A conversation with dr. Mark Zandi


If Congress does not raise the US debt ceiling, the federal government could default as early as June 1. An overwhelming majority of economists have said such an event would have a significant impact on the entire economy, including Main Streets across the country.

Mark Zandi, PhD, chief economist of Moody’s Analytics, warns that this would send the economy into a spiral when it is currently in a position to avoid a recession. In this interview, he explains the reasons why we may have already seen the worst inflation, how debt default could negate this progress, and why he would be optimistic if he were a small business owner.

Dr. Zandi leads economic research for Moody’s and is the Chief Executive Officer of Reinvestment Fund, one of the nation’s largest community development financial institutions. He is also a co-founder of Economy.com, which Moody’s bought in 2005.

I recently spoke with Dr. Zandi on the economy, the debt ceiling and small business resilience. Below is our conversation, edited for clarity.

Rhett Buttle: How would you describe the current state of the economy, especially how the private sector and business owners are doing?

Mark Zandi: The Federal Reserve has been pushing interest rates very aggressively over the past year to slow growth and quell wage and price pressures, leading to some tension in the economy and financial system. The most obvious is the recent banking crisis, where several banks failed and there was a deposit run on the banking system. The economy is still growing and unemployment is extremely low, but as long as inflation is as high as it is and interest rates are as high as they are, it will be a battle for the economy and for small business owners. They are already struggling with weaker sales, rising labor costs and greater difficulty in obtaining financing. If they are lucky enough to get financing, they will have to pay a higher interest rate.

Rhett Buttle: Despite some of these challenges, you said the economy is in a strong position to avoid a recession. Why are you feeling this way?

Mark Zandi: I think there are reasons to be optimistic that the economy can navigate through it without a full-blown economic downturn with many lost jobs and significant increases in unemployment. First, while inflation is high, it is moderating and all signs are that inflation will continue and that the Fed’s efforts will be successful. I also think inflation will be close enough to the Fed’s target again by this time next year and they can start cutting interest rates. I think the worst rate hikes are behind us. We are now in what is called the final interest rate, the highest interest rates will get in this particular cycle.

The other very important reason for optimism is that the economy is showing quite surprising resilience for reasons unique to this period and different from other times. Consumer households, for example, have a lot of savings that they built up during the pandemic when they were sheltering in place and unable to go out and spend money. Now, lower-income households have reduced their excess savings, but middle-income households and especially high-income households still have a lot of money in the bank and are willing to use it to supplement their purchasing power to reduce their spending to keep level. As long as consumers remain steadfast – because they are such a large piece of the economic pie – the economy should be able to pull through without an economic downturn.

Moreover, companies are very reluctant to lay off employees. Layoffs increased slightly, particularly in technology, financial services and housing, but remained very low overall. That means companies have had a very hard time finding and retaining employees, even going back before the pandemic. They know this will continue to be the case given the demographic aging baby boomer workforce and weak foreign immigration. I don’t think we can have a recession without layoffs because they are the catalyst for undermining consumer confidence and consumer withdrawal. So without significant increases in layoffs, I think the economy will be resilient enough to pull through without a recession.

Rhett Buttle: What do you think is the impact of the economic programs (Bipartisan Infrastructure Law, Chips and Science Act, Inflation Reduction Act, and American Rescue Plan) that the federal government has put in place over the past two years?

Mark Zandi: The US bailout (ARP) was successful because it very quickly returned the economy to an unemployment rate of around three percent. It was critical to helping the economy through the worst of the pandemic and was adopted at a time when it was still very unclear how the pandemic would play out and what kind of damage it would cause. The pandemic actually started to fade relatively quickly because the vaccines were quite effective in other mitigation efforts, but no one knew that at the time. In the end, the administration and legislators approved a much larger bailout package than was probably ultimately needed, but it got the economy back to full employment very quickly here. The ARP has received a lot of criticism for the current high inflation, but I don’t think that is the case. I do think it contributed to inflation when it was introduced in spring 2021, but at that point inflation had been too low for too long and inflation was considered good inflation at the time. I don’t think the inflation we’re experiencing right now has anything to do with the US Rescue Plan, so criticism feels hollow to me right now.

The other major pieces of economic legislation that have been passed, including the Infrastructure Act, the Chips Act, and the Inflation Reduction Act, will be very supportive of the economy. The infrastructure law is just getting underway. The impact of the Chips Act is only starting to become clear in terms of chip manufacturers as they bring production back home. The Inflation Reduction Act will be applied over a long period of time, as it will have benefits in terms of lower carbon dioxide emissions and will help address our long-term climate problems. Taken together, I think they will all be very helpful in supporting the long-term economic growth of our economy, improving competitiveness and making our supply chains more resilient to things like a pandemic. Given our heightened tensions with China, it helps to allay concerns about what would happen if that relationship failed.

Rhett Buttle: The debt ceiling debate has dominated recent financial headlines. What is the importance of the current debt ceiling debate and why is it having such an impact on the economy?

Mark Zandi: The debt ceiling is a limit on the amount of cash the US government can raise to pay its bills and that wouldn’t be a problem if the government raised enough tax revenue to pay all the bills, but it doesn’t. Tax revenues are less than government spending. We have budget deficits and we have since the last time we had a year-long surplus in 2000. Having deficits is not a problem in itself, but if the deficit gets too big and our debt burden rises too quickly, that is a problem . And it becomes an even bigger problem if you decide you’re not going to pay the bills. So legislators have passed legislation in the past on taxes and spending and we have these deficits and need to spend more debt to close that gap and pay those bills on time. The limit precludes the ability of legislators to do that if the debt reaches a certain level and we’re at that limit. The US Treasury Department can no longer issue debt and the date when it will not have enough money to pay all bills on time is very fast approaching. The earliest would probably be June 1, or most likely June 8 by my calculation. If lawmakers don’t raise or suspend the debt limit before then and the government doesn’t pay everyone on time, the economy won’t avoid a downturn. We are going into a recession and the longer it takes lawmakers to raise or suspend the debt limit, the more damage is done and the longer the recession lasts.

Rhett Buttle: What will be the immediate impact on business, particularly if Congress fails to raise the debt limit?

Mark Zandi: The first thing that would happen is financial markets would falter, so that means lower stock prices and higher interest rates. If you’re a small business owner, stock prices don’t immediately mean anything unless you have a 401K or a retirement plan. If you do, the value of those assets will be lower. However, many small business owners need credit and the banking system even before this debt limit drama struggled, especially the small, mid-sized banks that cater to small business owners. So it will become very difficult to get a loan if you need it and if you get a loan you will have to pay a much higher interest rate for it. The conditions will also become much tougher.

Many small businesses rely on the government as a source of revenue, and if the government can’t pay the bills, they won’t get paid on time. That will be a great hardship for many small businesses because they don’t have a lot of extra money in the bank to pay payroll. If a default lasts a week or more, small business owners really have a problem.

Sales will also weaken as consumers who are now less affluent and have higher interest rates will begin to withdraw. That will force small businesses to lay off employees, wiping out that source of resilience. Then you end up in a kind of self-reinforcing negative cycle. Consumers pull back and companies lay people off and you get into this dark vicious circle of a recession and then everyone gets affected in some way.

Rhett Buttle: How should entrepreneurs feel about the future of the economy?

Mark Zandi: I think small business owners are optimistic by nature. You don’t become a small business owner unless you are optimistic about what you are doing and I speak from experience. I started a small business in 1990 which I sold to Moody’s about 18 years ago so I know how hard it is to get a loan when you’re just starting out and how hard it is to manage cash flow and make sure that meet your payroll. We’ve had debt limit dramas in the past and we’ve had many challenges over the years, from the pandemic to the banking crisis. But the US economy is incredibly resilient and adapting and adapting and I think it’s our small businesses that make our economy unique. A very large part of our economy comes from small businesses in all sectors and that is very different from many other parts of the world, especially the developed world. So I would be optimistic if I were a small business owner.