you look at overall consumer spending, the whole shooting match, everything, services through goods, the growth rates are rock solid. You know, real, after inflation, real consumer spending is year-over-year, 2% to 2.5%. And it's been that way for three, going on four years. And it's almost, if you graph it, it's almost like someone drew a line, to the degree that some people are arguing that the Bureau of Economic Analysis, the folks that put the data together, are actually drawing a line. There's a conspiracy theory. It's that amazingly stable, in aggregate. 

There's a lot of churn underneath as we've been talking about, but on the, you know, when you look at the top line number or the bottom line number, whichever it is, it's like just incredible stability and spending. Just, just amazing.  

Tom: 

The composition of the spending may change, but the trajectory and the straightness of the line hasn't changed. Well, that's, that's good news. One of the items that you noted at the beginning of our conversation was, as a risk, was just the election. But regardless of who's going to win this, who wins this election, we do know that there's some major things that need to be talked about next year in 2025, one of which is tax policy. The Trump era tax cuts all sunset at the end of next year. So when you look at tax policy, and there's a whole series of things that need to be talked about, everything from personal tax rates to corporate tax rates to capital gains rates, etc., that were all part of those tax cuts back in 2017, are there any of those items that are going to be talked about that raises some concern? Or that you feel is the most, that the economy is most sensitive to a change?  

Mark: 

Well, know, Tom, my sense is here's one thing that will be invariant to the outcome of the election. And that is, I think the tax cuts for individuals will just be extended perhaps for a couple of years, until the next election in 2026. We just don't have the political bandwidth to do anything different other than kick the can down the road for a couple more years. Also, tax policy is very complicated. It takes a lot of energy in Washington for lawmakers to kind of work it through. And the TCGA, that's the tax cuts under President Trump, you had some really, very smart people in Congress that have been thinking about tax policy for a long time that are no longer in Congress. Like Paul Ryan is the best example of that. He was Speaker of the House, but he was a policy wonk and really could usher through, you know, changes in tax policy. We just don't have that right now. And so I just don't think there's going to be any change here. So I, there's a lot of other tax policy on the on the corporate side that needs to be addressed. And I think they'll kick the can down on the road on that. I think it's the status quo on tax policy.  

Tom: 

And you mentioned tariffs also in the course of our conversation. Just talk a little bit about tariffs, the potential consequences if we end up with some significant regime around, associated with tariffs and increasing tariffs.  

Mark: 

Yeah, let me just first say, I'm not dead set against tariffs if they're strategic. If they're designed for a very specific purpose and they're on a selected group of commodities with a very specific country in mind. Like, so for example, President Biden imposed $18 billion worth of tariffs on EVs and batteries and other technology with China. You know, I get that, particularly in the context of a world where there's no other way to adjudicate trade differences. And using tariffs in a strategic way with a scalpel makes sense to me. Broad-based tariffs, universal tariffs, so-called universal tariffs across lots of products, against lots of countries. That's just bad policy. We settled this a hundred years ago. Hard to imagine that we're here back debating it again. But it's just a tax that's paid through in the form of higher prices on imported goods. So every American consumer, obviously lower, middle income households will get hit harder because a higher share of their budget go to these imported products, are going to have to pay that tax. 

Another way of thinking about it is like a consumption tax. And the other thing that happened, it's not going to create jobs, as it has been touted, because you're going to see other countries that are facing the higher tariffs from us impose their own tariffs and other trade restrictions. They're not going to stand still. They're going to respond. And that's going to cost this job. So the net of all this is going to be, you know, no job creation. Maybe some, if you do the modeling, some job loss. 

The other thing I don't like about tariffs is they're very capricious. They're very difficult to implement, very messy. Which products, which countries, which businesses, over what period of time? So it creates an enormous amount of uncertainty for businesses. They just don't know what the world's going to look like six months from now, a year from now, two years from now. And if they don't know, they can't plug it into a spreadsheet. If you can't plug it into a spreadsheet, you're not going to make an investment. You're not going to do the things you need to do to make your supply chains resilient and efficient and make your business work. So I think there's a long-term pernicious effect of tariffs that is underappreciated. It’s very, very, it's corrosive on the economy. So of all the things that, policies one could pursue to help support the economy's growth, that wouldn't even be on the list. That's in the trash can. That is like a really bad idea.  

Tom: 

Got it. Let me ask you one other policy-related item. One of the, one of the lessons I think of the pandemic was kind of the interconnectivity of the global supply chain. Obviously we ran into some product shortages. Some would say that led to some of the inflation that we experienced. U.S. manufacturing, there's certainly been a trend to move some manufacturing back to the U.S. or, or at least nearshoring. First of all, do you, do you see that as a trend that will continue and are there policies that you think would be helpful to increase the U.S. manufacturing base?  

Mark: 

Yeah, it is happening. You know, part of that is just the, kind of the fallout from the pandemic and what we learned about supply chains during that very dark period. Part of it is policy, I mean, the CHIPS Act and the Inflation Reduction Act provide tax subsidy to manufacturers to build factories here and produce here. And that's in fact what they're doing. I mean, if you look at investment by manufacturers in facilities, factories, in the 10 years leading up to the CHIPS Act, it was about $75 billion per annum, know, give or take, you know, pretty consistent. Last data point I looked at, speaking from memory, so I might not have this exactly right, but it's $225 billion at an annualized rate. 

So yeah, they are coming back and they've got significant monetary incentives to do it. And part of that's just national security. A lot of it is around the chip industry. And we've learned, given the pandemic and given our relationship with China, we can't be dependent on Taiwan for chips. Just can't do that. We've got to bring that production back home. And that's what's happening. But a lot of it's also other manufacturing. A lot of it's related to clean energy, around EVs and charging stations and battery technology, solar and wind, and all those kinds of things. So yeah, I think there has been a significant increase in manufacturing activity and a lot of that just the result of the pandemic, a lot of it result of policy decisions that have been made over the last couple of years.  

Tom: 

There's one other topic I want to touch upon, which is the banking system, regional banks. Last year, 2023, there was Silicon Valley Bank, First Republic, a few others that collapsed. Some of that was concerns around debt related to the commercial real estate industry, specifically the office sector. Some of it was some other factors. Do you feel like that issue has subsided or is that something that could rear it said again?  

Mark: 

I think it's subsided, Tom. It goes to the Fed and other regulators’ response to the crisis. They were very aggressive and creative. You know, they set up the Bank Term Funding Program to help banks get liquidity on their securities portfolio, even though it was underwater because of the increase in interest rates. And of course, the FDIC showed a lot of forbearance and allowed the failing banks to effectively cover deposits of insured and uninsured depositors. But, you know, having said that, I'll go back to that inverted yield curve. As long as the curve is inverted, I don't think we're home free in the banking system in the broader economy because the banking system has a very tough operating environment. In an inverted curve, weak loan growth because of the tightening and underwriting in the wake of last year's banking crisis. Credit quality is weakening. It's still good by the historical norms, but it's moving in the wrong direction. And of course, the regulatory environment, I won't comment on whether the regulation is good or bad, but there's more of it and it's costly. And so that just makes the operating environment more difficult. So I think the banking system's on more solid ground. I don't think it's on solid ground though. And it won't be until the Fed has completed its work here and normalized interest rates.  

Tom: 

Before we conclude, the final question is looking ahead to next year in 2025 and just your outlook. I know there's a lot of unknowns and there's the so-called no unknowns, but look ahead, next 12 months. Do you feel, it sounds to me like you feel, generally speaking, outside of the risk that you've identified, pretty good about where the economy's headed. 

Mark: 

I do. I think the economy's on good fundamental ground. The only reason why it won't perform well over the coming year through the end of ‘25 is that we screw it up. The Reserve doesn't get it right. It doesn't lower rates and thread the needle appropriately. Yeah, I feel very good about the economy's fundamentals. We're in a very, again, I'll use that word exceptional, exceptional spot.  

But that doesn't mean we can't mess it up. And that's what I worry about.  

Tom:  

Well, thank you for that, Mark. We covered a lot in a short period of time. And I always appreciate your time and the opportunity to talk with you. It's just wonderful. Thank you, Mark, for joining us today on From Where I Sit.  

Mark: 

Thanks, Tom. I really appreciate the opportunity. Always do, anytime. 

Tom: 

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