Mark Zandi

Nearly $2,000. By my calculation, that is what the Iran war has cost the average American household since the war began nearly eight months ago. Nationwide, that adds up to $265 billion.

The military costs also continue to mount. Based on what the Pentagon has acknowledged, these costs come to $360 per household.

Consider that the war’s costs taken together have absorbed about half the average American household’s income gain over the past eight months. No wonder the war is so unpopular.

Nearly $2,000. By my calculation, that is what the Iran war has cost the average American household since the war began nearly eight months ago. Nationwide, that adds up to $265 billion.

Then there are the higher interest rates. The war’s inflation contributed to the Fed’s decision last month to raise rates and signal that more rate increases are coming.

Long-term rates are also up a lot – fixed mortgage rates have climbed from below 6% before the war to 7.5%. By our reckoning, the higher rates have cost the economy about $540 per household.

Nearly $2,000. By my calculation, that is what the Iran war has cost the average American household since the war began nearly eight months ago. Nationwide, that adds up to $265 billion.

Higher energy prices are contributing most to the costs. A gallon of regular goes for $4.37, up from just under $3 before the war. Diesel is above $6, and jet fuel has nearly doubled. As winter approaches, the much higher price of home heating fuel is also adding to the costs.

Altogether, that comes to close to $1,100 per household, paid at the pump and in the higher cost of everything that moves by truck or plane. And the energy tab continues to increase by about $50 a week at today’s fuel prices.

The Fed’s decision to hike rates this past week isn’t supported by the economy’s performance. But it may make sense if the move was intended to establish the Fed’s independence under the new chair. The President has said he wants the Fed to cut rates, yet the FOMC voted unanimously to raise them.

If so, another hike may come at the next meeting at the end of October, just days before the midterm elections. What better way to show that the Fed will not bend to pressure from the executive branch?

This puts the economy at risk. At best, it is growing at its potential and operating near full employment. Higher rates threaten to push growth below potential and burden an already fragile job market. Still, the near-term risk may be worth the long-term benefit of affirming the Fed’s independence.

I suspect not everyone on the committee believed a hike was the right policy on economic grounds. But by voting for it, they showed they had the chair’s back. This looks like a credibility hike.

17 Aug

The economic angst many Americans feel has much to do with how the economic pie is being divided. From WWII to Y2K, workers received close to two-thirds of the pie, while capital received the other one-third.

17 Aug

Since then, China’s rapid entry into the global economy, the Global Financial Crisis, the pandemic, and other forces have put labor on its heels, pushing the split closer to fifty-fifty.

17 Aug

Measurement issues matter, and the exact shares are reasonably debated, but the direction is not. And it's not hard to imagine artificial intelligence supercharging this trend. Many Americans fear it will.

The job market is struggling — and not just for foreign-born workers. Native-born workers are having a tough go of it, too. It wasn’t supposed to be this way, according to proponents of stiffer immigration policy. Fewer immigrant workers meant more jobs and higher wages for the native-born.

That’s likely because many firms that lose immigrant workers know that simply offering higher wages will not necessarily attract enough native-born workers. So instead, they operate at reduced capacity: shorter hours, closed dining rooms, thinner menus, and longer lead times.

The market then clears through prices. Businesses raise prices until demand falls enough to match constrained supply. That’s a stagflationary supply shock — higher prices, weaker output, and no clear gains for native-born workers.

Not so. It’s admittedly difficult to cut through the noise in the data, but while employment and labor force participation are moribund for both groups, unemployment among native-born workers has been trending upward and is now higher than that of foreign-born workers.

Moreover, the view that stiffer immigration policy and fewer immigrant workers would lead to larger pay increases for native-born workers does not appear to have materialized, at least not yet.

Suddenly, there is a new potential threat to the economy – a serious mistake by the Federal Reserve. This risk was brought to the fore by this past week’s FOMC meeting. I’m not concerned about the Fed’s decision to keep rates unchanged.

That means more volatility in bond and stock markets, which is likely already reflected in a larger term premium, rising long-term interest rates, and a wobbly equity market.

If the Fed continues down this increasingly opaque path, a future meeting could trigger a serious market sell-off — putting the broader economy at risk.

My concern is that policymakers are unwilling to provide even a modicum of forward guidance — or a broad sense of their reaction function. Many (most) meetings will thus be live, and investors will be unsure of what the committee will decide. They will be left guessing and repeatedly wrong-footed.

30 July

The economy is soft and vulnerable. This is the clear message in today’s GDP, income, and spending data. Abstracting from the vagaries of the data, real GDP growth is at best 2%, driven largely by AI-related investment and wealth effects that support consumer spending among the well-to-do.

30 July

But housing, government, and international trade are more or less headwinds to growth. And given that real disposable income is flat and personal savings are about as low as they ever get, spending by middle- and lower-income households is under significant pressure.

30 July

The longer the Iran war drags on, and the higher energy prices and interest rates go, the more likely these consumers are to pull back – and take the rest of the economy with them.

I was away last week and didn’t have a chance to weigh in on the June employment report. But even though belated, I can’t help myself, as I thought the commentary was much too dismissive of how weak the numbers looked, all the noise in the data notwithstanding.

The unemployment rate ticked lower, but only because labor force participation is in free-fall. Participation is down across most demographic groups, especially among workers under 35. Employment-to-population ratio for prime-age workers also fell. The declines are overstated, but even so.

You may recall our vicious-cycle measure, which adjusts the unemployment rate for trend labor force participation. It rose to over 5% in June. That is, without the outsize decline in participation, unemployment would be over 5%. As I said, the commentary on the June report was much too sanguine.

Not only did employment as measured by the payroll survey post a small gain in the month, but previous month’s gains were revised much lower, and the bulk of the job gains were in healthcare. And employment as measured by the household survey fell sharply again, as it has all year.

28 June

The raft of economic data released last week isn’t sending off red flares, but it is sending off yellow ones. No red flares because real GDP is still growing at a 2% pace, with AI and corp tax cuts powering business investment. But yellow flares because consumers struggle to maintain their spending

28 June

Adding to the concern is the fall in real disposable income, fodder for future spending, which rarely happens outside recessions. And the saving rate is seldom lower. With consumers over two-thirds of GDP, and business investment less than one-seventh, those yellow flares are getting brighter.

inquirer.comIran war has cost your household $1,000 — and counting | Expert OpinionThe war's impact on gas and grocery prices has hit consumers' wallets in a meaningful way.

25 June

$1,000. That's what the Iran war has cost the typical American household so far — at the pump, at the grocery store, in higher mortgage rates, and in what we're spending as taxpayers. And the total keep climbing. Full piece in The Philadelphia Inquirer: www.inquirer.com/economy/iran...

The Fed meets this week, and while it will be the first with Kevin Warsh as chair, it is tough to see any significant changes to monetary policy. The Fed is stuck between surging inflation, which argues for rate hikes, and a soft job market, which argues for cuts, thus no change.

If Warsh doesn’t buck his colleagues on holding rate unchanged and eliminating the easing bias, it would help assuage fears over Fed independence. Those worries have already receded with former chair Jay Powell’s decision to stay on.

And if the Supreme Court rules that the President can’t fire Fed officials at will, as expected, it’s (mostly) a reason to exhale.

One likely tweak will be to remove the easing bias in the last meeting’s statement. This, despite the new Fed chair’s own seeming bias to ease rates. He has called out trimmed mean inflation, which is rising more slowly than the Fed’s current preferred measure, the PCE deflator.

He has also argued that AI will lower inflation. Neither argument is convincing, as trimmed mean is also above target, and, at least so far, AI is juicing inflation.

podcasts.apple.comIs the US Economy Dangerously Dependent on the Rich?Podcast Episode · Trumponomics · June 3 · 23m

8 June

Enjoyed joining Stephanie Flanders and Andrew Sacher on @Bloomberg's Trumponomics podcast last week to dig into a question that's top of mind for many: is the U.S. economy dangerously dependent on the wealthy? podcasts.apple.com/us/podcast/i...

1 June

$100 billion. That’s our estimate of the cost of the Iran War to American households. That’s nearly $750 per household. This includes the additional U.S. military costs and the higher energy and other prices resulting from the war.

1 June

This is a big economic blow, but deficit-financed tax cuts have cushioned it. Until now. As of May 16th, the bigger tax refunds Americans have received this year no longer cover the higher costs of gasoline, diesel, and jet fuel caused by the war.

1 June

Financial pressure is mounting quickly, particularly on mid and low-income households. With the saving rate about as low as it ever goes, unless the war ends soon and energy prices come down, they will have little choice but to rein in their spending, weighing further on the already sagging economy.

The economy isn’t just soft, it’s struggling. That's the clear message in the flood of economic data released today. Ordered from least to most worrisome: First-quarter real GDP was revised down to just 1.6% and this includes the bounce back from the government shutdown at the end of last year.

And then, of course, there is the surge in inflation, which is closing in on 4%, double the Federal Reserve’s target.

And of all of this, with the benefit of massive deficit-financed tax cuts, which are now fading fast. The Iran war needs to end, and the Strait of Hormuz needs to be reopened soon, or recession will become more likely than not.

Then there is the durable goods report, which showed a decline in core capital goods in April. The decline comes after some strong readings, but it's still not great. New home sales were also weaker than expected, as higher mortgage rates overwhelmed homebuilders’ incentives.