The (Not So) Great Wealth Transfer

Moody's Talks - Inside Economics

In this episode of Inside Economics, Chief Economist Wayne Best of Visa joins the Moody's Analytics team to discuss his highly accurate economic

Key takeaways

• Wayne Best was recognized by the Wall Street Journal as the top economic forelar for 2025.
• The 'Three R's' framework describes the current economy: Resilience in spending, Restraint due to inflation, and Realignment in trade and technology.
• An estimated $93 trillion is set to transfer between generations over the next 20 years, though liabilities reduce the net impact.
• AI-related imports now constitute 23% of total U.S. imports, with significant supply chains involving Taiwan and Mexico.
• Rising interest rates, including mortgages exceeding 7%, are contributing to a 'housing recession' by limiting mobility.

Main topics

• Economic Forecasting
• Consumer Spending Resilience
• AI and Productivity

Notable quotes

The consumer continues to spend, to continue to hold up.

Conclusion

The episode provides a nuanced look at how demographic shifts and tech

Transcript preview

Speaker 4 (0:14) Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Marisa Dignitali, Chris Dorides. Hi, guys. Hi, Mark. Speaker 3 (0:25) You're looking dapper? Speaker 4 (0:27) Am I looking dapper? Yeah, you got a haircut. Speaker 3 (0:29) I got a haircut. Speaker 4 (0:29) That's what it is. I cut my three hairs. Speaker 3 (0:33) You're wearing a suit jacket, you know? Speaker 4 (0:35) Oh, yeah. Yeah, I've been going from one thing to the next. One thing to the next. Marcy, you didn't say hello. I did say hello. I did. You did say hello? Speaker 1 (0:43) Yeah, yeah. Speaker 4 (0:44) Okay. She did. She did. And you've had a busy week, I know. I've been following your travels around the country. I've heard a lot of Speaker 1 (0:51) good things. Speaker 4 (0:51) Yeah, I've had a busy Speaker 1 (0:52) few weeks. I've been traveling every week. It's not going to stop until next week, right? Because we'll be in D.C. next week. That's Speaker 4 (0:59) right. We've got a conference in D.C. Yeah, very good. Well, I'm glad you're back. Glad you're here. And we have a guest, Wayne Best. Hey, Wayne. Hello. Good to be back on Speaker 2 (1:08) the air. Speaker 4 (1:08) Yeah, yeah. Wayne, of course, is the chief economist of Visa. Do you have any more highfalutin title than that, Wayne? I Speaker 2 (1:15) think our biggest thing is that the Wall Street Journal named us the top economic forecaster for 2025. Speaker 4 (1:22) I did not know that. Wow. Back Speaker 2 (1:25) in April. Really? Of course, everybody, you know, strives to get that beyond that list. And now that I'm on it, I want it again. So, okay. So Speaker 4 (1:40) 2025, what, what were you saying? And why do you think you became, you were number one? Um, Speaker 2 (1:46) it, you know, you think about. everything that was happening in 2025 and some of the uncertainty. I think what they do is they measure it based on a number of different factors, as you probably know that. And then January is where the kind of the starting point is. And we were closest on the most measures for the year by the end of 2025. And then they announced that like in March and April of this year. Speaker 4 (2:15) Right, right. So they take the forecast from January of 25. Of course, that was the month that President Trump took oath for the second term before the tariffs really kicked into gear. So were you thinking the year was going to be a good year or okay year or bad year? Speaker 2 (2:35) I think we factored in a lot of the expectations of what likely would happen with tariffs based on rumblings, et cetera. In many cases, it was kind of less of an issue, I think, than many people expected, and that was our forecast throughout. Speaker 4 (2:49) You know, if you Speaker 2 (2:50) recall back in April of last year, there were a lot of economists, 80 % that, or not 80 % of economists, economists felt that there was an 80 % probability of a recession after Liberation Day. We never got above 35 % either. ever. Our data was not showing that. Our real-time spending data said, I don't think so. So that was a big departure. People started to make those corrections as we got into July and August and as they understood the tariffs and those types of things, you know, going in and going out and et cetera. But all of that kind of added up to an accurate forecast. Speaker 4 (3:31) Yeah. I mean, I guess real GDP was growth was Almost 2 % on the nose in 2025. Yeah, 2.1. Was it 2.1? Okay. And you're saying that most other forecasts, I can't even recall what we were saying at the time, in January of 2005, it was going to be a weaker year, below that 2%. Yeah, I think Speaker 2 (3:50) you did. Right. Speaker 4 (3:51) Yeah. Oh, interesting. Right. Oh, well, congratulations. Very good. Now you want that again? Yeah. Isn't that kind of greedy, Speaker 2 (3:58) though? Speaker 4 (3:58) Yeah, Speaker 2 (3:58) I want it Speaker 4 (3:58) again. After having it once, Speaker 2 (3:59) yeah. Most people only get it once in their lifetime if they're lucky. Speaker 2 (4:04) I've told the team, okay, I want it again, so get busy. So what did you say about 2026? We're at 2.2%. 2 Speaker 4 (4:12) .2. So very similar. I think it's Speaker 2 (4:14) along the line than you. We're very close. In fact, 27 looks like 2.2, and we're down to 2.1 in 28. So we're back to potential growth rate overall. Little higher this year because of the tax refunds, but still calling all in on. I mean, our real... Storyline today is we're going to call it the three R's. I mean, economists got to have some kind of shtick and I guess we're going to use letters now, whether it's U-shaped or W-shaped, et cetera. A lot of resilience going on, a lot of resilience. And I think that's really quite fundamental. The consumer continues to spend, to continue to hold up. Obviously, business investment has been very strong, especially related to AI. um the second r is restraint obviously inflation as you've talked about uh and many are aware of has been you know very problematic and unfortunately starting to accelerate again this latest diesel price is just unbelievable and um and so that has an impact of course on people's ability to spend they can withstand higher prices for a period of time but that's a challenge And then the last one is really related to realignment. You know, you start thinking about the changes in trade flows, you know, other countries trading amongst themselves in a much bigger way. I always found it fascinating, for example, in Latin America, very little trade happened amongst the borders, within the borders of all of LAC. And now they're starting to do so. That's kind of a... Big surprise. You know, they've got all these great resources and not as much trade really occurred there. But also under realignment is, of course, everything related to AI Speaker 4 (6:02) and, Speaker 2 (6:03) you know, what it means, what it looks like. You guys have talked about it in numerous previous podcasts, but it continues to be a topic as I talk to clients that is top of mind. Everybody wants to know how much is everybody else paying for tokens? Are they seeing any benefit from those tokens just yet? It's not uncommon for, say, a mid-sized company to spend $30,000 to $50,000 a year now in tokens. Where did that money come from? Where do they have money to pay for that? I mean, and so that's why you start to see some of the challenges on jobs, but also redirecting of other things. So you said Speaker 4 (6:42) resilience. There's three R's. Resilience. What was the second one? Restraint. Restraint. Restraint. Speaker 2 (6:49) And Speaker 4 (6:50) that's Speaker 2 (6:50) the restraint relative to what we're seeing in higher inflation prices or on higher inflation in general and kind of the impact that that's had. We also have to recognize the job market, too. You know, it's just we're not growing the labor force. We have 7 million people that are falling out of the labor pool every year from both immigration and demographics. And that's creating a lot of challenges. And then finally, just the realignment piece. Maybe, yeah, I always said, you know, with all of these people leaving the labor force, it sure would be nice if some kind of technology came along that, you know, maybe improved productivity or something. And here we go. So not to be measured yet, but so that's kind of our storyline. Speaker 4 (7:34) It's a good storyline. It brings up a question, though. I mean, you're kind of at 2 % growth-ish. you know, out through the calendar year 2028, where's the productivity growth? I mean, I mean, there doesn't feel like there's any AI because we're getting 2 % now. Is AI not going to add to? I mean, I'm sure it's going to add, it's part of that 2%, but it doesn't add any more juice as you move forward. It's just, it's 2%. I Speaker 2 (8:01) think there's a Speaker 4 (8:01) couple Speaker 2 (8:03) of factors. One is, let's be honest, it's always been difficult to measure the productivity of a knowledge worker. Okay. All right. I mean, how do you measure that? You know, my story is, you know, you use Copilot or some other tool to summarize meeting minutes and send out to-dos and all that kind of stuff. That saves some time, maybe quite a bit of time. But what did that person do with that extra time? Are they shopping online? At work? At work? Well, that doesn't save a whole lot of productivity. That's definitely Chris. I'm just saying that's Speaker 4 (8:37) definitely Chris. Just Visa card Speaker 2 (8:39) though. Just Visa card. Thank you very much. So that measurement of the product is going to be really quite challenging. And when you think about the jobs that are most impacted, yes, we're seeing, you know, our coders at Visa are, you know, creating all kinds of new content in a much more efficient manner. But what they're able to do with that extra time is actually build a new functionality. You know, you're not just trying to build a widget that adds one plus one equals two. I mean, you're really trying to do much more advanced things. And this gets into the whole agentic commerce area of having agents do shopping on your behalf and those types of things. So there's a lot of benefits that happen, even on my team. You know, we're using AI incredibly extensively, but it's making everybody smarter and able to spend more time thinking as opposed to doing. And when you start working with large data sets, as you all know, I mean, you can spend a lot of time manipulating data and getting it lined up correctly and all those types of things. So I still think it's 18 to 24 months out from now before we start to see material changes in large businesses. Now, on the small business side, we're seeing some very interesting statistics. You know, we can look to, for example, for a small business, all anonymously, of course. And when they actually purchase a subscription to a large language model, Speaker 4 (10:05) that Speaker 2 (10:06) is about four to five times the rate than what we're seeing with consumers. Four to five times more businesses are buying or subscribing to a large language model, you know, pick any of the LMMs that are out there. And you're not going to subscribe to something unless you're going to use it. So you start to see some of the improvements that maybe small businesses and, and boy, look at that 3.6 million or 3.9 million, uh, solopreneurs that have been formed this year alone. That's a big number. And I'll have to say that way, just to push Speaker 4 (10:42) back a little bit on your, people don't buy things without use if they don't plan to use it. I have so many subscriptions. Speaker 4 (10:51) That's Hulu and Netflix and HBO. No, Speaker 2 (10:54) no, I got Gemini, I got Grog. Okay, all right. Speaker 4 (10:58) You know, it's like, you know, but I use two of them. But I intend to use the other ones. I intend to use the other ones. Anyway, I didn't mean to stop. No, no, but it's true. But you're saying, what you're suggesting is that we will see the productivity gains. It just may not show up in the data. It's Speaker 2 (11:19) going to be more difficult for measurement authorities to actually discern what those levels are. I mean, it's the same kind of thing when, you know, you improve a car, you know, in terms of looking at the inflationary component. You know, you put airbag in. Well, I don't know what airbags does, you know, when they were first introduced or now self-driving. I mean, all of those things create measurement challenges. It's not because it's... hard it's because it's just not enough data to actually look at what people are doing differently and are they adding extra value to it i think the car analogy is probably one of the best you know we we keep making better cars or better iphones or whatever the case may be and how do you measure that and deflate it relative to um advancements in in that case inflation right okay Speaker 4 (12:08) let me let me also push back a little bit on um the near term the consumer, because obviously you have a very clear, direct window into the consumer through Visa. You know, here we are, the consumer spending all in, real consumer spending after inflation is about 2%, which is good. It's okay. You know, it's kind of right down the strike zone. It's not gangbusters, but it's just what we need to keep the economy moving forward at 2%. But right now, because of the war, and you mentioned diesel prices, but obviously gasoline. We've talked about this in our own conversations. The airplane tickets. I mean, jet fuel is like craziness. Like I'm just trying to buy a ticket for London. It's outrageous, you know, the prices we're paying. And that's cutting into, obviously lifting inflation, cutting into real income. So if you look at wage growth, it's... regardless of the measure you use, average hourly earnings, employment cost index. It's about 3 %-ish. Inflation is a little bit more than that. So real wage growth at best is flat. And this is kind of year over year. And likely negative. Yeah. For some folks, it's got to be negative, right? It's got to be falling. Saving rates have come in. Partly that's got to be wealth effects, the high end, but also probably folks at the low end, they have to pay more for gas. They have to dip into any savings that they have. So here we are. We add all that up. Doesn't it feel like the consumer is kind of at risk here in the current environment? Speaker 2 (13:39) I, you know, I think there's been a lot of said about that. A couple of points, you know, obviously it certainly didn't hurt having big tax refunds this year and the change in withholdings. So that gives you a little bit more money. Yeah, most of that tax refunds, I think you've even said, has been eaten up by, you know, the... by higher gas prices. So totally get that. But everybody's working. I mean, wage growth is holding itself steady. We create something called an income proxy, which is composed of wages plus hours worked plus employment. And you sum the three of those up, you get around 4 % or so. And that is flat as a pancake. I mean, it hasn't moved for the last two years. So, yeah, I mean, inflation is starting to buy. But we always seem to forget, you know, this gets back to the debate about using a consumer price index, which is often talked about in the press because it's nice and easy to describe. Fixed basket of goods, as you all know, PC deflator, looks at what people actually do. We have better tools available to us now than we've ever had before. Let's face it, you know, 10, 15 years ago, if this shirt cost me $30 and now it's $36, I'll sort by price and find it cheaper somewhere else. Those tools allow people to actually make different decisions. Back to the old adage of, you know, hey, beef prices go up, you buy more chicken. It's the same thing across the board. You can price shop much better, and people are. They're looking for that value. I can look at every single airline on a Google flight thing to see who has the cheapest price. and for particular days and time or have it send me alerts when there happens to be a deal, etc. So there's a lot of tools that are available to people and I think they're finding those and doing things selectively. The challenge of course is that with El Nino and everything else and I've always been joking about the fact, oh my gosh, we're going to have economists start talking about the weather. El Nino, and of all, yeah, that's going to be fun, right? But it's Speaker 4 (15:44) an issue. The weathermen, in my humble opinion, get it pretty right. I'm just saying. Speaker 3 (15:50) I wish I could Speaker 4 (15:51) do as well as the weathermen. Yeah, count me in on that. Speaker 2 (15:55) Yeah, economists are people who aspire to be weathermen. Yeah, exactly. But just didn't have the personality. Yeah, I get it. Yeah, exactly. Speaker 4 (16:02) That's right. Hey, Marissa, what do you think of... That point about real wage growth kind of flat-ish here, saving rates down, consumer at risk. How do you feel about that? It feels like Wayne's pretty sanguine about all that. Speaker 1 (16:17) Yeah. Speaker 3 (16:18) Are Speaker 1 (16:18) you as sanguine? No, I'm