Moody’s Analytics Chief Economist Mark Zandi joins Yahoo Finance Live to discuss President Biden's recent comments on the state of the U.S. economy amid inflation, the health of the labor market, and U.S. homebuilder confidence.

Video Transcript

- That was President Biden last night on "60 Minutes" saying he does not believe that the economy is going to get much worse from here. We want to bring in Mark Zandi, Moody's analytics chief economist. And Mark, we just heard what the president thinks. But what's your assessment of the economy and the odds of whether or not we're going to see a recession?

MARK ZANDI: Well, I think the soft landing is more likely than not. But having said that, recession risks are uncomfortably high. With inflation as high as it is and the Federal Reserve on high alert raising interest rates-- and we're going to see another large rate increase in a couple of days-- the economy is going to struggle here over the next 12 to 18 months.

And navigating through all this is going to be difficult. I think with a little bit of luck on the pandemic and the Russian invasion and some reasonably deft policy making by the Fed-- they can't raise rates too far too fast or that will push the economy into recession. But they have to raise them far enough fast enough to quell inflation. But if they can kind sort of get that right, I think we can make our way through with a soft landing. So it's going to be close. But at this point, I still say odds are that we'll make our way through without a downturn.

- Mark, what's your view just on the progress that the Fed has made so far in terms of taming inflation?

MARK ZANDI: They've done a good job in two regards. One, they've been able to bring inflation expectations back close to their target. When Russia invaded Ukraine and oil and commodity prices jumped, inflation expectations took off. And of course, that is a real problem because if they stay high, then actual realized inflation will likely be high as well. And so they've done a really good job raising rates, signaling to markets that they're going to raise rates further. And that has brought in inflation expectations down and that's good.

And they've also started to slow the economy, particularly the job market. Job market's been rip-roaring, as you know. If you go back six, nine months ago, average monthly job growth was 500k a month. We're now down to 350k. That's moving in the right direction. Although, we need to see much slower growth, probably closer to 100k or south of that because that would be consistent with underlying labor force growth. So they've got more work to do. But I think they've moved the economy in the right direction.

- And, now, some people are still predicting that we're heading for a recession, if not this year, next year. But then of course, as you were mentioning, the strength of the labor market. How complicated is it to really characterize the economy right now?

MARK ZANDI: It's really bizarre, right. I mean, GDP, the value of all the things that we produce, which has historically been kind of the benchmark for gauging how the economy is performing, that actually fell in the first half of the year. So based on that, you'd say, oh my goodness, the economy is in recession. It's struggling. Then you look at the job market. And the job market, as I said, is rip-roaring. It's not only the job growth. But we've got just close to a record number of unfilled job positions. Layoffs are about as low as they've ever been. There's been some layoff announcements by various companies. But in aggregate, they're incredibly low.

The quit rate, the percent of the labor force that's quitting their job, is very high, which is not consistent with a recession. So you it's been a reason for a lot of debate. That's why there's so much debate about how the economy is performing. But to me, at the end of the day, what matters most is jobs. And people have jobs, lots of them. And unemployment is very low. Close to record unfilled positions. So all of that suggests that the economy is moving forward and not in recession.

- Now, we're also seeing that there was a survey that talked about the rising health care costs. You obviously have a lot of people returning to work, some coming back with long COVID, with other complications. Meanwhile, a lot of people unionizing, trying to get higher wages. How complicated is it from a business owner perspective in this environment?

MARK ZANDI: Well, it's complicated, right. And it's not only about having to pay more for labor and other material costs. It's all this shortages related to the supply chain disruptions. It goes back to the pandemic and the disruptions to the labor market shoved a lot of people out of the workforce and still haven't gotten all those folks back, in part because of the pandemic. But, fortunately, businesses' profit margins and profitability have held up pretty well. I mean, just incredibly well. Another reason why I just think why we're not in recession. While GDP declined in the first half of the year, profit growth was very strong by any historical standard.

So they've been able to manage through all this even though it's difficult. They've gotten some help, obviously. The government support during the teeth of the pandemic was very important. The Paycheck Protection Program for small businesses and all the other support really helped businesses more broadly. So they got some help here. But I have to say they've done a really admirable job in aggregate. Obviously, I'm painting with a broad brush. But in aggregate, businesses have done a really good job of navigating through all these landmines.

- Mark, we had Bob Nardelli on the program last hour, the former CEO of Home Depot and Chrysler. We asked him just about one of the biggest risks here to the economy, also how it stacks up compared to 2007-2008. Let's take a listen to what he had to say.

BOB NARDELLI: The president said COVID was over. I think we have a new epidemic. It's called the quiet resignation. And labor continues to be a problem for us. So the breadth and depth of what we're facing today is a multiple of what we faced in '07, '08, and '09.

- So Mark, he was actually saying that the situation now could potentially be worse, it sounds like, when comparing it to 2008. I don't think you agree. But what's your reaction to what we just heard from Bob?

MARK ZANDI: Yeah. No. I mean, as I said, recession risks are high. But I think if we suffer a recession, it'll be pretty modest in the grand scheme of things. Probably not even as severe as a typical recession since World War II. The fundamentals of the economy are pretty good. I mean, consumers are sitting in pretty good shape.

I mentioned the jobs. A lot of excess saving. Leverage is low. Businesses, we just talked about that. Highly profitable. Leverage there is pretty low. Financial institutions. I mean, from my perch, they're about as strong as they've ever been. Lots of capital. Lots of liquidity. Good risk management. State and local governments are rolling in cash. Rainy day funds are overflowing. Real estate markets. The housing market is undersupplied, vastly undersupplied. Generally, when you go into a recession, you have an oversupplied market. So the federal government's balance sheet is a mess because of all the borrowing to help out with the pandemic.

But we're still the AAA credit on the planet. And I don't think that's going to be an issue any time soon. So, no, I just don't see that at all. Now, he did bring up a point about labor supply long run. I agree there. It's going to be tough to get labor because of immigration, much weaker immigration, and of course, the aging out of the Baby Boomer generation, me, retiring en masse. And that's weighing on labor force participation. So he's right about that. And I think that is our number one problem going forward. But no, no. This is nothing like '08 and '09.

- And in particular, in housing it is not. And that's why you write in the "Washington Post" that we are headed for a correction, not a crash. Practically speaking, though, what does that mean? And what will be the impact on the broader economy?

MARK ZANDI: Well, house prices are going down. I mean, it's just a matter of affordability. I mean, you saw back a year ago mortgage rates at record lows below 3% on a 30-year fixed. Demand was booming. Remote work. Juiced up prices. Now, of course, mortgage rates are up over 6%. And they are bumping up against those high house prices. And monthly payments are just not affordable. So potential for some homebuyers are getting completely locked out of the market. So we'll see prices adjust here. And a correction in my nomenclature is a decline 5%, 10% peak to trough in national prices. Some markets will see double digit, the most juiced markets previously.

But a crash that would be comparable to '08-'09, that would be down 25%, 30%. I just don't see that. I mean, the market's vastly undersupplied. Lending quality has been excellent since the financial crisis. You've got a lot of investors out there that this is a business model for them for buying homes and renting. They're going to be back into the market once prices come in a little bit. So I just don't see prices crashing in the current context.

- Is there a solution ahead for what some are referencing as a rent crisis across the country? We saw that reflected in the latest inflation print.

MARK ZANDI: Yeah. More supply. If I were king for the day-- and maybe I'd need a week. But I'd focus on tax credits to support more affordable rental. LIHTC. Low Income Housing Tax Credit. That's tried and true, you know, an infrastructure in place to make that work we can change a few dials there and really juice that up. Neighborhood home tax credit. New market tax credits. There's a lot of things we can do that I think-- it's not going to solve the problem next quarter, maybe not even by this time next year. But you look towards mid-decade, that could make a big difference if policymakers could get it together and do something along those lines.

- All right. Mark Zandi, great to have you on on touching on a number of subjects there. Really appreciate the time, sir. Thank you.