Moody's Talks - Inside Economics - Full Employment and The Fed

Episode Date: April 1, 2022

Mark, Ryan, and Cris welcome back Marisa DiNatale, Senior Director at Moody's Analytics, to breakdown the March U.S. Employment Report. They also discuss inflation, wage growth, and the current state of the economy.Full episode transcript.Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis on LinkedIn for additional insight.  Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. And as is normal on Jobs Friday, I have three of my colleagues. We've got Ryan, Ryan Sweet, the director of real-time economics. He's ready to go. I can see. And Mr. DeRides, Dr. DeRides, Chris DeReedys, in the office and looking dapper as usual, he's the same outfit here. Oh, yeah. I was going to say we kind of look alike. But, you know, you. You look so much better than I do, so I'm not even in your league. But glad that you noticed that. Yeah. We just have a dark kind of sweater on, you know, kind of with a zipper in the front here. So what was I going to say? Oh, you're the Deputy Chief Economist.

Very good. And we've got Marissa. Marissa Dina Talley. Marissa has been with us on a number of these jobs Fridays, a great labor market economist in our own right from the Bureau, formerly of the Bureau of Labor Statistics. We grabbed her from BLS. And good to have you, Marissa. Thanks, Mark. Good to have you all aboard. So, obviously, Jobs Friday for the, here we are talking about the jobs numbers for the month of March. And, Brian, take it away. What's your takeaway from the report?

There's nothing really to complain about it. It was another really solid report. Job broke in March rose $431,000. A little bit less than. what the consensus expected, but still... No, wait. It was 435,000, wasn't it? Was it 31? 4131. 4131. My stand corrected.

You're throwing me for a loop there. Catch me off my guard. Just testing you. Just testing you. Right, because Mark never gets his numbers wrong, right? Just wanted to make sure you had the courage of your numbers. So, go ahead. Okay. So job growth was broad-based.

I think there was only two major industries that saw a slight decline in employment that was transportation, warehousing, and utilities. but overall job growth for the last six months is averaging close to 600,000 per month, which is very, very strong. We still have ways to go. I mean, the unemployment rate came down. The job market's tight. I mean, the only point came down to 3.6%.

We're close to where we were pre-pendemic. I think the low pre-pandemic right around 3.5%. So we're getting there. My favorite number, prime age employment to population ratio. That's 25 to 54 is the share of the population, rose from, 79.5% in February to 80% in March. And that's up a percentage point, right, in two months. So if we keep this current pace going, we could be 81, 81.5% on the prime major employment

population ratio by the end of the year. So that's a good indication. The job market's doing really well. I mean, my takeaway is that it's good, but it's too good. We need, this has got to slow down or we're going to be an world of hurt. I mean, the economy's going to overheat. If it's going to panic and we're going to be facing a recession. Okay.

Before we get there, though, let's just round this out. So, though, let me ask you, up until a couple of few months ago, you were kind of saying 80% on the prime age, 25 to 50 year old employment to population ratio, your favorite measure of kind of the state of the labor market and where it is was consistent with full employment. we're now at 80% on the nose. Are we at full employment? No, we're close. We're very close. So I think 81, 81.5% was what we saw late 1990s, early 2000s. I think we can get back there.

And that would probably be, you know, that would be a slam dunk that we're at full employment. But right now I think we're close. We're barreling towards it. Are you moving to the goalpost? Yeah, that's what I thought. Moving it just a little, just a little bit. Yeah. Okay.

Because what else? I mean, employment's still $6 million below where it would be if the pandemic didn't occur in the recession. So, you know. Maybe, maybe not, right? Well, trend job growth was around $190,000 per month pre-pandemic. So if you just extend that, you know, we'd be $6 million higher than we are today. Although I would throw out that we were at an inflection point for job growth,

given the slowing and labor force growth that was going to happen anyway. And we probably would have been, if you remember the, forecasts, and there's still a forecast, but go back to the forecast pre-pendemic for now, we were saying kind of break-even in employment, monthly employment growth, meaning consistent with stable unemployment, was something like 100K, you know, not much higher than that. Right. But, okay.

But even if you assume 100K, we're still, you know, a little bit lower than where we should be. Not that we won't, we'll make that up pretty quickly in the next few months. Right. Okay. Anything else on the jobs numbers? you want to point out? Labor force continues to increase. It was up more than 400,000 in March.

This year alone, we're up over 2 million. So that's an encouraging sign that people are coming back into the labor force. Right. Now, the participation rate, which is another kind of barometer of whether you're at full employment or not, that ticked up to 62.4%.

That's still well below where it was pre-pandemic. It was over 63%. I think 63.5%. I think, wasn't it? Yeah, we won't get back there. We won't. Why? No, because the demographics.

We have an aging population, people retiring, and we're not going to get back to, you know, 63% on labor force participation. That's why prime age employment's population ratio is much more important in telling. Yeah, I mean, but I look at that participation rate. I think we can get at least a half a point, right? Oh, yeah, we'll close the gap. I just don't think we get all the way back. But a half a point would be consistent with your point that we're not quite at full employment.

but we've still some room to go. So a half a point on the labor force, I think that translates into, what, a million, million and a half jobs. So that says what we could add in addition to what you typically would get to get back to full employment.

And that's about three months. About three months, right? Yeah, this current pace is three months of job gains. And that sounds about right to you, three months. That would be April, May, June. If I told you June, full employment, that feels about right to me.

Yeah, sometime in summer, I think we'd get full employment. we'll get there. And that's when we would get back to recouping all the jobs that we lost during the pandemic. So it's about, if we're adding about half a million jobs a month, then by June, July, we're back above the employment level in February 2020. And that's the payroll survey you're talking about. That's on the payroll side, yeah. I think on the household survey, the payroll survey, is a survey of business establishments, the payroll survey, which is the basis for the unemployment rate and participation rate and the things with those things. I think that's already

pretty close to being back. I don't think it's within a few hundred thousand of getting all the way back to where we're pre-pandemic. Can check, but I think that's the case. So Marissa, did you want to add anything to Ryan's perspective description of the jobs numbers? What do you miss? No, I think he got all the highlights. I mean, we're seeing labor supply kicking in. Participation rates were up among most of the major demographic groups. Unemployment rates were down among most of the major demographic groups. Job growth was broad-based, not quite as broad-based as it was last month.

I think last month the diffusion index, which is the percentage of all the detailed industries and the payroll survey that we're adding jobs or staying the same was up in the 80 percent. Now it was like in the 60s. But that's still very broad-based. I mean, over about two-thirds of industries or at least not losing them. So yeah, it's hard to find anything bad in this. Average hourly earnings were up. The work week was flat. So hours were about the same. And so hours were about the same as they were previously. I think hours per work for a week, that did decline. I think that declined.

It fell a little bit. Barely. 10 minutes or six minutes or something like that. Yeah. That doesn't move. That's up. Yeah. Yeah.

It doesn't move. Yeah. Okay. All right. So anything in the bowels of the report that was a blemish that kind of made you scratch her head or make you think about what the message is. and that, anything, anything you saw? It doesn't have to be, I'm just asking.

That's an opening. No, not really. In the moderating biz, an open-ended question. See how good I'm at this? I'm really pretty good. Yeah. Tell me what I, you know, I'm just saying, what didn't I ask you?

Daycare employment was up. Huh? Daycare employment rose. Oh, did? That's a good sign. It's still well below where it was pre-pandemic, but we're moving in the right direction. Key to participation, right?

Because you have a lot of young women with young children that, or I should say, women with young children that can't get back in because they have daycare problems. Yeah. Okay. All right. Chris, anything you wanted to point out? A couple things. One thing that struck me was there was this phrase repeated a couple times in the report, little different from its February 2020 level. So many of the indicators as you go further into the bowels of the report are back to where they were.

pretty close to where they were pre-pandemic. So it does indicate that it's fairly broad-based this employment recovery. So I missed that. So you're saying in the, somehow I missed that. So in the BLS language, the, when they describe it, the report, they said back to February 2020 levels? Yes, a level different. Oh, blah, blah, blah. Let's see. For example, number of permanent job, losers is at a level that is little different from its February 2020 level. And they repeated that language for a number of the different indicators. So that just kind of stuck in my head reading it. One thing that did stick out was there was a slight decline in the number of workers in

oil and gas exploration, which seems kind of intuitive, right? So not a whole lot, right? We're talking like, I don't know, for our jobs or something, but still, you would have expected it to go the other way. Yeah. Yeah. Maybe seasonal adjustment, though, I don't know. Could be.

Could be. We did see, there was a larger gain in refining, though, petroleum products, right? So expiration may be down, but you do see some job gains in actual transformation of refining of truth. Right, right. Okay. Yeah, I think you guys covered it. I guess the wage grows, and I really don't like using the wage. numbers from this report because it's so messed up by the mix of jobs and occupations.

You said it best. They're worthless. Yeah, they're worthless. But I still talk, you guys still talk about them, right? Yeah. So we're up year over year five, six, I think. So, and if you look at all the other wage measures, the ones that I think are better, like the Philana Fed wage tracker or the employment cost index, that feels consistent,

right? Somewhere around five, six percent. Is that right? Marissa, is that roughly right in terms of wages? Yeah, they're all around five and a half, five, six, five, seven, something like that. Which is strong, but not inflation. So consumer price inflation, I think it's almost eight percent, right? It's through through February. So right now, workers, they're getting big wage increases, but they're not keeping pace with inflation. So they're so-called real wage. Their nominal wage growth, less inflation is negative. So they're kind of

falling behind here. Yeah. Unless you work and leave your hospitality, then your wages are up like 15% over the year. Oh, is that right? Yeah. Okay. And that's where the wage growth has been most pronounced. And if you look at the land of Fed wage tracker data, it does suggest that it's, again, it's the strongest wage growth is low wage workers in those high contact industries that got nailed

during the pandemic. They're scrambling to get people back into their seats. There tend to be younger folks with lesser skills and education. that's who's seeing the biggest wage increases. In fact, if you believe the wage tracker data says that folks, high wage workers are, you know, they're not seeing much of a wage acceleration and wage growth at all, you know, pretty consistent with what it was pre-pandemic. It's also the low-income households.

So those that are seeing the strongest wage growth are the ones being hurt the most by high inflation. So that's, you know, kind of cushioning the blood. Yeah. Hey, one thing, I do want to talk about what this all means for. monetary policy in the Fed, because that's top of mind. But before we do this, I did, Ryan, you've been doing some pretty good work on trying to understand the causality, the relationship between wages and prices. So what's driving what? And are they both, you know, obviously we're,

there's a great deal of concern, and this goes to monetary policy, that we're going to get into this kind of self-reinforcing wage price spiral, where workers see their cost living rise, they demand higher wage growth from their employers. Employers then provide that, pass that along in the form of higher prices, meaning inflation, and you get into this kind of self-reinforcing, very vicious kind of cycle that the only way out of that is the Fed breaking it, and that means recession in all likelihood. What's your research show you on that dynamic? How is that playing out right now?

It's actually the opposite. So we have a price wage spiral where inflation. is causing wages to increase. So the causality actually runs just one way. Inflation causing changes in wages. So that's still a concern. I mean, that's still inflation that's causing inflation, but it's less of a problem and things that we lose less sleepovers,

that it's not a wage price spiral that like kind of grip the economy in the late 1970s, early 1980s that caused the Fed to really clamp down on tiny monetary policy to break inflation's back. Right now, it just seems inflation is driving wages currently. That causation can change. I don't know what would trigger it or when, but as of right now, it's less concerning to me that inflation is driving wages higher.

And that is consistent with kind of this group's thinking around what's causing the proximate cost for the higher inflation, and that is the pandemic effects on the supply side of the economy. supply chain disruptions, you know, the labor market disrupt. People are sick or fearful of getting sick so they don't go to work. So it's on the good side of the economy where labor costs are much less important in terms of driving price increases. That's where we're seeing.

Inflation has picked up pretty much across the board, but the most significant acceleration has been in the good side vehicles being the poster child and energy prices, that kind of So what you're describing is consistent with that kind of explanation for what's going on here. Yeah, more than half of our inflation problem. So we have 8% inflation, give or take. Four percentage points of that is energy and supply chains. So a good chunk of the inflation problems are isolated to do these two components. And of course, desirable is two.

So you're really talking about the six percentage point acceleration in inflation. Four percentage points of that is due to these factors you just saw. Correct. Yeah. Okay. Hey, Chris, Mercia, any, any, any observations or thoughts on that dynamic, wage price dynamics that we just described? Just, just curious if you have any thoughts on that.

Have you done any work in that area? I think that's right, but as Ryan said, things can change pretty quickly. That's the nature of the spiral, right? So you could see prices being influenced by the higher wage. costs in short order. Yeah. What do you think? Oh, sorry, go Marissa.

I was just going to say, you know, one way of gauging that is to see how broad-based wage gains are. And because we still see this huge disparity among wage growth in these traditionally lower wage industries that were really hit by the pandemic compared to, you know, professional service jobs or jobs that were kind of insulated from the pandemic because people could keep their jobs and work from home, it does suggest that there's still that catching up from the pandemic bounce back that's happening, right? So it's not, everyone's not getting 10% wage increases. It really is very isolated to a few industries at this point. And also the other thing

the Atlanta wage tracker tracks, and I think you've mentioned this before, is the difference between people that switch jobs, get new jobs and people staying in their jobs, right? And you see one of the largest gaps between those two now. So people that are getting new jobs and switching jobs and able to negotiate new wages are getting significantly higher wage gains than people staying in their current jobs. That's always the case, right? That's always how you get the biggest wage gain is by leaving a job and getting a new one. But that gap between the two is larger than it's been in a very, very long time. Oh, I didn't notice that.

Yeah. It's maybe about one and a half percentage points higher for people that are switching jobs. And just to remind everyone, the Atlanta Fed wage tracker, and you can Google it, go Atlanta Fed wage tracker, you'll go right to it. It's kind of a nice little tool there. You can cool data very timely through February of 2022. That tracks the same worker through time. So it's controlling for those mixed problems that I just articulated was a problem with the average average earnings data that's in the today's jobs number.

So why it's so useful to look at? Okay. Any can you see anything in the report that might connect back to the Russian invasion of Ukraine? I mean, Russia invaded Ukraine, you know, back, I think it was now. late February, right? And of course, we all had, there was growing evidence that they were going to do that for at least a few weeks before that. And of course, the March employment data we're looking at today was based on a survey done by the BLS kind of mid-March. So that was now well into the Russian Ukraine. We had seen oil prices spike at that point. And there's already a lot of concern about what Russia, Ukraine means for global commodity markets and the global economy. Anything in the report at all that connects, that gives you a sense that, you know, businesses are worried about Russia, Ukraine and its impact on their, on their business and on their hiring or layoffs? Anything? I didn't see it.

I'm just saying it. Nothing. Yeah. Marissa, Chris, do you guys see anything at all? No. Okay. Even employment in, remember, we had that big decline in auto manufacturing employment last month and it, it didn't fully. reverse itself, but there was an increase in auto manufacturing employment this month. So these

sectors that are really sensitive to, you know, consumer spending or consumers substituting one good away from another high gas prices, that doesn't really seem to be showing up in a compelling way. Yeah. Okay. Chris, you're a maven of LinkedIn, aren't you? I think you're well-known on LinkedIn. Well-known. Yeah, yeah. Isn't he, is he, or you're not on? LinkedIn are you Ryan? No, I'm on there. Oh, you are? Yeah. Yeah. I mean, I see I hear Chris is all over LinkedIn. Chris is a frequent poster. Yeah, my phone throughout the day just beeps because Chris is posting things on LinkedIn. He's tagging you and stuff. Yeah, he's just unbelievable. Yeah. Nothing else to do. So, you know, no. Oh, don't say that. Uh, what was I going to say? Oh, so I was listening to

this researcher from LinkedIn and, uh, they, contract. like real-time kind of engagement from people on the LinkedIn site. And with regard to looking at job postings and applying for jobs and that kind of thing, it's global. It's all over the world. And she was saying that on the day of the invasion, I guess going back to late February, and you look at engagement in the U.S., there was no change, you know, the same level of engagement in the day before and the day after.

No one was really, at least in terms of job search, paying any attention to Russia, Ukraine. But a very noticeable effect on engagement job search in Europe, which makes, I guess, perfect sense, but, you know, is interesting. So it does seem to suggest that Russia, Ukraine is going to have a much bigger impact on the European economy than our economy. And that, again, that's what we've expected, but it is interesting to see that it's actually already showing up in the, anecdotal and I'm sure we'll see it in the economic statistics soon. So very interesting. Yeah, Chris, he's got to get off LinkedIn. Why?

Might improve his employment forecast. Do a little bit more modeling. Is that what you're suggesting? Take a little more time, dig into it. Ouch. Right. Ouch. That's, you know.

Yeah, he's telling. Sorry, Chris. Yeah. Remember revisions. Revisions are coming. Exactly. Good point. Okay, so let's now talk about what all this means for monetary policy.

Actually, if you, we didn't, I don't think you mentioned the revisions. Yeah, that's a good point. But if you add in the revisions to the previous couple months, then you're over 500,000 jobs, right? So we had 431 in March, but then January and February combined were another 95,000 jobs. Yeah. So I think that's a victory. I think so. For those of us who said there'd be over half a million jobs added.

Yeah, no, that's a great point. And we've been consistently getting upward revisions each and every month for the past more than a year, right? Yeah, I mean, the January job gain is over 700,000 with these revisions alone. Yeah, pretty amazing. Okay, so let's talk about obviously really strong job growth. rapidly falling unemployment, rapidly increasing employment to population ratios, very strong wage growth. I don't know. What does it mean for monetary policy?

I mean, watch out. Watch out, right? I mean, green light. Yeah. Yeah, they're close to breaking glass. Like that panic button, they're about to hit it. Yeah, and what does that mean exactly? Aggressive rate rates.

So 50 basis points in May, 50 basis points in June. So half a percentage point in May, that would bring the funds rate target, the key rate they control to 75 basis points, three quarters of a percentage point. Then you're saying another half percentage point in June when they meet in June. Okay, that makes you at 1.75 percent. And then what? And then 25 for the remaining meetings this year. So we'll end the year. Two and a quarter, two and a half percent on the Fed funds rate.

which is pretty close to the so-called, I guess, neutral rate, R-star, the equilibrium rate. Where everyone kind of thinks the fund rate should be in the long run if everything is functioning properly. Yeah, they will stop there. Yeah, they'll go higher. Then that puts monetary policy restrictive. So when you hit the neutral rate, it's neither stimulating or slowing down the economy, but when you go above that, that's when the Fed's pushing hard on the brakes. Yeah, so that's the so-called terminal rate.

That's where they ultimately push the funds rate to at the peak. And what do you think that is in this rate cycle? Well, the Fed's own forecast, their summary of economic projections have it 2.75. So just above neutral. Yeah, I think we probably get to three. Okay. So is this is what you think they should do? No.

This is what they will do. Right. I mean, our job in forecasting is what the Fed will do, not what they should do. I don't think they should panic. You always say that, but, you know, the way I think about it is what should they do. And then, because they generally do what I think they should do, that's therefore what they will do. There's, it's rarely different. Is it different this time? I mean, are you saying what they should do and what they will do is different? Yeah, just like in 2015. I didn't think they should have raised rates in 2015. But, They did. So they're going to make a mistake.

Yeah, they're going to make a mistake by saying too aggressively. Okay. Okay. So they're reacting to, I mean, they described the labor, like Powell described the labor like Powell as unhealthy. Like that's, you know, that's panic to him is, you know, we have high inflation.

We have an unemployment rate that's plummeting. So they're going to really slam, slant enough when the breaks. Okay. So you, so you're saying what they will. do is half a point in May, half a point in June, quarter point rate hikes after that until they get to two and three quarters percent sometime in, what, early 2023? Correct. And that will be too much, meaning what does that mean exactly?

What does that mean too much? It means the time is going to come. Well, we'll get close. I mean, it could be. Okay. I mean. All right. So you're saying if they do that, if they stick to that script.

a soft landing. Then it's going to be hard to have a soft landing. Correct. Okay. All right. Interesting. If you were sitting on the Fed, what would you do? Yeah.

And that would be interesting to see what Marissa and Chris do. Well, of course, I don't have to, I don't have to put in stone what I'm going to do for the next year because, you know, I'll adapt and adjust. The only thing I have to make a decision about right now is what I'm going to do at the next meeting, right? And I think- So would go 50? Yeah, I absolutely. I would go for, I would raise it a half a percentage point. And the other thing I would do is I would announce that I'm going to start to allow my balance sheet to wind down.

So as everyone knows, the Fed up until March, was buying Treasury bonds and mortgage securities. That was quantitative easing bond buying to try to bring down interest rates, long-term rates. They've stopped buying in March, but the, you know, my sense is by May, they'll say, okay, let's allow the, you. Treasury's and mortgage securities on my balance sheet to run off as they mature, or in the case of mortgage securities, they might prepay, although I don't expect a lot of that in the current rate environment, and allow the balance sheet to come down, which is kind of adding to the rate increases. So I would do both those things, what you call passive quantitative tightening and a half a point increase in the funds rate target. Well, that's what they're going to do.

Yeah, they're going to have to. Okay. Okay. So that's what I was saying. Usually what I think they should do, They will do. It's rare. Okay, so, but you wouldn't do that if you were on the FMC? No, I'd go 25. I'd go 25 and let the balance you run off. I'm afraid it's too much all at once, especially with the yoke curve flat as a pancake.

I'm concerned. Right. We'll come back to that in a second. Chris or Marissa, any different perspective on this? Or what's your view? I agree on the short term. Certainly 50. and I would actually, if it was me, I would start to unwind the balance sheet now.

Why wait? You actually send even a stronger signal that we're really concerned about this. I don't think they're going to be quite, I don't think they're going to be able to be quite as aggressive later in the year. I think some other factors will pop up here. We still have other risks to growth. So I don't think we'll get all the way to Ryan's trajectory here, but certainly the path is upward. It's just a question of speed. Right.

I forgot to ask Ryan. So the Fed in their forecast says the terminal rate, the peak, the peak fund's rate is going to be two and three quarters. What's your terminal rate? What? Yeah, right around there. Right around. I'll get up there. Just get there slower.

Chris has a great point. Like the markets could push back. And I mean, if you look at the market's implied path, they're already pricing in a policy misstep. They're penciling rate cuts towards the end of next year and into early 2024. Hey, can I ask you about that? Because I got a tweet, by the way, at Mark Zandi. I'm just saying, you know, at Mark Zandi.

And Ryan, what's your Twitter handle? At real time underscore income. At real time. Okay. So I had a Twitter follower tweet a question and they said, you guys talk about these probabilities of the Fed doing X, Y, and Z. So now you're saying we're going to have a half a point increase in the funds rate target at the May meeting. Can you tell us what's the market probability of that happening?

And can you just tell everyone how you arrive at that? How do you know that? So there's something called Fed Fund's futures where people, it's invest. is putting money where their mouth with and, you know, buying what the futures contract for each FOMC meeting for the rest of this year are. And out of that price, you can back out, you know, the probability of, you know, different outcomes at the FOMC meeting. So with the May contract, currently where it's priced at is implying a 73% probability of a 50 basis point of the month. And that's in the month of May. Correct. That's the May contract for the FOMC futures.

Right, May contract. 73% probability. I'm surprised it's not higher than that. 73% probability. Okay. What about June? Do you know that offhand? I don't.

I can look it up. No worries. I just curious. It's probably north of 50. Yeah. Okay. So good rule of thumb is 70%. That's kind of like historically, you know,

leading up to FMC meetings. If the probability of, you know, 25 or 50 basis point rate hike is more than 70%, the Fed usually follows through because they don't want to surprise markets. So as May gets closer, if the probability of a 50 basis point hike is north of 70%, they're going to go 50 basis points. Right. Okay. Marissa, you're now on the FOMC. You're a Fed member.

What would you do with regard to setting of the policy? The decision is what's going to happen in May at the May meeting? Yeah. I mean, I think they have to take it meeting by meeting because things are changing so rapidly. if nothing major happens between now and May, then 50 basis points seems reasonable. They have so much to play with on the balance sheet that I would maybe do more there. And I also, I wonder if letting the balance sheet run off has a different psychological effect on the market than announcing an outright rate hike. I don't know if you know the answer to that, Ryan,

but they've got such an enormous balance sheet. I think they can certainly wind that down, which they haven't done yet, right? But announcing a rate hike might have a different effect on investors and markets in general. Yeah. Well, I think I think, correct me if I'm wrong, Ryan, but the evidence suggests that the most significant

impact of the Fed's balance sheet policy on financial conditions and on the economy is through the signaling effects, not just so much the actual purchases. So they're using that as a signaling mechanism to investors that, hey, I'm going to, you know, be very aggressive in easing or tightening. and that's really where the juice comes from, mostly, I think. Is that right, Ryan? That's correct. Yeah. You can see, like, when you look at, you kind of can do event studies,

looking at the impact on interest rates or financial market conditions when they make announcements versus actual falling through with changes to the balance sheet policy. And the largest impact is when they make these signaling through the signaling channel. Yeah. Hey, one thing that no one's talking about, and I'm wondering if they should, is the Fed has another tool or tools, and that is regulatory policy, right? I mean, one thing I've noticed is in the housing market, you know, rates have jumped in

anticipation of what the Fed's going to do and the higher inflation. So mortgage rates, crock going wrong, Chris, is on the Freddie Mac 30-year mortgage is now 465, I believe, last week. That's still low by historical standards, but that's up a lot in a very short period. of time. Market feels like it's starting, a housing market feels like it's starting to freeze up because these higher mortgage rates are conflating with the high house prices and affordability is getting crushed.

And you're starting to see lenders, and this is completely typical, they say, oh, my gosh, you know, I can't originate loans to keep things going that are starting to lower their underwriting standards. They're becoming more aggressive and accepting borrowers with lower credit scores or higher debt to income ratios, higher loan to value ratios. I guess the first question to you, Chris, is, have you observed that yet? Are you hearing that? Is that something that's going on?

I haven't really heard much of that happening, right? So it's possible. Yeah. Certainly with refinance volumes going off a cliff, you certainly want to keep your operations. But, you know, there's just the number of sales is also quite low as well, right, because of a limited inventory. So it's possible, but I don't know that we'll see that dynamic play out this cycle just because of what happened last time around. Right.

Well, I guess I bring that up because, you know, that dynamic of lenders kind of easing at the same time the Fed's tightening is pretty classic. And that generally creates problems because some of those, that bad lending that weaker underwriting gets caught in the subsequent economic slowdown or recession. and it exacerbates the recession and downturn. And, you know, maybe the Fed should use its regulatory, put on its regulatory hat and say, hey, for example, they could, you know, juice up capital standards for banks, right? And say, hey, you need to hold more capital because we're, you know, you're taking more risk here. And or at least we're concerned that you're going to take more risk. Or simply, I want things to slow down.

You know, I want things to slow down. But what do you think? Is that, that's kind of like a cudgel when you need a kind of a scalpel, I guess. Possible, but the banks are overcapitalized, right? They, they, well, I expect them to sail through C-Car this year. The stress testing exercise, no problem. So they would really have to ramp it up substantially and I don't know, if that's, if that's on the agenda. So I do think that they'll be mindful.

I don't think they're going to let things loosen up. appear significantly, but I don't see them going down that route necessarily. I think the rates themselves are going to be enough. Yeah. Yeah, okay. All right. Yeah, the Fed puts out, you know, every January, their long run policy objectives, and they reinforce the idea that the Fed Fund rate, the target Fed Fundry, is their primary lever.

So it's, to Mercer's point about using the balance sheet, they'll use it, but the Fed Fund rate is their primary tool. So they're going to lean on that pretty heavily. I guess the other argument against the Fed actually turning to regulatory policies, they don't have a person on the Fed to manage supervision, right? So there's a vice chair of supervision. They had the Biden administration had nominated Eraskin to do that, and she was only able to get through Congress. And so that position is still empty. So that might make it more difficult to use that as a tool, I think, in the current environment. Okay.

Hey, you mentioned the yield curve, Ryan, because you're saying, look, one reason why I think the Fed might be overdoing it here and raising rates too quickly is the shape of the yield curve. It's gone flat. Do you want to just describe what that is and what's going on there? And, you know, this goes back to another question, a person who tweeted to me on. asking, you know, what kind of indicators should we be watching to gauge where the economy is headed? And the thing that comes to my mind immediately is the shape of the yoke curve. Yeah, so the yield curve is the difference between long-term treasury securities, so the 10-year treasure yield versus a measure of short-term interest rates. So right now, all the attention

is on the difference between the 10-year treasury yield and the two-year treasury yield. So that's one measure of the yield curve. And that temporarily inverted earlier today, and I think it converted earlier this week. An inversion, you know, typically is an indication that investors are worried about the economy's near-term prospects. The yield curve has a pretty good track record. I'm skeptical of it, a pretty good track record in predicting recessions. But this inversion that we've gotten today and earlier this week is a softener. It's a blip. You need a hard inversion. probably 30, 60 days of a yield curve being inverted. Also, the 10-2 has sent false signals.

The best measure of the yield curve is the 10-year minus the three-month treasury bill yield. But that's being anchored by the Fed Funds rate. That's keeping that three-month treasury bill yield really, really low. That's going to start to increase and flatten out that yield curve as the Fed begins to dial back on or begins to increase interest rates going forward. all in all the yield curve is going to continue to flatten out. And that, you know, the Fed has the yield curve on its mind because, again, it's track record and predicting recessions. And when the Fed is tightening and the yield curve inverts, that's a recipe for an economic downturn.

You said it's falsely predicted recessions? When? Yeah, the 10-2 has. Oh, it has when? I didn't realize that. 60s, 1960s. Oh, I want to say 67 or 69. Yeah, yeah.

Okay. You're really stretching, buddy. You have to go all the way back to 1960s. It's false signal. It's not perfect. It's not perfect, Mark. Okay. Yeah.

Was it a hard inversion back in 67? Okay. Because I tend to only look back to like the late 70s, you know. But since the late 70s, I don't think it's ever falsely predicted a recession. I don't think, right, Chris? I mean, you got to put an asterisk on the 2020 recession. There was no need for a reason. I don't know.

Why? Why? A pandemic. The yield curve to not predict a pandemic. That is false. No, but it was predicting a recession. And we, and I think there may very well have been a recession. There would not have been a recession without a pandemic.

Not because of the pandemic, but because the proximate cause would have been the trade war. But, you know, it was signaling something. You know, the pandemic just came along. No? Okay. All right. I think so. We'll never know.

We'll never know. That's the problem. We'll never know. This could be the end of the podcast. Why? The yoke curve. What do you mean? It's going to cause some tension.

between the three of us. Oh. This is going to cause a lot of... No, no, no. The podcast is... It will survive. Yeah. Oh, yeah.

This podcast, right, there's no way they break us apart. Like tension. People are here for the tension. Yeah, they're here for the tension. Yeah, they're here for the tension. Okay, let's play in... You thought I forgot about...

Oh, sorry, Chris, you wanted to say something. I was going to say the inversion in 2019, it was September. It wasn't that large and it wasn't that long. No. Right. So... I don't even know qualified as a hard inversion. I don't know. Did it actually invert for?

So there's another false alarm. It was a, I think it was like a week. It wasn't. Yeah. No, what I'm saying. You need at least a month or two,

I think, to get some kind of signal. So maybe that's a yellow flag. Yellow flag inversion. And you're saying the red flag inversion is when it's more than time basis points. Ryan said it's called a hard inversion. Yeah. Okay.

So, but with all the caveats, though, when you agree that, if you had to look at one indicator, you had one indicator to pick to try to gauge which way the economy is going in the period like this when you're trying to gauge whether it's going to go in a recession or not would be the yield curve, right? I'd actually go with, and we'll see what Mursa says about this one, the unemployment rate.

I know it's backward looking, but historically, if the unemployment rate increases by 25 or 30 basis points on a three-month moving average basis, it's over. The recession always follow. There's not, there's no false signals there. Fair, fair, but that gives you no warning. Once that happens, you are actually in recession. Right, exactly. Yeah, but I'm just saying if you want to try tested measure, that's it. Okay.

So again, because of the listener asked, just describe that other measure you just mentioned. The unemployment rate? Yeah. Yeah, so when the, on a three-month moving average basis, if the unemployment rate increases by 25 or 30 basis points, a recession always follows. because it's the self-reinforcing cycle kicks in. You see unemployment going up, people start to get pessimistic. They cut back on spending. That leads to more layoffs, and that drives the unemployment rate even higher.

So it just kind of go around and around. And also is consistent with the observation that the lower the unemployment rate goes, and more likely it's going to rise. And when it rises, watch out, you know, because this bad dynamic takes hold. Yeah, that's why I watch Chobbles claims. Yeah. Because that gives you kind of an early warning on the unemployment rate. Okay, there's a third one.

You're really good at this. We can spend hours. I know we could. Yeah. Okay. All right. If you had to pick one, it's the yoke. If you had to pick one.

He's saying the unemployment rate. I still say the yield curve. But anyway. I'll go with job claims. Oh, geez. Okay. We got to play the game. You think I forgot about the game, the statistics game.

So just to remind everyone, one, this game is we each announce a statistic. The rest of us try to figure out what that is, you know, through questioning deductive reasoning. We're allowed to quiz the person who put it forward. The best question or the best statistic, I should say, is one that's, you know, not too easy that's a slam dunk, one that's not too hard that will never get it,

one that's kind of related to recent performance, you know, generally something that happened in the past week or related to the topic at hand, which obviously today is the job market. So with that as a preface or a description, Marissa, I'm going to turn to you first. What's your statistic?

And Marissa, she's had a checkered past with this game, as I recall. Something about positive, negative signs. I can't. She has a love heat relationship with this game. A love hate relationship.

Oh, by the way. It's exhausting. By the way, by the way, this is April 1. This is where April 2 is the first year anniversary of our podcast. The very first podcast we did was April 2nd, 2021. And Marissa, you weren't on the first podcast, but you were one of our initial podcastees, I believe.

Within the first month. Yeah. And I think that that first time you were on, you kind of got the negative with the positive sign. Right. Yes. A year later, and we're still talking about it. You're still talking about it.

Okay, I promise. I won't bring that up again. But Ryan definitely will. I will. I will. All right. So what's your number? Thanks for letting me go first because I was afraid someone would steal it.

Okay. My number is $5.5 million in March. Okay. Labor market data? Yes. Okay. In today's numbers, employment report. Yes.

Okay. in the household survey? Yes. The number of unemployed. No. Oh, wait. That's pretty close, though. The number of unemployed is six.

It's five six? No, six million, right? Unemployed. No, I think it's lower than that. I think it's five. It's like five. Five point nine, I think. Someone look it up because,

I don't know. Five point seven. That's my number. 5.5. Okay. So, but anyway, that's not your number. It's five point. Yeah, that's not the number. The number of unemployed in March was 5.9. Is it the number of people, a number of people not in the labor force, but want a job? You are correct, sir. That is it. Watch out. Yep. Good guess.

Okay, so what is that again? It's not a guess. So it's the number of people that aren't in the labor force, but say that they want a job. Right. Okay. So the reason I picked that is because we're talking about participation rate rising, labor supply, starting to kick in, you know, the E-pop ratio coming up. I think it's interesting because a lot of the people in this category, they're saying that they want a job, but they haven't looked for a job in the last year. And that might be they also, or they might have looked, but they may not be available to take a job, which are two of the requisites to be. counted as unemployed. There is a disproportionate share of that group that are women versus men that are in this want-a-job group. And it's about half a million higher than its pre-pandemic low. So it was right around $5 million, excuse me, in February of 2020. So I think that that represents more labor supply that's out there. And we've seen the participation rate in the past few months. And since

the start of the year, in particular, rising among prime-aged women. And if a lot of these women are in this wanted job, but I haven't looked or I'm not available to take one right now category, that could represent, you know, if we get down to that pre-pandemic level, that's another half million people that could potentially come into the labor force over the next few months. Can I ask you, oh, sorry, go ahead. Yeah, yeah, yeah. So in trying to kind of gauge how much labor supply is left before we're out. You know, what we're doing is we're kind of comparing all these numbers to pre-pandemic numbers. And I think that's reasonable. We don't have a better option. And if you do that, as you say, the number of people that are out of the workforce that

want a job, that feels like labor supply, and it's a half million or so above what it was pre-pandemic. So that's a half million. At the current rate of job growth, by the way, that's one month. We can absorb those folks. And then, the unemployment rate is at 3-6, and I don't think there's anything left there, really, right? Because pre-pandemic unemployment rate was 3-5, right? 3-5, yeah. So maybe, I don't know, 100, 200,000, something like that. Where else would you get labor supply, you know, based on that kind of arithmetic that I'm doing?

It's either the unemployed or I'm not in the labor force because I'm not looking. that's the number of folks that are not in the labor force but want a job. So is there any other source of supply here? I think it's going to come mostly from people that are not in the labor force at this point. I mean, even if you look at all the other statistics around unemployment, people that are unemployed long term, like 27 weeks or less, that's actually below now, I think, where it was prior to the pandemic or people that are losing jobs. layoffs. I mean, look at jobless claims, right, in the past few weeks. I mean, they've fallen into the extremely low territory. So people aren't getting laid off. Even the number of people

that left jobs last month, according to the household survey, fell. So it seems to me it's got to be people that left the labor force during the pandemic and are starting to come back. we've even seen, you know, we talked about the great retirement or the great resignation or whatever people have called it. There's even been some upturn in older people who had left the labor force during the pandemic coming back. So maybe these people that we thought left the labor force and said, okay, this is a good time to retire. Seems like some of them are even beginning to come back a bit. Although, you know, I saw that statistic. It's called the, you know, exit rate from retirement.

And if you look at the exit rate from retirement, it actually collapsed early in the pandemic. No surprise. But now it's completely normalized, meaning back to where you would have expected to be without the pandemic. So it's almost like can't even look to that for any additional unless you, unless it rises above, you know, the trend, you know, the pre-pandemic trend. Right. So I'm getting, like I'm trying to figure out where do you get the people. I mean, right? I mean.

Yeah. People that are in school, people that are not in the labor force because they're worried about getting sick. Now with the pandemic, hopefully winding down, they'll come back in. So you're saying those are folks that are not in the labor force but don't want a job at this point in time because they're still. That's where you're going to get it. Okay, fine. Okay. There's some.

Yeah. Some immigration too, right? There was just announcement of increasing number of visas. So you're saying the rate of underlying labor force or of a working age population. is going to grow is going to is going to is accelerating here because of easing up on immigration laws as a pandemic phase we'll get more immigrants coming into the country the the right that'll increase in help okay all right okay so we've got a little bit more to go on the number of unemployed we've got you know a half a million or so labor force not in the labor

force but want a job we've got folks that are probably still out there kind of waiting for the dust to clear the dust to settle on the pandemic before they come in. We'll get a little bit where juice as immigration picks up here. And if you kind of add all of that up, we might have a million and a half or two million jobs left to go before we're, you know, tight as a drum like we were pre-pandemic. That's kind of the arithmetic, right? Okay. Yeah. And I agree just back to what Ryan was talking about earlier. I don't think we're going to get back to the participation rate that we saw prior to the pandemic. I mean, you need to get back to that participation rate with the current population, you need a couple million people to come in to the labor force.

And that's just given what we just talked about, where do you get a couple million people, unless immigration really picks up? I mean, that's really the marginal gain. And I don't think that it's going to be that large. Just demographics, I just don't think, just given baby boomers aging out of the working age population, I don't think we're going to get back to that. Okay. All right, Chris, I know you need to leave in a 10 minutes or so. So let's get your statistic.

Okay. Minus, minus 274,000. Are you sure it's minus? I'm positive, it's minus. A decrease. How about a decrease of 274,000? Okay, there you go. And that's in the employment numbers.

Yes. It's in the household survey? Yes. Oh, is it the number of, it's, is it a number of unemployed people? Is it in the unemployment? Yeah, it's a decline. Yeah. Permanent job losers.

You referred to it earlier, Marissa. 27 weeks are longer unemployed. That's right. Good job, Marissa. Good job, Marissa. That is definitely a cowbell. She gets a cowbell. That was good.

That was a weak cowbell, but okay. Oh, my God. drop it off your house. You can now do the cowbell going forward. Well, you know, I have an idea. We should all get together in the office and do this podcast together. That'd be kind of cool. Office is mind-blowing if we did that.

Yeah, Marissa, you have to fly out. Oh, Marissa, you've got to fly out for this. I will wait for her. Next employment. Are you flying out, by the way, anytime soon? No plan. No. All right.

Not to sit in an empty office. All right. So what was your statistic, Chris? It seems a little lame to me. The decline in long-term unemployed. Oh, long-term. 24,000. So there's 1.4 million long-term unemployed now. That's still above, about 300K above what it was in February 2020. So not quite back all the way yet, but making progress. And this is usually the toughest segment, right, to get reintegrated into the labor market. Can you say it again? How far away from pre-pendemic levels for folks that are more than 27 weeks unemployed? A 300K.

$307,000. $307,000. So, and it fell with $273K last month. Yeah, 274, yeah. Okay. So it could be there next month or the month after. Easily. Goodness gracious.

Okay. How do you square that with the beverage curve? So the beverage curve is a relationship between job openings and the unemployment rate. So an outward shift in the beverage curve, which we have today, suggests that the late market's less efficient or there's structural unemployment in the short run. But that's Chris's number. That long-term unemployment, which is a proxy for structural unemployment, it's coming down pretty quickly. But the beverage curve is still shifted way out. Don't you think that that's pandemic-related weirdness with the labor force?

I mean, it's a supply-side recession where... Yeah, whenever we calculated by industry, I wonder if like leisure and hospitality has been, you know, the biggest outward shift in the beverage curve. This also happened after the financial crisis, remember? Same exact thing. And we're all sitting there, what's going on, what's going on, and then it just came right back into where it had been historically, you know,

this thing settled in. I suspect that's the case here. Okay, Ryan, what's your statistic? All right, so I'll give you a hint. It's close to Marissa's, but, all right, I'll give you three numbers. You seem a little bit. You seem a little hesitant with, nervous.

Yeah, I seem a little nervous. You're like fidgeting and, you know, what the next? I know, I know. All right, three numbers. 11.263 million, 5.9.52 million. Chris got openings, very good. What do you say?

11.2 million openings. That's job. 5.952 million and then 11.689 million. They're all related. Are they all in the jolts, the job opening labor turnover survey? 5.9 is higher. The first one is Jolz.

That's it. The other two. Okay. So job openings is 11.2 or 11.3 million. What's the second one? 5.9.9 million. That's the number of unemployed. Exactly.

Very good. Yeah. And then what is 11.689 million? And you're saying it's related. It's only related because it's a job statistic? Oh, is that U6? Mm-mm. No.

11 point Huh It's in the Household survey data It is Okay You gotta do a little bit of a calculation Oh we gotta do a little addition

Oh Something plus something Correct Okay I don't know Do you guys know? Oh is it Mercy you can get this one

Saying I can't get this one Is that what you're saying? That's what he's implying or now I've got to think about this because now that's a challenge. You laid down the gauntlet. The challenge has been I'll give you a hint.

Okay, give us a hint. Unemployed plus something. Is it? Yeah. Is it the U6? I got that. You six? Discuss that.

Nope. Discuss that. Earlier conversation. Hmm. I don't know. I don't know. Chris, do you know? Is it a subset of not in the labor force?

I'm writing. I'm trying to figure it out. I'm trying to do some math. Is it, Ryan? Is it a subset of people that aren't in the labor force? Yes. Because it's close to that wanted job, marginally attached. Now that's... No, you got it. It's unemployed plus those not in the labor force that want a job. So, okay. A lot of attention. You look at job openings, 11 million, north of 11 million. And everyone's saying, well, that grossly exceeds the number of people that are unemployed, which is roughly $6 million. But if you add in the people that are not in the labor force but want a job, we have $11.7 million.

So, you know, there's not a labor supply shortage. It's a tight labor market. But people are there. You just got to find them. Yeah. Okay. All right. That would have been, that's pretty tough.

You have to admit. I guess the first one was pretty easy. Well, it was my statistic plus. The number of unemployed. Yeah. A little tough. That's a little tough. You should have gotten that one, Mark.

Yeah. Okay. Okay. Whatever you say, buddy. Yeah. What's yours? Well, I'm a little embarrassed by mine, too, to be frank, because you'll never get it. But it's a really good one.

And it, and I'll give you a big, I'll give you a big hint. It has nothing to do with the employment report because I knew all you guys would be all over the employment report. And I'd be the last to go. And I'd, you know, have a hard time coming up with this to say. Did you learn this number on your conference call with the New York Fed? I did not. Okay. But I did, I will give you a huge hint, huge.

It is on EV, Economic View, which is the website. Is it labor market related or not directly? No, not at all related to the labor market. All right, so here we go, Chris. All right, ready? I'm going to give you two numbers. I'm going to give you two numbers. Here we go.

7.4% ready? And the other one is 25.6%. And I'll give you another big hint. The 7.4% is the month to month percentage change. The 25.6% is the year over year percentage change. These are big numbers, right? So what do you think that number is?

All right. Is it U.S. related or are we going to? It's U.S. It's U.S. It's obviously related to inflation, and it does connect the dots back to the Russian-Ukraine invasion, I think, to some degree. That's also a big hint. Is this gasoline prices? Gasoline prices?

No, that would be too weak. That would be a – no, this is better than that. But you're in the right ballpark. Your mind is in the right place. Is it heating oil? No. No. Was it in the ag price report that came out this week?

Man, she's good. Yeah. Wow, Marissa. Ag prices, yeah. She's very good. Very good. Is it all ag prices? It's all, yeah, all agriculture.

It's prices received by farmers, all agricultural goods. So that would be crops and livestock. And in the month of February, which is, I think it is February, the last data point, let me just check. Yeah, it's February. That increase was almost, that was crops, not livestock. But year over year, livestock prices are up 35%. Crop prices are up 17.

And, you know, this goes to lots of things, obviously, including the higher cost of fuel, which, you know, is an energy, which is, you know, key to production of agricultural products. But it's also, I think, maybe partly related to what's going on Russia, Ukraine, because not only did that disrupt energy markets, oil, natural gas markets, but it's been a huge disruptor to large parts of the agricultural, global agricultural export market for wheat, for corn, for soybeans, for sunflower oil, and fertilizer. Fertilizer is a big export, and that's been also quite disruptive.

And, you know, obviously this goes to just another source of overall inflation. And I don't think it's over. I mean, I think we're going to see much more pass-through here in higher food prices. And food prices actually matter more. See, Chris. We're almost done, by the way. All right. But go ahead.

Go do what you need to do. You know, in the consumer price index, I believe energy, which includes cost of gasoline and home heating, everything, is probably what, Ryan, 7% of the CPI. And food prices are, I think, 13, 14% of CPI, so almost twice as much. So this is very, very important. And obviously, a big concern, you know, around the world. Okay. Sorry about that. I knew that was a little hard.

No, Marissa, that was impressive. That was impressive, though. That was. Yeah, that was pretty good. Very good. I had tip to you. So you can tell she's a careful consumer of your work, Ryan, on economic. Oh, I would never.

Very much so. Yeah. Very good. Okay. Okay. Chris has left. I think we'll keep this a short podcast. There's a lot of other topics to discuss in the labor market.

maybe we'll keep them for next job Friday. I think at some point we got to go back, talk about remote work. I'm curious what your thoughts are there on that in productivity. Talk a little bit more about the great resignation or reshuffling, you know, what's going on there. We kind of talked around that, but not right to it. And, you know, talk a little bit more about the wage dynamics and, you know, what that means for overall inflation. So there's a lot to talk about, but we'll have you back and we'll do that. Before we sign off, anything else?

Here's another open-end question for both of you. Any other things we should be talking about or things I should be saying? Oh, I should mention, Sarah mentioned to me that I should let everyone know that we are going to have a bonus podcast. We've been having a few of these along the way here. And this one is to answer all of the listeners' questions. And we're going to have Emily Mandel, one of the other economists at Moody's to help moderate that.

So I won't be the moderator for that one. I'll be an answerer if that's a right term. So we'll be doing that. But anything else, Ryan, do you want to mention? Marissa? I think we covered it. We did? Okay.

Marissa, we covered it? Yeah, I think so. Okay. Next time we can talk about some of the special questions that BLS does related to the pandemic. They all improved. They all improved to February March. To the number of people that were able to work because of the pandemic, that fell. So we should make further progress in April.

Okay. We'll talk about that. We'll put a pin in it. With that, we're going to call this a podcast. Thanks, everyone. Talk to you next week.