Moody's Talks - Inside Economics - Full Employment, Failing Banks

Episode Date: March 10, 2023

It’s another Jobs’ Friday and colleague Dante DeAntonio is here to discuss February’s employment report. Wage growth is moderating and the unemployment rate ticked up, but labor supply among prime age workers reached a post-pandemic high--is that enough evidence to say we are at full employment? Also on the agenda is discussing the failure of Silicon Valley Bank, the 2nd largest bank collapse in U.S. History. We are already seeing the disruption in financial markets but what does it mean for the broader economy?For the full transcript, click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale 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 Saney, the chief economist of Moody's Analytics, and I'm joined by three of my colleagues, which is tradition on Jobs Friday. This is Friday, March the 10th, and we got the jobs numbers for February today. And that would include Mr. DeRides, Chris, Dr. DeRees. How are you? Doing well. How are you? How are you? I'm okay. And Miss Deinatale. Hello. How are you? I'm great. How are you? And Mr. D. Antonio. How are you? Doing well, as always. Oh, I know, I always say this. I thought he's Italian last week. That's what I was going to say.

The three Ds. The three Ds. Yeah. Well, very good. And, well, we made our way back from Phoenix, right? We had the summit. How did you guys think it went? What do you think?

I thought it was great. It was, yeah. Yeah. Would you say otherwise? You would never say otherwise. Oh, that was awful. Probably not. Probably not.

You know, I'm unvarnished. I would tell you. the truth. Okay. Well, that's good to know. I certainly wouldn't have said the truth. No way. It was fabulous. It was fabulous. No, it actually was pretty good, I thought. I thought it were very well. Marissa, how was your sessions? Okay. Yeah, it was good. It was pretty well attended. Chris helped moderate it. And it was really interesting. We had Ronnie Moeman from Lending Club, so it's nice to have sort of a fintech voice there. Yeah, it was really good. We talked about household finances, which is what we talked about on the last podcast. Last podcast. Yeah. And we had our own podcast there, right? We recorded a podcast session. Is that going to go up on Apple and Spotify and everything else? Does anyone know? Or did we record it for that or not? Which is special to the conference. Does anyone know?

I don't. I was wondering the same thing. Is that going up, Sarah? Sarah runs the show here. Sarah, does that go on? It will take a week before we get it back. But it is going up on Spotify and Apple and everything. If you approve, we'll put it up. Okay. Yeah, I think we should. I think it was a, I don't know if I call it a classic, but it was quasi-classic. Yeah.

Good. What's that, Chris? We broke New Ground, right, with the live studio audience. Yeah. If I were going to do it again, I have some ideas about how it would change it, though. Yeah. Yeah. Because we were a little removed, felt physically removed from our audience.

And we need to be with our audience. Even from each other. Yeah, and with each other. We were very far apart on the stage. We'll be in the round. We need to do it in the round. Yeah. Yeah.

Yeah, with cameras and everything. Yeah. That's Mr. De Antonio that's snickering. Snickering's the word. I just wish I could have been there to see it. Oh, yeah. Yeah, it was good. Hey, we've got to do two things in this podcast.

Number one is the jobs numbers. We've got to go through that. But we also need to talk about this, this failure of Silicon Valley Bank, SVB, which is, you know, causing a bit of adjeda in markets today. So why don't, what should we do first, guys, the jobs numbers or SVB? Dante, what do you say? Always go for jobs. Always vote jobs. Okay, we're doing jobs for us.

So we'll do the jobs. We're going to go through those numbers. And by the way, I think that those numbers are right down the strike zone. I'm just saying. Inside joke. Stuck to script. Yeah. Inside joke.

Exactly. Yeah. But let's talk about that. Then we'll do the game, the statistics game, and then we'll come back and talk about SVP Silicon Valley Bank and its failure and what it means. Okay. Dante, you're up. Give us a rundown on the jobs number of numbers for February of 2023.

Sure. So we got another, I can call it strong jobs report for February. We added 311,000 jobs. Three-month moving average is now just over 350,000, which is up from a little over 280,000 at the end of the year. Pretty broad-based gains across industries. There were a couple pockets of weakness, transportation and warehousing, manufacturing decline for the first time in quite a while. Information was down again for the third month in a row, which, you know, tech-related layoffs, obviously having an impact there. but also some, I think, good news if you're thinking about maybe a little bit of softening in the labor markets.

Average hours came down a little bit. Average hourly earnings was a little bit softer than I think we were expecting it to be given the strength of the labor market recently. The unemployment rate ticked a little bit higher back up to 3.6 percent because labor force growth was very strong. We added over 400,000 people to the labor force in February. labor force participation edged higher to its highest rate for the cycle at 62 and a half percent. Prime E-pop, the employment to population ratio hits back to its February 2020 level. Again, the highest that it's been in the cycle. So I think, you know, all in all, like you said, it was a good report.

If anything, I think maybe bordering on stronger than we'd want it to be. But certainly, I think, a better read than January, not as, you know, sort of overly strong is what we saw last month. Okay, so obviously labor demand still very strong, 311K. I saw some downward revisions, small downward revisions to the gain in January and December. But still strong demand, you know, 300K plus on a three-month moving average basis, as you say. But the good news is more labor supply, right? We got increased labor force participation.

and as you say, labor force increased by over 400K. And that's why the unemployment rate notched a bit higher. So we were at 3.4%. I think as low as it's been since 1969 in January, and now we're back up to 36. Although I did miss, I didn't look, employment to population ratio for prime age workers 25 to 54, which is another good measure of slack in the labor market.

That rose to a new high this cycle. Yeah, it was up three-tenths of a percent to 80 and a half percent. which matches exactly what it was in February of 2020. Oh, if I go back prior to the pandemic, now we're back to where we were prior to the pandemic. Right. Okay. That was also a pretty obviously tight labor market at that point in time.

Right. Okay. And you mentioned wage growth. Do you want to average hourly earnings wage growth in the report? You want to provide any more granularity there on that number? Because that seems to me an important, that seems to be an important number. if you're thinking about it through the prism of the inflation, right, the cost of services,

the price for services, which are labor-intensive, goes to wage growth. So all eyes on wage growth. You want to just provide a little more granularity there? Sure. A few ways to look at it. It goes up 0.2% month over month, up 4.6% year-over-year. My guess is your preferred way to look at it will be the three-month annualized rate, which is 3.6%, which seems to be right in that sort of sweet spot of where you'd want it to be. I do have a little bit of caution. I think maybe there could be some composition issues there that are sort of keeping it down a little bit in recent months. You've obviously seen some pullback in information, which is obviously a high wage industry,

and you've seen big job gains in leisure and hospitality and retail over the last few months. So I think there could be a little bit of compositional effect helping keep it lower than it maybe really is. Yeah, your point is the average hourly earnings measure does not control for the mix of occupations or industry. So if you get, you know, strong gains in lower paying industries like leisure, which we did in leisure hospitality and retail, that might bias down the number. But abstracting from that. Okay. Can I ask before I'm going to, Mercer and Chris, I'm going to come to you next and kind of ask you to fill out this storyline here. But on wage growth, do you, and this is, let me just frame it this way.

If I go back a year ago or so, wage growth was a lot stronger than it is today. You know, pick your measure average hourly earnings, the employment cost index, the Atlanta Fed wage tracker. He looked at the plethora of data and you say, okay, wage growth is, you know, over 5%, maybe his high as 5.5% year of year. I look at the data now, and it feels like it's closer to four and a half percent. So we're not maybe, give or take, down about a point. And as you said, the kind of the benchmark where we need to go, or at least where we think we need to go to get inflation back in the bottle, is three and a half percent wage growth, because that would be 2 percent inflation the Fed's target, plus one and a half percent underlying

productivity growth, which is kind of the productivity growth we've been getting for the last few years abstracting from the ups and downs in the data. Why do you think wage growth has come in by a point in that kind of stylized frame that I just articulated? When the labor market has been so strong, lots of jobs, continued low unemployment, E-pop, as you pointed out, is now in a new cyclical high. So labor market has not eased by any meaningful measure that we look at, but wage growth has moderated. So what do you think is going on? How would you explain that? I'm not sure that I have a good explanation for it, to be honest. I mean, yeah, I've got one, by the way. I've got one. I figured you had something in your market. Yeah. By any measure, like, as you said, there's not any

significant loosening in the labor market by any measure that we look at. So I don't know that there's a great sort of underlying story as to why we would have seen wage growth come in. Other than I think obviously inflation has come in some. I think, you know, maybe the sort of demands from workers have, eased off a little bit. We've seen the quit rate come in a little bit. Workers don't feel quite as comfortable jumping from job to job, which will take some pressure off of wage growth. So we have seen a little bit less movement, a little bit more uncertainty, I think, in the labor market, but it's still incredibly tight by pretty much any measure you look at. Okay. Chris, Marissa, do you want to answer that? Do you have a view on that particular question before we move on back

to the report on why wage growth has moderated over the past. year despite continued very tightly remarked conditions. Marissa, do you have a perspective? Yeah, I think I agree with Dante. I mean, there is evidence that hiring has to. Do you ever disagree with Mr. D. Antonio? Is this like an Italian thing going on? No, it's not an Italian thing.

That's okay. What are you implying? Exactly what it sounded like. The three of us against you, Mark, is right? Yeah, exactly. UD is against the Z. Yeah. Go ahead.

So, yeah. I mean, so there's some evidence that hiring has softened, that the quit rate has come down a little bit. I don't know that that explains a full percentage point decline in wages. I think if you look back at the peak of where wage growth was, you can see that there's some industry composition factors going on. So initially coming out of the pandemic, the hiring was all these in-person things, right? It was restaurants and bars and entertainment and retail that were really struggling to convince workers to come back to those sorts of jobs. And they had to offer very, very high wages. Wage or employment levels in those industries are still in leisure hospitality.

It's still below where it was prior to the pandemic. But hiring has been very, very strong. And it doesn't seem like there's quite as much of a labor short. as there was, you know, back then. So I think some of that pressure to offer very, very high wages has come off the boil. I mean, if you look at wages and leisure hospitality, and I think it was the summer of 21, wage growth was like 15% above where it had been, you know, a year prior. And now that's back down to something that looks more average, like 5%. So I think some of it can be explained by just a broader base of hiring across different segments of the economy.

Yeah. Okay. So what I took away is you're pushing back a little bit on my stylized fact of no easing in the labor market. And you're saying, oh, it has eased up a little bit, most notably through the quit rate, the number of people are quitting their jobs, still a bit elevated, but it's definitely down from where it was a year ago. And that closely is correlated with wage growth because it's the switchers that people

moving jobs where they get the big pay increases. So that, yeah, that makes, that makes perfect sense. Chris, do you have a pet theorist? What's going on here? I would have pointed to the quits as well. The other aspect I can think of is compensation in a non-pecuniary ways, right? So people still preferring to have flexibility in their schedule or, you know, give me Friday off or some some non-monetary incentive or benefit versus demanding a higher wage gain. But it's just a pet theory, right? Yep. I think there's definitely something to that.

I mean, I know people that have been, you know, looking for jobs and are willing to take less money if it means they can work from home three days a week and they don't have to go into an office. So I think that there is something to that workers valuing non-monetary compensation. Yeah, that's something we might want to try to test looking across industry because different industries have different kind of remote work dynamics. And you can look at that compared to, you know, what's happened with the wage growth in those industries. That might be something worth that. What about, remember when Bill Sprague's, the chief economist of the AFLCI, I was on, he was talking about the minimum wage hikes across the country that they, you know, they've had some additional ones this January, but much less so than last January.

in the January before, maybe that's taking a little pressure off. Does that resonate with anybody? We need to go investigate that a little bit. It could, especially just given the industries, right? Because most minimum wage workers work in retail or leisure hospitality, which is where you saw all this job growth and demand for labor, too. So that could have been exacerbating that, for sure. Well, and I'm surprised no one took my pet theory. Maybe you guys don't buy into it, and that's inflation expectations. Yeah. I mean, inflation expectations took off. off this time last year when Russia invaded Ukraine, gas prices went north. And those workers' inflation expectations jumped. They went to their employer and said, hey, you got to pay me more to get to

work because inflation is going to be higher. But now we're on the other side of the fallout from the Russian invasion. Gas prices have come back down. People are less up in arms. You can see in the inflation expectations data. And that's caused wage growth to moderate. Does that make, does that resonate with anybody? Yeah, I think it fits into the story. I think it's certainly a piece of the puzzle. I think all of the, you know, all the things we mentioned probably come together to give you that percentage point.

That percentage point. Okay. All right. Okay. Let's go back to the report. There's a little of a sidebar. And let me turn to you, Marissa next. Anything that you want to fill in with regard to the story around the jobs numbers that

you think Dante missed or you want to highlight? One thing, Dante and I were talking. about before we started recording was the demographic composition of the household survey and what the increase in unemployment looks like across different groups. So I noted that over the past year, almost all the increase in unemployment has been among foreign-born workers as opposed to native foreign workers. That means anybody who wasn't born in the United States, regardless of when they were born, right? So, I mean, it could be, doesn't necessarily mean it's a recent immigration. And it looks like a lot of the increase was among younger workers

to this time. Like the teen under 24, under 20 unemployment rate went higher. Also among Hispanics, it jumped quite a bit. And what else do I want to say? I think you know that this. On that one on the foreign board, that I've noticed, correct me if I'm wrong, I didn't look today at today's numbers. but all of the increase or the vast bulk of the increase in the labor force since the pandemic has been among foreign born. That's right. So that makes sense why you would see the, why you would see the increase in unemployment there. Yeah.

Yeah. And he noted the, I also was looking at the labor force flows. And, you know, there was an increase in the labor force last month of over 400,000. And more of those people went from, you know, out of the labor force into unemployment, mean they entered and they started looking for jobs, then people getting laid off, going from employed to unemployed.

So it's a mix of people. Yes, there is evidence that people lost jobs or were laid off. We see that in the duration of unemployment and the reasons for unemployment, but a lot of it was new supply into the labor force, which Dante noted with the E-pop ratio rising. Got it.

Got it. Chris, anything you want to add? I looked at those demographics as well, and the one that stood out to me is that a disproportionate share of the new labor market entrance, the increase in the labor force that we're talking about, the 400,000 or so came from folks with less than a high school education. So, 350,000 people within that category entered the labor force. So that's consistent, at least with the narrative that it's really folks at the bottom end who are getting a lot of financial stress and having maybe being forced to pick up another job or see how they can supplement their incomes. Can you repeat that again? I missed that. So what age group has seen the biggest increase in labor?

No, education, less than high school. Oh, less than high school. That's where the biggest increase in the labor force is better. Last month. That's right. Yeah. Now, there's some volatility there, so you don't want to read in too much. but yeah, it just stuck out.

So, Chris, can I ask you, you're sitting at the Federal Reserve Board and you're making a decision around monetary policy and you get this report, all else being equal, what kind of impact does this have when you're thinking? Interesting question. So I think overall, this report, you can see what you want to see. It's a little bit of a Roar Shack. Right.

So you could justify a 50 basis point if you just looked at the top line and said, oh, 311,000 jobs is still, way too hot in terms of the labor market. Or you can justify 25 basis points because the wages seem to be coming and even accounting for the compositional effects. So for me, right now I'm kind of in that second camp. I don't know that I need to be quite so aggressive because we do see some signs that

there is some softening here going on. So I would go with the 25 basis point at this point. Yeah, and I guess, and we'll come back to this, given what happened with Silicon Valley Bank and the angst now in the financials. And the stock market act took it on the chin. And there's a lot of angs about the banking system, a lot of questions, which we definitely will come back in. But now having seen that, that would probably push you to 25, right? That's right.

And that's on top of it. But if I'm just looking at the labor market report. Yeah. That's what I said. Yeah, all else being equal. Yeah. And I said, like I said, you could certainly make the case to be more aggressive. But I don't think it's needed at this point.

Yeah. Okay. That's my sense of it too. I mean, you know, the 311,000 job gain is still too strong, right? I mean, I think a good rule of thumb is if you want to get unemployment kind of moving north a little bit. And I think we want some easing in the labor market. We want unemployment to get closer to four than three and a half. You need a hundred, less than 100,000 jobs per month. So if underlying job growth is 300K, which is kind of sort of what it feels like, that's still way too much relative to, you know, what we need. I think we'd be looking at at this point, you know, to get to ease up the labor market and get it moving, moving in the right direction. So to me, that that does signal more rate hikes. But, you know, then I look at the labor supply side. I look at labor supply. And that's actually pretty good. You know, labor force participation, you know, I think we went to 62.5%, which is a new high since the pandemic hit. The peak before the pandemic was 633, so we're down 8 tenths of a percent. But that now is pretty much what you would have expected if there had to have been no pandemic. So labor force participation is right where it should be. And we're getting more working age population. We were talking about foreign-born workers coming in, immigration is picked up.

So if you look at labor force growth, it's about 200, K%. per month. So, you know, we're not, it's not, it could be the case that we, we could, if labor demand comes down to 200K, a little south of 200K, we could be okay. You could see some easing up in the labor market if this continues. And at least so far it continues. Here's the other thing on labor supply that, in labor demand that, you know, has kind of been bothering me. And I just, I'll throw it out there and see if anyone's got a kind of have a view on this, is how can the labor market, how can one think, the labor market's at full employment if we're creating consistently so many jobs, right?

How is that possible? If you're at full employment, that means there's nobody out there to take a job, right? At the same time, the wage growth is moderating. So doesn't the fact that we're creating 300K jobs for month mean we're not at full employment? What am I missing? You get my point? Well, full employment's dynamic, right? Yeah.

Well, what does that mean? You can keep adding. The goalpost keeps shifting. So you just keep adding to satisfy it. Yeah. But you get my point, though, right? I do. I do.

You do. Dante or Marissa, do you have any insight on that? I mean, this is something that doesn't bother me for a while. I just, how can those two things be true? How can you be at full employment

and still generating so many jobs? I don't know that you can be. I think part of the answer to that is that maybe we're not at full employment. And I think that's your point is that we're probably not, yet, even though it seems like by a lot of measures we are, but maybe the goalposts, as Chris said, have moved since the pandemic started. And, you know, we need to be at 3.2% unemployment to get to actually be full or we need the prime E-pop ratio to be, you know, 80.8 to be full now instead of what we used to think of as 80%. So maybe the goalposts have moved a little bit. Or I'm not even arguing that's lower. Maybe it's not as high as people think. It's, you know, most people think it's over four closer to four and a half. That doesn't feel right. to me and that kind of. Here's the other, here's the other possible explanation. The employment data is going to get revised down. We're not creating many of these jobs as we think we're creating.

Right. I mean, that feels like even a more likely scenario. Lots of questions about the data these days. Yeah. Right. The response rates and everything else, you know, seasonal factors. So, you know, makes me, the data just doesn't square. It never does, you know, obviously. That's why Dante gets paid the big bucks trying to square that data. Yeah. Mercy, do you have any perspective on that? Yeah, I think we might see revisions. And the household survey has not been as robust, generally speaking, as the payroll survey has been. So that might, you know, even this report, yes, there was a big increase in the labor force.

But you see maybe the absorption of people into the labor force is taking a little longer than it had been before. And so that would suggest that, yeah, maybe the payroll survey did. are overstating a bit. I mean, and then your point about full employment, I mean, the unemployment rate, if we go back prior to the pandemic, was also very, very low and we're having the same conversations about what full employment was, right?

I mean, we had an unemployment rate back then of three and a half percent. We were saying, how are we still creating jobs? So I think it's very likely that we have to revise what we think full employment is. Demographics have changed. I think the pandemic probably kind of screwed things up in terms of who's available for work and who's still out. And, you know, it could very well be

that there's more supply out there. Yeah. Okay. I mean, clearly there is, right? Yeah. Yeah, right. We see it. Right. Okay. Anything else on the jobs number that people want to bring up before we move on? Going, going, going, going, gone. Okay. You can always come back later whenever you want. Well, there's the stats game, too. I don't want to give it away. Oh, that's true. That's true. And I have a confession to make on the stats game. I don't have a stat.

So. Okay. You can have a lot of time. Actually, I can come up with one while you guys are gabbing away here. Yeah. While you guys are gabbing away. All right. Let's play the stat game, the stats game.

The game is we each come up with statistic. The others try to figure that out through questions, the clues to Dr. Reasoning. The best question is one, or best statistic is one that is not so easy we get it immediately, not so hard, we never get it. And as apropos to the topic at hand, which is jobs and, you know, also what's going on in the banking system today. So with that, let me, this is now firmly tradition. We're going to begin with, Marissa, what's your statistic? Okay, my statistic. And this, this straddles both topics, I'll say, I think. That's a big hint.

Oh, wow. It is a big hint. I shouldn't have said that. Okay. Well, all right, you might get this. minus 54,000. Jobs in finance? Information job losses over the last three months. He got it. He got it. It was one of my staff. That was your staff?

It was one of the ones I had on my list, yeah. Yeah, that's a good one, though. So we want to explain and the information. So the information sector, which includes a bunch of stuff, but it includes most of these tech companies, software publishing, you know, kind of the traditional tech, but it also includes things like newspapers, online publications, the movie business. This has lost jobs for each of the last three months. So lost jobs in December, January, and February. We've been talking about why these tech layoffs haven't been showing up in the jobless claims data. They are showing up in the payroll

survey. So for the over the past three months, the industry is lost. lost 54,000 jobs since November. And you have to go back, if you abstract from the pandemic, you know, you have to go back several years prior to the pandemic to get consecutive losses that were that big in the industry. That's a good one. Very good. Okay. Dante, you're up.

Go to have a second one. 56. 56. 56. 56. Is it related to jobs? It is. Is it in today's employment data?

Yeah. Oh, is that the gain in retail employment? Nope, that was, I think that's about 50, close, but, and this is not a thousand. It's just 56. Yeah, that's what I was going to say. He hasn't stipulated the units yet. I mean, usually you say 56,000 if there's something. Yeah, that would be really rude.

It's not 56,000. It's 56, it's actually 56. It's 56. Okay, okay. Is it in the household survey? It is not. It's payroll survey. 56.

Is it a percentage? Is it the diffusion index? It is an index. You're correct. Yeah. It's the employment diffusion index. It's the employment diffusion index? Yeah, for total private industries.

Oh. So I got it. Yeah. Ding, ding, ding. Where's that Cal Bell? Nobody has a bell. Yeah, we're kind of bellless this time. Very good.

So you want to explain? Yes, that's the lowest that it's, been since April 2020 when obviously we had tons of job losses. The diffusion index measures the percentage of industries that are adding jobs. That means that 56% of industries were adding jobs in February. Again, that's the lowest. It's been in the first half of 2022. It was all the way up at 73, even in the second half of 2022, it had come down a little bit, but it was still 65. So it certainly suggests that the strength of job growth, even though the headline number is still pretty strong, the strength of job growth, sort of the breadth of job growth is definitely diminishing.

But I think certainly sets us up for a situation where we could see job growth slow pretty dramatically if you continue to see weakness broadening out across more industries. Now, that's an interesting statistic. That's a real sign of, I think, cooling off in the labor market, don't you think? I think so. Yeah. So it's 56. It's 56.

and if it goes below 50, is that consistent with recession or not necessarily? What's consistent with recession, do you know? Probably lower, probably around a third or something. Yeah, I have to go back and look historically to see. I mean, just because it's under 50 doesn't mean the job, you're losing jobs necessarily. Obviously, the size of the gain or loss is not factored.

Right. And how many industries are in the, is it two, I keep on saying 250, 300, industries that they provide data for? Yeah, it's several hundred industries in the several hundred. Yeah, that's a really good one.

Can we keep track of that going forward? That's a, I think, a pretty good window into what's going on in the labor market. Yeah. Okay. Okay, very good. Chris, you're up. All right. Two related numbers.

Okay. 105,000 and negative 1.4%. Are they job in the job numbers? They are. They're in the report. Payroll survey. Really? Yeah, yes.

Oh, he's not sure. Yes, yes. Both are in the payroll service. 105,000, was that leisure hospitality, job games? It is. It is. Minus 1.4%. Is that related to leisure hospitality?

It is. Is that way, wage growth? Is that the slow in the wage growth? No. No. It's related to leisure hospitality? Hours worked. Hours worked.

Weekly hours worked index, aggregate index event. Yeah. Weekly. Yes. That's exactly what I meant. You got it. You guessed your own statistic. Yeah.

That's so funny. Yeah. Oh, good. Well, okay. Well, you want to explain that one? Yeah. So 105,000 people, right? Jobs added.

Yes, a lot. That's a lot. But in terms of the hours, the weekly hours, so you get the aggregate weekly hours, that actually declined. Interesting. Right. So you have more people, right, that have been higher, but the average hour, the average work week is shorter for them. Right. So in total, you actually have fewer hours in the leisure and hospitality industry.

Is that a trend in the industry? Or is that just a-it-have-been going up. Okay. So it could be just a February data point, you think? or it could be. It could be, but I really just wanted to underscore that the, yeah, the difference. You got to look behind the numbers because you might be hiring a lot of people, but they might be part-time or something. Well, that's a, the, Dante mentioned this, but just to call out again, the other sign of a bit of weakness in the report was hours worked declined again.

Right. So that, you know, that's a key statistic, both overall and in manufacturing. So, and that's a good leading indicator of historically of job growth. So if you, you know, businesses generally cut hours back before they cut, you know, jobs. And so that might be another indication that things were crawling off. Okay, I got a statistic. I told, I lied. I got it on the fly here.

It's actually a pretty good statistic, but, you know, it's going to be hard. It's going to be hard. I'm going to say zero. Zero is the number. Was it into the job? No. It's it's it's it's it's it's it's it's as a propos to the second the next part of this conversation around okay Silicon Valley Bank that's a big hint by the way the share value of Silicon Valley Bank that that's pretty good I don't know if you think it's exactly

zero now yeah probably part could be that's a good answer but that wasn't what I had in mind okay yeah is it a market financial market statistic no I'll give you one I'll give you another statistic that very, very related that might help you with this. 4,700. The market. S&P 500. No, that's more that 3,900 now. Yeah, 3,900, maybe lower than that last I looked.

Yeah. 4,700. What else can I tell you without giving it away? What happened to Silicon Valley Bank today? It failed. It failed. It went into receivership of the FDIC. Yes, that's another fancy way of saying.

It went kaput. There was a run on it. Yeah, yeah, there was a run. That's true too. So is that the number of bank failures? Oh, yes, yes. Great, that's it. Exactly.

Number of bank failures in 2022. Zero. Also zero apparently in 2021. No bank failures in 21. But what's the 4,700? What do you think that is? Bonus. The number of banks.

Number of banks. Yeah, very good. Well, you know, a number of FDIC insured institutions. To be precise, you know, because Marissa is saying receivership, you know, so, yeah, 40, 100. Zero. Isn't that fascinating? Yeah. And now I'm speaking from memory, like memory of about five minutes ago when I looked, but still memory. So I probably have it wrong. But I think in the teeth of the financial crisis, I think it was 09, maybe, 100%. 150 banks failed, you know, to give context, something along those lines. Yeah. Okay. Let's now turn to Silicon Valley Bank. And, you know, of course, the other bank that failed or I think it's, it is failing or they're winding it down is Silvergate, right? That's the crypto bank, the bank that was lending to the crypto industry. I think it is winding down. I don't know if it's actually been put into receivership, has it? I don't know. I don't know. know the answer to that question. Do you guys? I don't know. Okay. I haven't seen that. It doesn't matter, but we now have two, these aren't, I would call big banks, but they're not small either. Yeah, they're not small. Silicon value is 200 billion, right? That's, okay, yeah, that's a big bank. 200, that's a big bank. Yeah. All right, Chris, I'm going to turn to you. Maybe you can kind of summarize, you know, what's going on here. And then the next question will be, well, you know, what do you

think it means, but what exactly is going on here in a case of SVB? Yeah. So the bank failed earlier this week, right? They are undercapitalized. They are- Failed today. It failed today, didn't it? On Friday?

Yeah, okay. But it already was starting it, they were unable to successfully raise capital or over last day or so, right? And that's what caused the, ultimately cause the failure. The, I guess a couple of things went on here in terms of there was a, there is a run aspect to this. So depositors started getting concerned about their deposits and pulling out, pulling them out. And that certainly hurt the financial position of the institution even more. The value, they had a lot of bonds on their balance sheet. And with the run-up and

interest rates, the value of those bonds has been marked down. So as they tried to sell those bonds, the value or the price was actually lower than what they paid. And that certainly helped hurt capital position as well. So just, you know, in some sense, classic bank failure in the sense they just were undercapitalized. But then I think what's unique about this institution is that they have a lot of exposure to, of course, the tech industry, a lot of venture capital. Right. So they may have been taking collateral shares in pre-IPO businesses. Right. So they're really trying to facilitate or help the tech industry in a major way. They had a lot of exposure there.

And with all the weakness that we were seeing in tech, that only snowballed into the broader weakness that they faced today. Yeah. Can I take a crack at that just because it's complex? And certainly let me put in my words and tell me if this is consistent with what you said. So the problems really began a little over a year ago when the Fed started raising interest rates and the value of tech stocks fell sharply. You go back January, February, March, April of last year, that's when the stock market went south,

and that was led by a big decline in the stock of technology companies. And that goes to the fact that these are generally growth companies, investors invest, thinking that they're going to make money in the future, long into the future. So if interest rates rise, the present value of that future earnings is a lot lower. And so they get dinged. The valuations get dinged, you know, very significantly. So they got marked down. So that made it difficult for, because the stock market's down. And, you know, that affects the ability of tech companies to raise capital to go out and issue new debt, new equity and new debt, right, because they're now worth a lot less. So they can't raise as much cash. But you have got all these companies out there that are kind of, you know, they're losing money.

they have negative cash flow. They're burning through their cash. And that's drawing down. And a lot of these tech companies do business with Silicon Valley Bank. And they started drawing down the deposits that they held at the bank because they needed the cash to keep their business going and try to get across the finish line and produce something that investors invested in. As the deposits started to run off.

And of course, there's already pressure for deposits to run off because rates are up and there's more competition for those deposits from other banks. And so there's runoff from that as well. But this puts pressure on Silicon Valley Bank having to raise cash. They have to turn to the assets they own, which in this, they want to sell the most liquid assets. And that's Treasury securities. I don't know if they held any mortgage securities, but Treasury securities. But the problem there was the value of those Treasury securities was now significantly lower because of the run-up in rates. A lot of those Treasury securities they invested in back when interest rates were very low.

You know, think back a year, year and a half ago, we were at record low interest rates. But now those bonds are worth a lot less in this higher rate environment. So now they're having difficulty raising the cash they need to pay off the depositors. That's a classic kind of mismatch between assets and liabilities that banks often, are struggling with. And then, of course, you know, you have depositors in those banks that are particularly those that have deposits that are over $250,000 because then they don't have FDIC insurance, very sensitive to this. They get a whip that there's an issue here and they start moving their money out of the out of the bank. And then we get into the classic bank run. Everyone kind of Jimmy

Stewart, wonderful life running for the door. And the FDIC says, oh my gosh, I better I better shut the door shut before all the cash is gone. And so they shut the door and they said, okay, now we're just going to sort this out. The bank is now under receivership. They came up with another bank of Santa Clara or something. I can't have to come up with a different name. Now, for people with insured deposits, $250K or less, they're fine. They may have to wait until Monday to be able to get their money out.

But if you had more than $250K in the bank, now you've got to get in line with all the other creditors, the bank, the bondholders, and they're not. everybody else, and that gets to get sorted out, you know, in the process of receivership. Does that, I'm, I'm sure I repeated a lot of what you said, but just to repeat it because it is so complex. Did I, did I get that roughly right, Chris? Is that, does that narrative sound right to you? Yeah.

Yeah. Yeah. Yeah. Yeah. Yeah. Perfect. Anything else to add? I understand that they kind of took on the role as sort of, you know,

almost like a venture capitalist in a lot of tech startups and tech, you know, new tech companies in the area. And as you said, we've seen what's happened to the tech sector in the past year. So I guess my thinking about it is that it's sort of idiosyncratic to the kind of lending and the customer base that it had, you know, I mean, I think the question that everyone will ask is this, is this a sign of something more systemic in the banking system to come? It seems to me like perhaps this is not and that it's idiosyncratic to the industry in which it was heavily invested in. I was going to go there next, but before I do, Dante, anything else to add?

No, go ahead. Okay. Okay, let's go back to that. So the obvious next question is, well, what does this mean? I mean, is this a fissure in the financial system? Is this a fault line in the financial system? Is this an earthquake that's coming? I mean, are we going to see a lot of banks get into trouble and we see a lot of bank failures? In your sense, Marissa, is no. That won't be the case. Why? Yeah, tentatively no. Because of just because of the nature as as I explained, of who they were lending to and the kinds of positions they appear to be taking, somewhat different than your other traditional regional bank that has a broad-based portfolio lending to consumers and businesses, credit card lines, auto lines, mortgages.

I'm sure Silicon Valley Bank had all those things as well, but they also took somewhat of almost like providing seed money to a lot of tech startups too, which I think is unique. which is why I'm not as worried about something more abroad-based. And you had mentioned another bank that looks to be in trouble that was heavily invested in cryptocurrency. Silvergate, yeah. Yeah. So, again, that seems a bit idiosyncratic and not truly representative of what most community or regional banks look like. Yeah.

Well, Chris, same view. What do you think? Yeah, I would concur. At this point, it does look like it's the exposure to the tech industry itself. But I'd be a little cautious that the valuation problem in terms of the assets, that could be universal, right? So you don't have a problem until you have a problem in a lot of institutions. So if there was some other industry, for example, that started to show some signs of stress, and the banks serving that industry may very well experience a similar type of issue in terms of their asset base

and what the true value of the securities that they're holding actually is, if they have to suddenly liquidate and try to raise capital. So that would be the major concern I would have. Yeah, I think in terms of the direct exposure to tech, I don't see many other banks in a similar situation, but there are banks that are very exposed to energy or very exposed to car manufacturing, So there could be some other areas if indeed we get into more of this rolling recession type of idea. Right, right. I do worry about the very large security holdings the system has. I mean, I think in the wake of the financial crisis, one of the reforms was to have the banks hold more insecurities, more Treasury securities, more mortgage securities, Fannie Mae, Freddie Mac, Ginny May, that are government-backed securities.

Thinking being that they're more liquid, that, you know, if a bank gets into trouble, that they could easily get cash to help them out if they had a lot of treasury and mortgage securities. And this is obviously, I guess, a potential problem with that strategy is that, you know, the value declines significantly in this in this world that we are just going through. I mean, if you go again, back a year, year and a half ago, I think the 10-year treasury yield at one point was below 1%, right? So now it's four. That's a pretty big difference in a very short period of time. The one thing that gives me a little bit of solace there is that banks do need to stress test their balance sheets and their income statements to different interest rate scenarios. I mean, what I just articulated is not surprising. It's not news.

and the banks have been required to, you know, stress against different interest rate assumptions. So it feels like the system should be able to, you know, kind of digest this. It's not great, but it should be able to digest this without this becoming a bigger issue. Here's the other thing that I think might be useful. Just I'm going to throw it out there. It's a bit of a non-sequitore, but, you know, I think important. The one sort of institution out there that can really help with this is the federal home loan bank system, right? The federal home loan banks were put on the planet back in the 30s to try to

help banks with their liquidity issues. The banks can use their securities on their balance sheet, particularly mortgage securities to provide collateral to get so-called advances from the federal home loan bank to provide them with liquidity, you know, through tough times like this. And that should be helpful here. You can see advances by the federal loan bank have picked up quite meaningfully here over the last six, nine months, and that should help to support the system. But I agree with you. I think at this point it feels like this is more, as you said, Marissa, idiosyncratic, you know, something related back to the tech industry.

What about, though, with interest rates, I guess it's a question of how high rates go, right, and how long they stay there. So this gets back to monetary policy. Do you think that now that we're starting to see some more stresses develop, here in the system that this might be a reason why the Fed might not raise rates as much and keep them as high as as long as they would or what does that mean exactly? Chris, you have a view on that? It's got to figure into the calculus, right? Because they don't want the, you know, it's the cutting your nose to spite your face, right? If you raise rates so much, yeah, you might get

inflation down, but then you've introduced all sorts of other financial system issues that the Fed is responsible for as well. So I think it certainly has to enter the calculus. I don't know that this event alone, right, takes precedent now and, you know, they call off the inflation fight, but I think that it certainly will be in the back of their minds. And if there is this decision, if they're on the precipice of all, is it 25 or 50, right, kind of undecided, you know, could go either way. This certainly would be perhaps an additional weight to take a pause here, maybe and just take the 25 basis point hike versus the 50. Yeah, I mean, this is part of financial conditions, is it not?

Yes, absolutely. So when the Fed makes a decision around interest rate policy, it has a so-called reaction function. It sets policy based on a number of variables, one obviously being inflation relative to its target, two, inflation expectations, three, the strength of the labor market, how close are we or are we not to full employment? this kind of unemployment rate. And then financial conditions, you know, what's going on in the equity market, what's going on in the corporate bond market. And here, you know, what's happening with the banking system would be kind of key to those financial conditions. So if banks are running into some trouble here and financial conditions are tightening, meaning they're tightening down on credit availability and raising interest rates on the loans that they're making,

that would be a reason all else being equal, given what's going on with inflation, inflation expectations, the labor market for the Fed to be less aggressive in raising interest rates, raise rates less than otherwise would be the case or perhaps not keep them there as long. So it would seem to suggest that here's another thing they need to be considering when they're setting policy here in the next couple weeks when they meet again. Along that lines, do you think the Fed should take into account the debt ceiling debate if they see that there's no there's no resolution coming should they preemptively adjust their monetary policy yeah i think it should be in their calculation in the following way it might go to timing you know

if you're going to raise rates you know we think the x-state on the debt limit this is based on really good work bernard yaros is doing is mid-august right so things are really going to start getting tense, probably beginning around July 4th. You get come back from July 4th, you know, holiday. Things are really going to get tense. And hopefully the Fed's finished with his rate increases at that point in time. And it doesn't try to raise rates, you know, in that period, because I think it would be highly counterproductive. So yeah, I don't know that it affects the terminal rate, you know, the highest rate that gets or how long rates stay at the terminal rate, but certainly should affect the timing, I think. If they want to get some, you know,

rate increases in, let's get it done, you know, March, May, and June. And that's the, that's the end of it for a while. So that'd be my thinking. You, what do you think? Yeah, I can, it has to be part of that calculus as well. Yeah. But it gets, it certainly gets a little sticky in terms of. Right. Okay, let me ask you this. Chris, I meant to be pushing you too hard, but let me just ask anyway, because I push you all the time. So what should I be watching to gauge whether, what's going on here is idiosyncratic to SBB or something that is more systemic, you know, broadening out a problem that's broadening out across the banking system. What would you be watching? I guess I would be looking at debt spreads or, you know, looking for market signals. What do investor, how are investors reacting here? Presumably they have more information about individual banks and are factoring that into their calculus.

So it used to be the case I would say go look at the TED spread. LIBOR, you know, remember LIBOR, the London Airbank offering rate versus three-month treasury bills? There's no LIBOR anymore, right? You got SOFER. So what would you look at if you can't, you're not looking at LIBOR? There's got to be something in, you know, out there that you would look at. Because SOFER doesn't have any, that's the, that's the, the substitute for LIBOR. LIBOR is the, used to be the rate that banks would charge each other for borrowing and lending to each other.

So if there was a lot of angst in the banking system and banks got nervous about lending to another bank, they'd say, you've got to pay me a higher interest rate. So LIBOR rates would go up relative to the risk-free three-month treasury bill. And that was like a pure read into kind of the angst in the system around these issues. But LIBOR was discontinued. You may remember back there was a scandal around LIBOR fixing. because they came from dealers and they lied about LIBOR during the financial crisis. So the replacement is the so-called SOFER, the secured overnight funding rate. I think I got that right, SOFER, but there's no credit risk there.

So it doesn't represent the same thing. Is there some other measure out there, Chris, that's similar to that we can look at? I think of a single measure? Because the credit defaults or EDFs or the individual. I'm attracted to default frequency on the banks. Yeah, the individual. But you're thinking more of an aggregate. Yeah, I'm just not sure.

I mean, you know, something I hadn't thought about until just today when, well, SBB failed. Right. Well, what should I be looking at to gauge whether this is broadening it out? So maybe we can work on that. Good question. Yeah. I'm not sure what we should be looking at.

But anyway, okay. Anything else on that, on that topic that anyone wants to bring up? Yeah, I don't know if you saw how dramatically market expectations for what the Fed's going to do in a few weeks shifted today. No, no, I didn't see that. I think it was a combination of the jobs report and SVB, but it was a pretty dramatic shift. Yesterday it was about a two-thirds odds of a 50 basis point hike in a few weeks, and that shifted basically the other direction. Now there's about a two-thirds probability on a 25 basis point hike in a few weeks.

So it was a pretty dramatic one-day shift in what the market is expecting the Fed to do. And I don't imagine that comes just from the jobs report alone. I mean, that might have boosted a little bit. I was going to go to recession probabilities again in the context of all this. So let's do that quickly and then we'll call it a podcast. Let me begin with Marissa because she's always straddling the middle 50-50. So Marissa, what's the probability? And I'm going to ask this question one last time and then I'm going to change it next time I ask it.

but what is the probability of recession over the next 12 months? Seems a bit higher now. I'm a little worried, a little more worried than I've been. In Phoenix, because in Phoenix you were a little less worried. Right. So now I'm on the other side of 50. Oh, you're on the other side of 50. Okay, but you're still at 50.

I'm still at 50 with risks to the upside. Risk to the upside. Or the downside, depending on how you. And what bothered you the most, the job number or the SBB? I think despite what I just said about it being idiosyncratic, that worries me in the context of we know that banks are, generally, this is a difficult environment for banks with rising rates, right? So I think, you know, to Chris's point, which I hadn't really thought about in that way, I mean, this could be emblematic of just stresses in other parts of the economy if they were to come and just banks struggling to get funding. and financing.

So, you know, if we do go into a recession, I mean, we could see more, there could be more financial stress coming. I still think this is idiosyncratic, but I'm a little more worried than I was yesterday, for sure. Reasonable. Dante? I think I've been between 45 and 50. I would say I probably edge at 45.

I think I feel like a little bit better. If anything, I think SBB is concerning, but I think you also might get the. sort of weird benefit that maybe it has the Fed back off a little bit sooner than they would have otherwise, which maybe provides a little bit of upside. Yeah. So I'd go 45%. Yeah, that's interesting. Chris, I'm going to stick with 60.

Okay. With the arrow pointing up. Right. More nervous. Because of SVB? I guess both, the job report and SVB. In the jobs report, really. Oh, okay.

Interesting. Okay. Yeah. The Fed will look mostly at the top line. Top line, the 311,000 jobs. Yeah, it's interesting. But let's see CPI next week. Yeah, obviously, that's going to be really important.

Yeah, really key. I'm still at 45% probability recession in the next 12 months with the arrow pointing down. And then pointing down, because I thought the jobs numbers were on balance pretty positive. that the labor market is easing up here. And wage growth is the bottom line, you know, for me is the key. And that moved definitively in the right direction, even with the measurement issues. And also SVB, I think that's got to play a role in their thinking. You know, there's a, there's got to be some uncertainty with regard to, you know,

what kind of pressures are developing in the, in the securities portfolios of banks. You know, if SBB got turned upside down all around and its asset liability, you know, management, there may very well be that in other cases and other institutions as well. So something to watch. So I'd say the arrow is pointing down at this point. But next time I ask, I'm going to ask for probability recession in 2023 and then probability recession in 2024. I think we need to.

All right. We need to do that. We need to do that. And that gets interesting. Yeah. That gets interesting. Yeah, very good. Okay, we're going to call it a podcast at this point.

I think we covered a lot of ground and looking forward to next week. But take everyone, have a good weekend. Talk to you soon.