The “Ceasefire” Won’t Save The Economy — ft. Mark Zandi

Ed Elson is joined by Mark Zandi to break down what the tenuous ceasefire in Iran means for the U. S. economy and investors. They discuss his forecast for inflation, what the Federal Reserve is likely to do next, and the probability of a recession. Mark Zandi is the chief economist of Moody’s, a leading provider of economic research, data and analytical tools. He also hosts the Inside Economics podcast. Subscribe to the Prof G Markets Youtube Channel Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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• 1:32Speaker 04

  Listen to me. Markets are bigger than us. What you have here is a structural change in the world's distribution. Cash is trash. Stocks look pretty attractive. Something's gonna break. Forget about it.

• 1:42Ed Elson?

  Welcome to Prof G Markets. Scott is off for spring break, but he will be back next week. In the meantime, we have a big episode to share with you today with one of our favorite Prof G Markets guests. So let's get right into it.

• 1:58Ed Elson?

  President Trump issued an unprecedented threat against Iran on Truth Social Tuesday, warning that a whole civilization will die tonight. Hours later, he announced a two-week ceasefire. As part of the agreement, Iran said it would reopen the Strait of Hormuz, but would impose a fee of $2 million per ship to help fund its reconstruction efforts. The market's reaction was immediate. Brent crude fell below $100 a barrel. S and P futures jumped, signaling a sigh of relief. And on Wednesday, Defense Secretary Pete Hegseth declared, quote, "decisive military victory" over Iran, but General Dan Kane said the U.S. is ready to resume attacks if the ceasefire falls apart. Meanwhile, Israel continued its Hezbollah strikes and the Strait of Hormuz remains jammed.

• 2:42Ed Elson?

  So the situation is not resolved and the economic impact is now coming into focus once again. The conflict is expected to push inflation higher, with Bank of America projecting the Fed's preferred measure, PCE, could approach 4% this quarter. So for investors, the big question is, how do you navigate this kind of uncertainty? Here to help us answer these questions, we are joined by the chief economist at Moody's Analytics, Mark Zandi. Mark, good to have you on the program. So at the beginning of the week, the question was, are we going to bomb Iran? Are we going to nuke Iran? Was actually a question that a lot of people were asking.

• 3:21Ed Elson?

  The answer was no, but I think the question becomes now, have things changed? Because of the fact that we made this threat, now we have this ceasefire, which is kind of a ceasefire, not really, we can get into the details. But I guess, how has this adjusted your views of what's going to happen in the markets? And perhaps in the economy in the U.S.?

• 3:44Mark Zandi?

  Feels pretty close to script, more or less. You know, the president has gone down this path in other ways. And when push comes to shove, when markets start to react, when stock prices are down, when interest rates are up, and in this case, when oil prices are up, he figures out a way to pivot, to stand down and to declare victory and hopefully move on. And if, you know, this go around, that's been more difficult than, you know, with other... Similar events, Greenland comes to mind most recently. This one's been more difficult just because of the Iranians leverage over the, over the Strait. But nonetheless, that feels like where we're headed here. And that's kind of sort of what I think markets have been anticipating.

• 4:29Mark Zandi?

  You know, if you look at stock prices for, for example, as a benchmark, you know, even at the worst of the angst around what was going on in the Middle East, they, they were down on the S and P five to 10%. So not even a, you know, typical correction. So I think investors were expecting the president to do something like this. And in fact, that's now what he's done now. Clearly more script to be written here. We'll have to see how this plays out. You know, hard to imagine that it's all going to go forward without any, any difficulty that feels like there's more problems dead ahead, but we'll, we'll see. But this so far feels kind of sort of what investors have expected. It's close to, as I said, it's pretty much sticking to script.

• 5:10Ed Elson?

  I mean, one thing that has changed from before, I mean, I would argue that once you threaten nuclear warfare, the whole world has changed for various reasons, though you maybe we can't see them. But one thing that is a legitimate material change that has happened as a result of these, I guess, negotiations is that now Iran is charging $2 million for every ship that passes through the Strait of Hormuz. And they have said in the agreement that they have full sovereignty over the Strait. And now they're going to charge people for moving goods through it. So I guess the question is, one, do you think that that holds? And two, how significant is it from an inflation perspective?

• 5:51Ed Elson?

  Because it seems like that is, yes, ships can pass through, but now there's a toll and it's quite significant. And perhaps that will increase prices on oil or maybe on gas down the line even more. What do you think?

• 6:05Mark Zandi?

  Yeah, I think prices are permanently higher. I mean, when I say permanent, nothing's permanent, but at least in the foreseeable future, this year, next year, the year after, you know, we're not, there's no going back to the. Sixty, sixty-five bucks a barrel we were paying before all this mess. Uh, you know, there's the points you're making about the Iranians charging the fee. We'll see if that sticks or not. At this point, feels like that's probably the path forward here. That's the one way the president can stand down and declare victory, move on. Uh, even though it's, you know, a victory only in name, but you know, all we need is for the president to use that as a way to extricate himself and the military from, from all this. But you're still left with a fee, uh, that's not inconsequential.

• 6:49Mark Zandi?

  And then of course, uh, insurance companies are going to demand a higher insurance premium for insuring the traffic that moves through this great because, you know, who knows what will happen in the future. And then traders are going to demand a risk premium. They're not going to hold oil prices, uh, thinking, you know, without a premium, thinking that, you know, again, the Iranian regime's still in place and can still create havoc and more than likely at some point will, therefore, you know, you gotta pay me a higher fee. So if you told me after everything kind of normalizes winds down, hopefully that's by the end of the year, that prices are, oil prices are at eighty bucks a barrel, you know, that sounds about right to me. So we were at sixty, you know, we got as high as one-ten, you know, before the, the ostensible ceasefire.

• 7:32Mark Zandi?

  With the ceasefire, the oil's now trading at ninety-five, and if you told me at the end of the year it's eighty, I'd say that sounds about right. Now, you know, for the US economy, that's obviously not good, uh, that, you know, we're paying more for oil and other, uh, products that are, uh, coming from the Middle East, the agriculture, chips, aluminum, you know, lots of different commodities. It sort of adds to inflation, it weakens growth, it adds to the, uh, ill effects of the tariffs, which do the same thing. They raise inflation, weaken growth. But, you know, the economy can navigate through without an economic downturn. It's, it's much diminished by what's happened and what's going on, but it's, it's not pushed under by, by what, what's going on.

• 8:15Mark Zandi?

  Now, I'm just obviously, Ed, focused on the very near term, you know, next month, next six months, next year, there's other longer-term consequences of all this. And you, you know, you mentioned about the, kind of the implicit threats around using nuclear weapons. You know, those things have consequence, I think, in the long run. They're not cliff events, per se, but they're corrosives on economic growth. It just creates general angst, uncertainty, and that's just not good for business in the long run.

• 8:42Ed Elson?

  Yeah, how does that play out, those long-term consequences? Because I feel like we're so focused on direct effects right now because we're talking about guns and missiles and nuclear bombs. It's, it seems almost ridiculous to try to map out, oh, what are the second-order effects going to be of dropping a nuclear bomb or not? It's like, whatever, you dropped a bomb. But what are some of those second-order effects here? I mean, how do you think that this ceasefire that was preceded by very, very scary threats and that may not really last, at least that seems to be the situation right now, how would that affect our economy further down the line?

• 9:26Mark Zandi?

  Yeah, I view this as a part of a broader, very corrosive trend, and that's the deglobalization of the economy, that the US is pulling away from the rest of the world is very quickly. I mean, tariffs, immigration policy, what we're doing geopolitically. And then, of course, now the rest of the world is pulling away from us very, very quickly. And when he makes, you know, raise the specter of military action and even implicitly make reference to potential use of nuclear weapons or other weapons of mass destruction, it just makes everyone nervous about your ability to lean and the stability of your leadership

• 10:10Mark Zandi?

  and what you have in mind. And I think it means that the rest of the world is looking for, going to be looking for different partners to do business with. And, you know, the US is a big economy, it's the largest on the planet, so, you know, it's still going to play a very central role, but increasingly less of one as we move forward. And if that's the case, if we are deglobalizing, and this is just one more thing that will cause that process to continue and potentially even accelerate. That has all kinds of corrosive effects. You know, we have been, the nation has benefited enormously from the globalization process and the fact that the US is central and the US dollar is central to everything that goes on in the world.

• 10:53Mark Zandi?

  And that is now going to be under, it's under pressure before all this, it will be under even more pressure going forward. And again, it's not one of those things that manifests in a particular event. It could, but that's unlikely. It's one of those things that just plays a role longer run in markets. So, you know, for example, we're going to have to pay higher interest. And you can kind of see it in the current context, right? I mean, historically, you might have thought if we had this kind of event and a risk-off environment and people are nervous and scared, the capital will come flowing into the United States, interest rates would decline. But that's not what's happened. Interest rates actually have increased. You know, the 10-year Treasury yield before this, all this was below 4%. We got as high as 4.5%.

• 11:37Mark Zandi?

  Today, we're sitting at 4.25%. You know, that's indicative of things moving in a direction that's very unusual, unexpected. It may go, there may be lots of reasons for that, but one of the reasons may be, I think, that the safe haven status of the US is under pressure because of events. We're no longer deemed to be the rock, the place you go when things are going bad. And we're going to pay a price for that in the form, in many, many ways, but it's most manifested most immediately in the form of higher interest rates.

• 12:06Ed Elson?

  So, higher interest rates, higher gas prices, long-term, I assume, is the trajectory? I mean, I guess one question is, oil prices surged above 100, they were approaching 150, and now they're coming back down. And your suggestion is that if things remain as they are, which is like...

• 12:30Ed Elson?

  There's a little bit of a ceasefire, but bombs here and there, but the strait isn't completely closed, then maybe we'll hit 80. I guess the question is, does the fact that oil was at close to 150, does that trickle through down to gas prices in the long term in any way? And what is the overall trajectory of gas prices at this point?

• 12:53Mark Zandi?

  A good rule of sum, you know, for US gasoline prices, the cost of a gallon of regular unleaded is that for every $10 sustained increase in oil price, you get 25 cents increase in a gallon of regular unleaded. So if we were 60 bucks before this all started, we got a, we kind of peaked out, you know, on a weekly basis around 110. I'm rounding, obviously, to make the arithmetic easy. That's a 50 buck barrel increase. So that would say a gas, which was just under $3 a gallon before all this, will settle in at 4 and 1/4. That's where we were headed, to 4 and 1/4. Now with the ceasefire, we're down to 95 bucks a barrel. Let's just assume for sake of argument, that's where we stay

• 13:36Mark Zandi?

  for a while, for the next week or two, which is, you know, obviously very tenuous. I mean, the ceasefire, who knows how that's going to play out, but let's just say it does. That's an increase of, you know, 35 bucks a barrel. You can kind of do the arithmetic, we'll settle in at, you know, somewhere around 375, 380, 390, something in that order of magnitude. So, you know, well above, below 3 where we were, but not, not 4 and 1/4. That's kind of sort of where we'll settle in. Obviously, it's not just gasoline, it's diesel, right? That's the other thing. Diesel prices have gone up even more, and jet fuel, but diesel prices have gone up quite a bit more. And that is critical to things like groceries, you know, because a big part of the cost of

• 14:21Mark Zandi?

  Getting food on the store shelf is trucking it from the farm or the port. And so we're going to be paying more for groceries. And obviously, Americans are already very upset about the high grocery prices. They're paying for lots of, lots of other reasons. It affects everything that's delivered at your door. You know, Amazon, UPS, FedEx, the US Postal Service now has a surcharge. So you'll be paying more for that. And then every airline now is figuring out, trying to figure out ways to raise prices for tickets and other ancillary services to compensate for their higher jet fuel costs. So the effects of, of those, the run up in, in, in oil prices is going to be felt for, you know, quite some time.

• 15:01Mark Zandi?

  The thing I just, as a point of interest, economists have this old adage, prices go up like a rocket, they come down like a feather. Right? Right. Because especially in the current context, I've been very surprised by how quickly the pass through has occurred, particularly with gas prices. Yeah. It's very rapid, you know, almost like as soon as it went up a dollar barrel and it showed up at our local gas station. But they'll come down more slowly. They'll come down because of competition, but the competition will take a while to kick in, so they'll take a longer to come in. So I, I think we should, you know, you mentioned, I think it was JP Morgan, B of A, 4% inflation in the second, in the current quarter, annualized. That sounds about right.

• 15:43Mark Zandi?

  That's what we're going to get despite the ceasefire and despite the, you know, pullback in, in oil prices that we've seen over the last, last day or so.

• 15:53Ed Elson?

  We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify, or wherever you get your podcasts.

• 16:09Speaker 00

  This episode is brought to you by Michelob Ultra. Good times mean competitions between you and your friends, like seeing who can throw some pigskin the farthest or rush the field the fastest. Winner gets an ultra because it's not just a superior light beer. It's also giving fans superior access to their favorite sporting events. Superior is worth playing for. Visit michelobultra.com/superioraccess to enter. Enjoy responsibly. Copyright 2026 Anheuser Busch InBev Michelob Ultra Beer, St. Louis, Missouri.

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• 17:42Ed Elson?

  We're back with Prof G Markets. When you do anything that increases inflation at a structural level, which seems has happened here, it's almost like you're testing the consumer. Are you down to pay this much? And then when the consumer does pay, largely because, what, you're going to not pay for gas at this point? I mean, most consumers need to pay for gas. And it's like, oh, they can afford it. They're good. The consumer is spending, which is obviously going to make the inflation even stickier. I think the big question then becomes, what does this mean for the Fed? And, I mean, coming into 2026, what was so striking was that investors seem to recognize, yes, there are some headwinds here.

• 18:27Ed Elson?

  Yes, we're worried about the AI story. It might be a bubble, and that's causing some concern, et cetera. But generally, the story, which I even bought myself and said on this podcast, was, yes, but we are entering a rate-cutting environment. And so the idea of betting against the stock market in a rate-cutting cycle is pretty bold and maybe one that you should sort of second guess. And now inflation's rising again. We've had tariffs plus this. And it appears as though the Fed might be interested in even hiking rates. That is increasingly becoming a probability. What do you think this means for the Fed and the Fed's decision?

• 19:10Ed Elson?

  And how might that affect asset prices moving forward?

• 19:14Mark Zandi?

  I mean, I think the Fed for the foreseeable future, at least the next a few, couple, three meetings is on hold. That they're just going to sit on their hands for two reasons. One, they don't know how this is all going to play out. You know, what exactly is the ceasefire? Is it going to hold? You know, what does it mean? Where are oil prices going? You know, I can, I'm giving you my forecast, but I say it with no confidence, you know? So reason number one for doing nothing, sitting on their hands is the uncertainty. The other is the, the nature of the shock, just like tariffs. It weakens growth, it hurts the job market. And since Liberation Day a year ago, we've created no jobs. You know, some months up, some months down, but net, net, we've gone nowhere.

• 19:59Mark Zandi?

  And now you're throwing this into the mix. All else equal, that would say to the Fed, you should be cutting interest rates, right? Because your mandate is full employment. But conversely, you have higher inflation and that your other mandate is low and stable inflation. So all else equal, that argues for higher interest rates. So the net of all that is, I don't know, I'm just going to sit on some of my hands. I think the deciding factor for the Fed ultimately will be inflation expectations. You know, if in fact, investors, business people, consumers begin to believe that we're in a world of higher inflation. And that shows up in wage demands and, you know, pass through and the willingness of businesses to, you know, pass through their higher costs quickly to consumers.

• 20:44Mark Zandi?

  That's when the Fed's going to say, oh, I got a problem here. I can't allow that to happen. And they'll sacrifice the economy at the altar of low and stable inflation because they realize that if they don't, that inflation will only accelerate. Ultimately, they're going to have to push the economy into recession anyway, and that will be even more severe down the road. So take your lumps, you know, right now, get inflation expectations back in. And that's kind of sort of what motivated the rate increases back when Russia invaded Ukraine and inflation took off. Inflation expectations actually did pick up. If you go back and look, lots of ways of measuring that, but you can look at, you know, five-year, five-year forwards, or five-year breakevens, or inflation swaps. They all show that inflation expectations were coming unmoored, and that's why the

• 21:29Mark Zandi?

  Fed jacked up interest rates in an unprecedented way. You know, they raised them more quickly than any time in history. So if inflation expectations in the current period come unmoored, then that's what they're going to do. Now, good news, at least so far, it feels like inflation expectations are still anchored. That, you know, if you look at five-year, five-year forwards, or five-year TIP breakevens, they don't look like they pushed up to a significant degree, at least not yet. So that would argue that, you know, once things settle and the uncertainty fades and they got a better grip on, you know, what's going on with the events in the Middle East, they'll be more focused on the job picture, the weak growth, than they will be on inflation. And I think, and again, I say this with low, low level of confidence, but I think the

• 22:13Mark Zandi?

  next move will probably be a cut, but not, you know, not anytime soon. At best, late this year, there's a December meeting, maybe, but more likely early in 2027 for them to start cutting rates. Now, you asked about asset markets, the other aspect of that. I mean, I think asset markets have kind of sort of bought into that. I mean, you know, it depends on the day or the minute you look at Fed futures, because, you know, investors are all like, you can tell I'm all over the map and how I'm thinking about this, they're all over the map. But my guess is if we look today, they'll be saying no rate cuts. Their forecast will be very similar to what I just laid out, you know, something like that. So I suspect that if that's, you know, what we get, then, you know, this should have no, at this point...

• 22:58Mark Zandi?

  No more further bearing on asset market stock prices because that's embedded into their expectations, or at least ostensibly embedded into their expectations.

• 23:06Ed Elson?

  The more you game theory this out and we talk about what, how this will affect inflation and what this, what the decisions that this leaves for the Fed, it basically leads to recession. I mean, unless we can keep inflation under control and get prices, get that, those numbers downward, it does seem that that is kind of the, the trajectory we're headed. You said that a recession would be more than likely by the second half of 2026 unless the hostilities ended.

• 23:39Mark Zandi?

  Yeah.

• 23:41Ed Elson?

  I guess the question is, how does what's happened this week update your recession forecast and your probability that we would enter a recession?

• 23:51Mark Zandi?

  When we started the conversation, I said, things kind of stuck to, reasonably stuck to script. So that would suggest that we'll come close to recession, we'll feel uncomfortable, things are going to feel very uncomfortable, particularly in the labor market, the job market. I wouldn't be surprised if we see more consistent job loss here in the next few months. But we still will be able to kind of navigate through without an economic downturn. I mean, the one, the one thing that's kind of saving the day is the, the deficit finance fiscal stimulus, right? We had one big beautiful bill act passed last year that has tax cuts for businesses and for individuals and the individuals are benefiting from it

• 24:31Mark Zandi?

  right now because tax refunds are larger by consequential amount. I think the average refund check is about 350 bucks more than it was last year. And for lower middle income households, that, you know, that goes a considerable way to cushioning the blow from paying more for gasoline and, and for, for groceries. And so if we had not, if that, and that's all deficit finance, right? So, you know, taxpayers are paying for it. But if it hadn't been for that, then I, I, I think the odds of a recession would have been well over even. But with that, it's, it's providing enough support at, at the same time that people are having to put all their hard earned money into their gas tank that we should be able

• 25:14Mark Zandi?

  to navigate through. But it's going to be close. It's going to be very, very, very close. And that's what. My modeling is saying, you know, different indicators of recession. We've talked about it, I think, in the past. And they're all basically saying the same thing. The probabilities at this point are 40, 45, 50%. You know, very, very close of a recession at some point in the next 12 months. So it's, I think we'll navigate through my kind of baseline worldview. You know, in the middle of the distribution of possible outcomes is we navigate through at this point, particularly because, you know, hopefully the ceasefire is signaling we're moving in the right direction here. But again, you know, we've got to be humble and I do think the risks are awfully high.

• 25:56Mark Zandi?

  The final thing I'll say is on that, in response is nothing else can go wrong. Nothing, nothing. There's no margin of error here. I mean, everyone's on edge, you know? If anything else doesn't stick to the script, and goodness knows, I mean, things are not sticking to anybody's script here for the past year. If something else doesn't go exactly right, you know, I think we're over, recession odds are over even and it's going to be very difficult to avoid a downturn.

• 26:30Ed Elson?

  Right, and that's the part that is so interesting, watching investors and watching the markets try to price that in because the way, I mean, it's almost like, I just think about the way I'm thinking now. I mean, at the beginning of the week, I didn't think we were actually going to drop a nuke on Iran. But I was like, well, it's a question that you have to take seriously.

• 26:52Mark Zandi?

  Right.

• 26:52Ed Elson?

  Because the guy did threaten it and he said that it would probably happen. And so I didn't actually think that, but that was something that was in my head. And now, as we get to the end of the week, I'm sitting here and in my own mind, I'm just completely preoccupied with completely different things. The entire conversation has changed and yet, one thing that remains throughout all of this is that the uncertainty and the volatility and the erraticism of the guy remains incredibly high. And so the idea of saying, oh, okay, it's solved now, probably slightly. That also seems crazy. And I wonder if, I think you make a good point about the insurance premiums

• 27:37Ed Elson?

  in the Strait of Hormuz and the way that that will affect prices moving forward. It does seem like that's the business to be in right now. And that's possibly going to put I mean, I guess I pose the question, maybe the most amount of pressure on prices is as, I mean, insurance is the best example. We are going to have to price the uncertainty of this moment. Yes, maybe ships can pass through right now, but how do you price the risk that perhaps they will not be able to pass through tomorrow? And how do you put that into your model? And do you put that into a model? Those are the questions that seem to be significant and very, very hard to answer.

• 28:16Mark Zandi?

  Kindness uses the word uncertainty a lot. I mean, and that's what we're talking about here. You know, I talk about distributions of possible outcomes. I talk about the baseline in the middle of the distribution. But the distribution isn't a kind of a nicely bell shaped, normal distribution. It's like a fat distribution, mostly to the downside. I mean, there's just a lot that could go wrong here. And, you know, in that world, it's hard to assess risk and price risk. And therefore you would expect higher risk premiums, which are reflected in things like higher insurance premiums. I will say though, Ed, you know, if you look into financial markets, you know, like the obviously the equity market or even the corporate bond market, you don't, you don't see the same kind of risk premium built in, right?

• 29:01Mark Zandi?

  I mean, valuations are high. I mean, you know, with this rally today in the equity market, we're back close to within spinning distance of the record high. Now, some of that can be explained by dynamic, artificial intelligence and AI that runs its own dynamic has nothing to do with anything. The rest of what's going on in the world does not matter to, you know, what's going on with, you know, these companies, these hyperscalers are on a different dynamic and they're a big part of what's going on in both the corporate equity market and the bond market. So, but even abstracting from that, it doesn't feel like investors are running for the, are pricing in that risk, which, you know, one perspective on that is, well, you know, maybe you guys are just overstating the case. I mean, you know, the uncertainty isn't as big a deal as you think it is.

• 29:44Mark Zandi?

  The other is, well, you know, markets kind of move in a very discontinuous way. They're okay until they're not, you know, and you don't know exactly what the catalyst for not is, you know, what is it going to tip the psychology in the marketplace and everyone kind of runs for the door at the same time. That kind of feels like, that again, goes back to those recession probabilities. They're close, but they're not quite there. But, you know, if people lose faith and, you know, start running for the doors, which is a real distinct possibility, you know, that that's the fodder for an economic downturn. But that's the one, you know, a holdout to the, for the argument that, no, you know, this isn't great, you know, it's not bad, you know, this is not, this is not, no one wants to pay higher prices and see weaker growth, but we're still going to be able

• 30:29Mark Zandi?

  to navigate through. That's what the stock market is saying. That's what the corporate bond market seems to be saying, at least at this point.

• 30:37Ed Elson?

  We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com.

• 30:53Speaker 00

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• 32:25Ed Elson?

  We're back with Prof G Markets. I do want to also get your reactions to some of the jobs data we've been seeing. Jobs report for March, 178,000 jobs added following a very different February where we lost, I believe it was more than 90,000 jobs, and then we revised it further to the downside, losing 133,000 jobs. What do you make of the labor market right now? And how did that report adjust your expectations?

• 32:54Mark Zandi?

  It didn't change anything for me. I mean, I think the job market's like flat on its back. It's not going anywhere. I mean, some months you get a pop up, some months you get a pop down. I mean, the 178, as you said, came after a decline of, I think, 133. I'm getting the numbers wrong, but roughly speaking.

• 33:09Ed Elson?

  Yeah.

• 33:09Mark Zandi?

  And that goes to, you know, things like weather. I mean, I didn't experience the weather in the Northeast, but apparently it was pretty bad in February. It goes to strikes. There was a big strike at Kaiser Permanente in California. You know, a lot of technical issues involved, the birth/death models, that kind of thing. So you abstract from the vagaries of the data. I just don't see the job market going anywhere since this time last year, since Liberation Day. In fact, you can do it yourself. You can do a nice chart, monthly job gain, payroll job gains, January 2024 through March of 26. You can kind of see the strong growth back in 2024, started to come in a little bit coming into 2025,

• 33:54Mark Zandi?

  but in April of 2025, boom, you're at zero. And that's where we've been since, you know, again, up a little bit, down a little bit. So I don't think the economy is creating any jobs of consequence, you know, at this point. Now, you hear the argument that, well, we, the economy can't create a whole lot of jobs because there's no labor supply, you know, because of the immigration policy, which is, you know, that's, there's truth to that. I don't, I don't know why one would take any solace in that, but you know, that, that doesn't sound like a healthy economy, but nonetheless, that's true. So the kind of the so-called break even monthly job growth, amount of jobs you need to maintain stable unemployment is probably somewhere around 50 to 75 K per month. So, but we're at zero, you know, just, just around zero.

• 34:37Mark Zandi?

  And that's why the, the unemployment rate's been drifting higher more or less. So my sense is the job market is fragile, you know, very fragile. One other thing about the job market that, you know, everyone knows, but I'll just state it, is that all the weakness is because of a lack of hiring, you know, businesses have stopped hiring and that might go back to the uncertainty. That might be one of the manifestations of the uncertainty we're talking about. They're, they're not laying off, they're sitting on their hands too, right? They're not, they're not making big moves, they're not adding to payrolls, they're not cutting payrolls. And that, that, that's the firewall between, no layoffs is the firewall between the economy we have, the job market we have, which is struggling, fragile in a recession.

• 35:20Mark Zandi?

  If, if that, if we do start to see layoffs, if for example, the higher gas prices, the higher food prices cause consumers to become more cautious, if the decline in the equity market, you know, causes high end consumers become more cautious in their spending, not that they'll pull back, but they become more cautious and businesses. Take from that that, oh, I need to reduce my payrolls and start laying off. That firewall will come down and then we're in recession. And that's why we're so close to recession. Businesses have done everything they can to avoid layoffs. They've cut hiring, they've cut hours, they've cut temp jobs. The last thing they'll do, and we're right there, is start to lay off. And that's why we're so close and why recession probabilities are as high as they are. But also why they're less than even.

• 36:04Mark Zandi?

  We still have not yet seen those layoffs.

• 36:07Ed Elson?

  How do we explain the lack of hiring in the US right now? I mean, the first thing that comes to mind is AI, but maybe I'm sort of jumping the gun there. What are some of the forces that are causing businesses not to hire, do you think?

• 36:22Mark Zandi?

  Well, a very unsatisfying answer. It goes back to that word, uncertainty. I mean, that's what economists are saying, which is not satisfying because it's hard to prove. As you said, how do you build that into your models?

• 36:34Ed Elson?

  Right.

• 36:35Mark Zandi?

  But that's kind of what you do when you're uncertain. You just, you sit on your, I keep using the phrase, sit on your hands. That's what everyone's been doing, sitting on their hands. And that would mean no hiring. The other, I do think AI is probably playing a bit of a role here. You know, you can kind of feel it and see it in some of the industries that are on the front lines of artificial intelligence. You can certainly see it in the tech industry, kind of feeling customer support and service in the financial services industry. You can, there's some academic research that are connecting dots using, you know, third-party data, ADP data, for example, between young people in tech sectors that are getting creamed.

• 37:19Mark Zandi?

  And hiring rates are particularly poor for entry-level, younger people, which you would expect to be more likely to be affected by AI. So I think we're starting to see the early effects of it. But by the way, that's another reason for a bit of nervousness. I mean, if. You know, the AI productivity gains start to kick into a higher gear here at the same time that we're not creating jobs and we're grappling with the effects of these higher energy prices. You know, that's a, that's a, that's another reason to be nervous that we'll start to see some layoffs and that firewall will come down and go into recession. But I, you know, the other reason you often hear, I think there's some, some, you know, truth to it is quit rates are down, you know, people aren't quitting as much, you know,

• 38:03Mark Zandi?

  they're, they've kind of settled into their jobs. Many people quit, obviously, back during the pandemic and are now kind of in the sweet spot after a move, you know, after you've moved through two, three, four, five years in, that's when you're, you know, really reaping the benefits of that move. And because of that, people aren't moving and aging of the population also reinforces that. So if you don't quit, you don't have hires and that may be, you know, part of what's going on. So I think it's a, it's not one thing, it's a melange of things. But again, there, I've not heard, and I have not come up with a completely satisfying answer to that question, why aren't they hiring? But equally, you know, a difficult question to answer is why aren't they laying off? You know, why aren't

• 38:48Mark Zandi?

  we seeing more layoffs? I mean, why have they responded the way they have? Historically, they have laid off. So just another, you know, question that's, you know, no, no smoking gun answer to that question.

• 39:00Ed Elson?

  And then the question becomes like, what, what would it take to trigger that change? And I just want to go back to the inflation expectations that, I mean, we started this with a Bank of America's expectation that inflation would hit 4% by the end of the year. We started this year, the official numbers coming out of, on the CPI were below 3%. But as you pointed out, there were some issues there because of the October shutdown. So we're, we're realistically more at around 3%. The Fed's target is 2%. We were basically

• 39:42Ed Elson?

  at 2% until we put the tariffs in place, which basically raised prices by

• 39:50Ed Elson?

  A percentage point got us to three. Now we've got the war and what it's doing to gas prices, which as we've all started to learn, gas or oil is sort of affects everything. It affects freight, it affects construction materials, it affects plastic, it affects literally everything, the gas that we put into our cars, obviously. Which it sounds like it's going to add another percentage point. So it sounds like we have doubled prices. What prices would have been if we hadn't gotten into a conflict with Iran? And if we hadn't nuked trade policy with indiscriminate tariffs on the rest of the globe?

• 40:31Ed Elson?

  I guess, put that 4% number in context. How consequential is that from a consumer perspective? And is that something to be actually worried about?

• 40:46Mark Zandi?

  Yeah, it's consequential, particularly given that inflation has been above that that's target now for what, five years? I mean, we haven't been at 2% for a long time. And the direction of travel is not encouraging. And, you know, they'll throw also throw into the mix. AI is adding to inflation, right? Because of electricity prices. And if you look at the cost of, you know, all the things that go into the data centers, consumer electronics, chips, you know, the demand is extraordinary. It's jacking up prices and chips go into everything, right? So they're going into cars and everything we we use. So that that's adding to it. The immigration policy, that's certainly not helping either, right? I mean, because, you know, many industries, ag and construction and retailing and personal

• 41:31Mark Zandi?

  services rely very heavily on immigrant workers. And because of the heavy handed immigration policy, that's tightened up those labor markets and caused, you know, some costs to rise in in those industries. So, you know, there's a lot of inflationary forces that are pushing inflation up. So in this goes, you know, even before what happened in in the Middle East, there was, you know, the discussion we were having was around affordability. The fact that the cost of living was so high that people just felt like they couldn't afford a reasonable standard of living. For everything from groceries to housing to healthcare to childcare to electricity.

• 42:13Mark Zandi?

  And you're just throwing this into the mix and making it even more difficult for for folks. So I think it's it's consequential. I mean, I do calculate a statistic that might kind of, you know, bring it home is that I look at the increase in the monthly bill for buying all the goods and services that they the household purchased a year prior because of inflation. So you take a look at inflation, you say, okay, after a year, what do how much do more do I have to spend to to afford the same goods and services? And, you know, right now it's about $300 more a month, right? Because of what's happened over the past year. And that's before this bump from the higher energy prices.

• 42:56Mark Zandi?

  So you can imagine, you know, six months from now, I'd be saying, we're paying four or 450 bucks. The average American household is paying four, 450 bucks and more a month to to afford the same kinds of goods and services they were the year before. Now, you know, wages are up too, earnings are up too. But even there, you know, there's reasons for concern. Wage growth is slowing, right? I mean, if you look at Employment Cost Index, which is the best measure of wages for lots of different reasons, average hourly earnings and other measure, the Atlanta Fed Wage Tracker, they're all showing deceleration in wage growth. And aggregate wage growth now is about three to three and a half percent. So if inflation goes, you know, three and a half to four, that means people's real wages after inflation are now starting going to start to decline.

• 43:41Mark Zandi?

  And I think at that point, the people will come really upset and nervous, you know, it makes them very upset if their wages are falling relative to inflation. And I think that's probably dead ahead here over the next six months or so.

• 43:53Ed Elson?

  Over the next six months, what is the number one thing that you think that is going to be of most consequence? The thing that you think that we should all be watching, that you will be watching most closely in terms of its impact, probably in triggering a recession? I mean, I guess there are a range of things that we can think about and be worried about or excited about. It could be AI, we could be thinking about private credit, what's going to happen in the private credit markets, what's going to happen in geopolitics, what's going to happen to the price of oil? I mean, if you had to pick one thing that you think is most important or significant right now, what would it be?

• 44:29Mark Zandi?

  Yeah, it goes back to that firewall. I think it's layoffs. I mean, our business is going to start laying off workers in the context of all the things that we are going through and what we just discussed. And, you know, there's different measures of layoffs. The one that economists tend to use is unemployment insurance claims. That's a bit vexed in the current context because changes in eligibility rules have made getting UI less attractive. The layoffs are occurring in industries where people are generally paid more, you know, technology and financial services. And so they don't, they don't want to bother with applying for UI because, you know, there's a lot of, you have to do things to get the UI, have to prove that you're looking for work and so forth and so on. So if the amount

• 45:12Mark Zandi?

  you get from UI is not consequential enough, you're just not going to do it. And then the gig economy is also playing a role. So that's an increasingly vexed measure, but that's the measure I look at to gauge whether layoffs are picking up. And if they are, I think that firewall comes down and we're in recession. We go from less than, you know, 40, 45, 50% probability to something meaningfully higher than that. And I'll just say, just a rule of thumb, weekly UI claims and unemployment insurance claims are running just north of 200K. That's fine. That's good. Anything closer to 250K on a kind of a four-week moving average basis to smooth out the volatility, pay close attention, yellow flare should

• 45:53Mark Zandi?

  be going up. Anything closer to 300K, we're in recession. So that kind of gives you order of magnitude. That's the one variable I would focus on. Comes out every Thursday morning from the Labor Department. Good statistic to watch.

• 46:06Ed Elson?

  Mark Zandi is the chief economist of Moody's, a leading provider of economic research, data and analytical tools. He also hosts the Inside Economics podcast and serves on the board of directors of MGIC, the nation's largest private mortgage insurance company. Mark, always appreciate it. Thank you so much.

• 46:25Mark Zandi?

  Anytime, Matt. I really appreciate the opportunity. Thank you.

• 46:30Ed Elson?

  This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carti. Our research team is Dan Shalan, Isabella Kinsel, Kristin O'Donoghue and Mia Silverio. Jake McPherson is our social producer. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

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