Moody's Talks - Inside Economics - Jaw-Dropping January Jobs

Episode Date: February 3, 2023

Colleague Dante DeAntonio joins the podcast for another round of Job's Friday. The group dissects the January report, which included a shockingly large increase in jobs and a 53-year low unemployment rate. Everyone's probability of recession in the next 12-18 months appear to be trending downward. Including Cris!Full episode transcriptFollow 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 Sandy, the chief economist of Moody's Analytics, and today is Jobs Friday. The Jobs Report for the month of January, 2023, came out today. And to help dissect this and talk about the economy and where it's headed, I've got my two co-hosts, Chris Doridis and Marissa Di Natale. Hi, guys. Hi, Mark. Hi, Mark. And we got Dante, Dante D. Antonio, who is a regular on Jobs Friday. Good to see you, Dante. Do you too? You're looking a dapper in your Penn State pullover. Thank you. You went to Penn State, right?

I did, yeah. That's a great university. I love that university. I agree. Yeah. I mean, all the kids that we hire from there are just fantastic. Great econ department. And Dante, you're the poster child for that.

There you go. Yeah. So, right. All right. Can I have one of those pullovers? I mean, do you have any extra ones? Yeah, I'll find you one. Can you?

Yeah. Yeah, I would appreciate that. Yeah. Yeah. Just, you know, just saying. Yeah. Make that happen for you. Okay, very good.

I appreciate that. Any news this week, guys? We got a lot of news. We got a lot of data. Yeah, there's a lot of cover. There's some things to talk about. Yeah, we're going to do the statistics game for sure because we got a lot of statistics. This is action-packed week.

And we're also going to answer listener questions. This is a new feature that we implemented since the beginning of the year, particularly when we don't have external guests. So Marissa is going to guide us through that later in the podcast. But obviously, here we are the morning of Friday, February 3rd. Wow, what a jobs number. I'm really, really curious as to everyone's interpretation of this number. Dante, I'm going to begin with you. You want to get us the rundown?

Sure. Obviously, a lot to unpack in the report this morning. The headline number is obviously surprising to the upside. But we also got benchmark revisions on the establishment survey. We got updated population controls in the household survey. So a lot to dig through, you know, not only in the regular data, but also in sort of the extra data that we get in the January reports. On the industry employment side, things were strong across the board, although I'll say, you know, sort of the outsized gains were concentrated in a few places. really. Retail jumped in January, professional business services sort of turned back around, and leisure and hospitality sort of got back to where it had been in prior months after cooling a little bit last month. We also got a jump in government payrolls as a result of strike ending and some state government employees back to work. Outside of those, though, it was sort of a,

I would say, payroll gains as usual across most other industries. You know, most of those big gains were concentrated in those four places. And so not a huge amount of news outside of that. On the household survey side, the unemployment rate obviously ticked lower again, which was probably surprising to a lot of folks. Although, you know, if you sort of unpack the details after removing the effect of the changing population controls, the household survey was certainly weaker than the establishment side in January.

But other than that, yeah, it was obviously surprising to the upside. You know, we were expecting payroll growth to continue to moderate, and then that certainly did not happen this month, although I would consider this, you know, at this point more of an aberration than some start of a new higher, higher level trend of growth. So payroll employment growth in the month of January, that's kind of the headline number that where I goes to first. That's the first thing the Bureau of Labor Statistics says in its press release was 517,000 jobs created in the month of January.

And it felt like up till this report, underlying job growth. When I say underlying, I mean abstracting from the vagaries of the data was half that, maybe, 250K. That's what we got in December. That was kind of sort of on a three month moving average basis. That's kind of the job growth we were getting. 500K, 250K, what's reality? Is it 500K? Is it 250K or is it something else? It's certainly not 500. I think the reality is higher than 250. You do. Okay. Well, with this number and the revisions to to data from the end of last year, that,

you know, the three month moving average now is more like $350,000 instead of $250,000. I think, I think that's probably still a little bit high for what underlying growth is, but I think maybe it's, you know, closer to 300 than it is $200. There's so many things I want to talk about,

but with you and unpack, because you just laid out a cornucopia of issues. Most of them very geeky. I'm sure most people who heard what you said, What the heck is he talking about benchmark revisions and January controls and all that kind of stuff? But, you know, we'll get down and dirty with all that at some point here. But before I do that, let me turn to Marissa. Marissa, fill in the gaps here.

You know, what else would you say about this report? It was shocking. Stared at it for a while. I have to say, I was eating my wheat, not my weedies, I was eating. I don't think anyone eats weeds. anymore, but it was kind of weedy-like cereal with my Wawa-Baw coffee. And I did have to stop. And then I hit refresh, you know, maybe because I'm on the wrong page or something,

you know, refresh. But no. Yeah. I mean, it looks like a jobs report from early 2021, right? When we were getting gains of half a million jobs a month. Yeah, I mean, I think Dante summed it up. It's broad-based on the payroll side. You have to go really into the industry detail to find any industries that actually lost jobs on net over the month.

The household survey is really difficult because we can't really compare January to other months, other than December the BLS provided a table that lets us look at some of the very top-line household survey numbers in comparison. The unemployment rate at 3.4%. That's the lowest unemployment rate we've ever seen since 1969. It's, yeah, it's very strong. But on the other hand, we got a lot of other strong jobs data this month, which was mostly for the month of December. But, you know, Joltz was good.

I mean, I'm sure we'll talk about this too. You know, Joltz was really good. Job opening labor turnover survey. Yep. The UI claims fell yet again. I mean, so there's no reason to think it wouldn't be a strong jobs report, but to this magnitude, I don't think anyone was expecting it. Well, we certainly weren't. We were doing a poll last night via email.

I was on the high side, I thought, wasn't I? Yeah, you picked the over on, you know, 250 or whatever we were previously at. Chris was on the low side, 190, the bear. And where were you, Dante? I can't remember. 220. 220 and where were you, Marissa? 220.

Okay, okay. So 250, I mean, it was double, even the high for what I expected. Okay, I mean, it felt like everything was booming in the report, right? Yeah. It was not only a payroll gain. It was the revisions upward in previous months. It was hours worked. Did you see that?

Yeah. number of hour because that had been trending lower. It was cold low. Now just boom, right back up. Temp jobs, going back to professional services, that's where temp jobs are. Tem jobs were declining. And that typically is a leading indicator of future broad-based weakness and job growth. That rebounded in the month.

That increased. We saw unemployment decline. You're right. I guess one point you made Dante about the household employment, increase. That was large. That was 700,000 jobs in household employment. That's a survey of households. The other survey that the BLS conducts and releases data for, you're saying that was overstated because of this control of new population estimates that they do every January. Right. And they don't go back and revise the previous year. So you get this sort of break

between December and January. Yeah. But there was also a really big gain in December, November to December, which you can compare, that was like 700,000 as well in the in the household survey. If you control for the, if you abstract from the population control issue, you just mentioned, what would have the number been, do you know? 84,000. Okay. So much more pedestrian.

Yeah. Okay. All right. But on top of, you're saying, Marissa, this 700K in December. Yeah. Okay. So even even. And that's comparable.

That's comparable. Right. Okay. Okay. Chris, what do you make of the report? It's confusing. It is shocking. It does point to strength, right? But do we buy the number of face value? I don't think so, right? Because of all these other issues here. but every indication is that the labor market is even stronger in 2022 than we originally anticipated or originally thought and remains quite vibrant.

Okay. Okay, let me like I want to do pushback on two fronts. And let me level set by saying it does feel like the labor market is still strong. It's resilient. And that's most evident in the lack of layoffs. I mean, yeah, we're getting a lot of corporate announced layoffs. And maybe they'll start to come through in the data, the aggregate data we get on unemployment insurance claims and everything else down the road. But it hasn't so far.

And layoffs in total remain very, very low. So that, and we should come back and talk about what's going on there and why that's the case. But to level said, it's clear the labor market is strong. But I don't think it's anywhere near as strong as the data suggests for two broad reasons. And I'm going to throw out one and then we'll talk about it. The second. The first is it feels like there's all kinds of seasonal adjustment issues all over this report. That, you know, I believe January was this January was, and this, of course, is the employment report for January, was the fifth warmest on record.

Right. So if you have a warm month, a very warm month in a month that typically obviously is very cold and economic activities depressed when you seasonally adjust, when you try to account for that seasonality, the Bureau of Labor Statistics adds in jobs to account for that seasonality. You get an outsized gain like the one we got, particularly in the sectors you mentioned, Dante, it feels like you mentioned retail, leisure hospitality, maybe even temp jobs, I'm not sure. So does that, And also, just to add to that, another layer of complication, there probably some seasonal adjustment problems related to the impact the pandemic had, you know, back three years ago when we shut down, everyone got thrown out of work, we reopened, everyone came back to work and get these big swings in the data. and to, as a result, when you use the statistical techniques to tease out the seasonal factors, the seasonality of data, it gets very complicated to do. I'm sure the BLS has got techniques to try to work around that, but nonetheless, I'm sure it's complicating things enormously. So it just feels like seasonal measurement issues are all over the report. Am I off base here, Dante?

Yeah, can I push back on your pushback a little bit? I saw a few people mention seasonality this morning. So I didn't have a chance to get into the industry detail, but just at a top level, it doesn't really look like there's a whole lot sort of funky going on with seasonal adjustments. I mean, January is an unusual month in that, you know, on an unadjusted basis, employment declines by a huge amount every January, like clockwork. You know, it's usually between two and a half million and three million jobs lost on an unadjusted basis.

And then seasonal adjustment obviously corrects that. the decline on an unadjusted basis in January this year was the smallest that we had since 1995, which sort of fits with your story about, you know, it was a warm January, so we got a few job losses. That all makes sense, but the seasonal adjustment factor was not unusually large, and if anything, it was actually smaller than it's been in the last few January's. So if you look at like the difference between the adjusted data and the unadjusted data, the impact that seasonal adjustment had this year was actually the smallest that it had been. since I think 2015.

So it's not that there was an outsized impact. I mean, you could argue that maybe the factor was still too big, even though it is a bit smaller than it's been recently. I mean, so maybe there's something there, but it certainly doesn't stand out as a glaring issue like we had seen in some months, you know, sort of in the earlier days of the pandemic. And I think January in particular was not ever hugely impacted by the initial pandemic swing, obviously because the biggest changes happened sort of after January in 2020.

And by the time we got to 2021, things had normalized. sort of. So like the unadjusted declines for January don't look all that unusual even as you look back through the pandemic years. Yeah. I mean, but you know, here's another example, difficulty around seasonal adjustment. So we know that people bought early for this past Christmas. They seem to be out there shopping in October, you know, maybe a little bit in November.

And they had stopped shopping in December, right? So that means less hiring in December, which means therefore less layoffs in the retail sector, less layoffs in January, and that would, on a seasonally adjusted basis, cause the January retail numbers have come in strong. Because we know retail employment's been pretty consistently weak, losing jobs, right? And then all of a sudden you get this big increase in January. It just doesn't fit. It feels, I know what you're saying, but it feels seasonal to me, no?

I'm not thinking it's not possible, but yeah, go ahead. Yeah, okay. You got to be careful with retail this month. Another thing that they did this month that we haven't mentioned yet is that they reclassified all the industries on the establishment survey. And it was a much bigger than normal reclassification. It affects 10% of employment. They move stuff around. And they specifically call out retail as one of the industries that's most affected by this reclassification.

So I would take that big retail gain with a grain of salt, not only because of what you're saying about seasonality, which I think could be true, but also because of this reclassification is mucking things up as well. Got it, got it. Chris, you were going to say something there? I was going to point out the next. Oh, I see the next issue.

The shift in industries. Yeah. Okay, here's the other pushback. we know that this data that we're observing now will be revised, right? And the weird thing is in January report every year,

there's a so-called benchmark revision where the employment data, the payroll employment data, the data based on surveys of businesses, it's a survey of a sample of businesses, a large sample, but it's not the universe. And every January,

with the January data, the Bureau of Labor Statistics goes back and so-called benchmarks, the survey-based data to actual employment counts based on unemployment insurance records. So every company, small, large, has to file with the UI office, how many people are working for them. And that's a complete count. And with every January report, they benchmark. But that benchmark is March of 2022.

So it's already, it feels like way in the distance. and we do know that based on other more recent data from unemployment insurance records, that the next benchmark revision, the one we get for the next January report, probably in all likelihood, we show a pretty significant downward revision in all of the employment growth that we've experienced, at least going back to March of 2022. And that probably will affect this number as well. So, you know, and those revisions look like they could be quite significant, right? I mean, you know, we, we, the Q2 data based on unemployment record show a very weak job market.

I mean, the Bureau, the business employment dynamics survey, which came out last week, which is, you know, using Q2 data from last year, that should have an actual decline in employment in the second quarter. So I don't think it's going to decline, but nonetheless, it's making a point that all this data is going to be revised down. Does that, is that right? Did I explain that right? Do I have that right, Dante? And does that color your perspective on your, your, your, your statement that underlying job growth is 300K? It's certainly right for Q2 of 2022. We don't have, you know, that hard count of data beyond Q2 at this point.

So I would, you know, that could obviously reverse course in the second half of the year, potentially in the, in the QCW once we get it. So, you know, yeah, I think Q2 certainly was weaker than what we saw. initially, but I don't know that I would sort of lock that in to say that the rest of 2022 was also weaker than what we saw. I don't think that's a guarantee at this point. Okay. What do you think, Chris? Sorry, Mercy, you're going to say. There's some, I mean, there is evidence that that certainly the job market weakened in the summer, but then strengthened again. We were looking at UI claims trended up. They were above 260,000 in July, and then they started

coming down again. So that's, that is consistent with a weaker Q2, but we don't really know beyond as as Dante said Q2. Yeah. Yeah, okay. There are just so many cross currents here. It's hard to. Hard to just. And I got, I have to say, ADP, I don't know what's going on there.

But that was weak. That color was my thinking. Yeah. It was very weak. That came in 100,000, right? Or something close to 100,000 for the month of January. And that just a level said ADP is a private payroll processing company. They construct their own estimates of employment.

gains in the month based on their records. And they showed a small gain, 100K gain, I think roughly. And that's private sector. It doesn't include government. But even if you threw in government, it would be 150K, let's say. So much, much weaker than that's well below the consensus, even kind of number. Yeah. So that's right.

That's the colored your, I put too much weight on that. Oh, yeah. But I forgot. But Dante will tell you, Dante will tell you firsthand not to put much weight on that. It looks like they cited bad weather. They cited bad weather? Oh, that's right. Which also.

Oh, yeah, that's right. They did. Maybe because of the storms up in New York, the Buffalo storm, that Buffalo storm in the survey week or something. Oh, it could be. Yeah, it could be. Yeah. Okay.

Okay. There were a couple things in the report that were more, I guess, positive and negative is kind of all warped now because, you know, at any time when you, in the past, you said 500K jobs, unemployment at 3, 4, you go, woo-hoo. That's good use. But in the current context, it's a little disconcerting because it means that, you know, the labor market's tight and that that would put more pressure on the Federal Reserve to continue to raise interest rates. And if they continue to raise interest rates at some point, at some point the economy is going to break and you go into recession. So we want, we don't want, we want the labor market to cool off here and,

uh, give the Fed reason to stop raising rates sooner rather than later. And if you took this data, most of it at base value, you'd say, oh, the Fed's going to keep raising rates. And we'll come back to that in just a second. But the, a couple things in the report were more consistent with the Fed being, should be a little bit, uh, more likely to take its foot off the brakes here, or at least not keep pressing on the brakes as strong. And one was average hourly earnings, right? I mean, if you take a, if I asked a Federal Reserve board member, you know, to rank order all the statistics in the report in terms of what's important in terms of

their thinking about monetary policy and interest rates, I don't know if they put average hourly earnings at the top of the list because it's got its own measurement issues beyond seasonal adjustment. But it would be pretty close to the top of the list at this point because that's the key link between what's going on the job market and inflation, right? because higher wages, higher wage growth affects costs of doing business for service-based companies, and they passed that along in the form of higher prices for their services, healthcare, hospitality, education, that kind of thing.

So the one positive, meaningfully positive thing in the report was average average earnings. That came in modestly, right? I mean, I think year of year was 4.4%. Month to month annualized, it was 3, 3.5%, which is pretty close to, you know, where you'd want it, to be consistent with 2% of inflation. Do I have anyone have a different perspective on that or want to add some color to that? Any perspectives on? Chris, do you have anything else to add to that?

I agree with you. I think we'll get to the Fed, I think. But yeah, they're all concerned about the wage implications. But Powell cited the unemployment rate, right? The actual state of labor market jobs as a primary factor that he's watching. So, you know, I think it's good that this is supportive. and could lead to a decision to moderate, but I don't think that's the case.

I think they're still gung-ho because of the strength labor market, even if you revise down the 500K, I think that's still going to point to the case to raise. Well, let me ask you, Chris. I asked Dante what he thought underlying job growth was, again, abstracting from the vagaries and measurement issues in the data. What do you think it is? What is underlying job growth?

Yeah. So before I saw the report, right? Yeah. It was 200K, right? 200K. Okay. Yeah. Yeah.

So now what do you think? I still think that's the case. I want to be that I'm right. And this will be revised. This will be revised. Right. But again, I'm discounting data because it doesn't meet my narrative. Yeah.

Well, sometimes you got to do that because, you know, and this is an economist now speaking to you with 30 years of experience, every once a year, maybe once every two years, you get a wacko report that this is out of bounds, and it is out of bounds. It has, you know, it's not reality. It's just the vagaries of the data, and you have to discount it. So there are times when you have to discount, you know, what you're saying because they're, they're measurement problems. So I'm discounting this. You're discounting the yield curve. I think we're even, right? Okay, very good. Yeah. No one, there's, a few people understood what that meant, but I did. It's an inside joke.

That was like a dagger. We can come back to that. So, Marissa, same question. What is underlying job growth in your mind? I think it's around 250. 250.

Yeah. Yeah. I don't know what else to say. Okay. Well, that's fair. Yeah. That's my view.

I think it's 250K with a bias lower, because I do think we are going to get down with revisions to this data. when it all comes in. It would be very weird for Q2 of last year to be weak and then for things to bounce right back up. Yeah, it might bounce, but it's not going to bounce that much. So I think we'll get some pretty meaningful downward revisions to the data. So do you discount the Joltz data? I guess this is everyone as well. And the UI claims data? No, no, no, no. No. No. No. Well, the unfilled positions, I don't know what to make of that. I don't, yeah, I discount that. But, you know, I think it's very clear layoffs are extraordinarily low.

I think that's evident in the jolts. That's evident in the UI claims. That's, you know, there are seasonal adjustment issues with that data, too. So we've got to be careful with the UI claims week to week. There are seasonal issues. But, you know, it does, even with that, you know, we're around 200K and UI claims each week. That is really low. That is really low.

And in today's jobs report, if you look at the composition, of the duration of unemployment. Again, I know this is a little bit skewed by the pop controls potentially, but the share of people that were unemployed for less than five weeks. So this is very recently unemployed people, right? People that just lost their job, it fell quite a bit. So it's consistent with lower UI claims. Right.

Yeah. So I do think the job market is strong. There's no doubt about it and resilient. Of course, like most things, I'm looking at it through a glass half full kind of perspective, and that is the lack of layoffs is a reason to be optimistic that the economy will not go into recession. Again, we talked about this in the past. I have a hard time thinking that the economy goes into recession if we don't have layoffs, a lot of layoffs. I mean, 300K in UI claims per week, not 200K.

UI claims per week. So we're a long way from that. So that, to me, is, you know, coming through loud and clear. I think we are seeing moderation and job growth, not because of layoffs, but because of just less hiring. I think businesses are hiring less. And here's how I would square the Jolt's data. I'm curious to hear what you think about this. Quits are still elevated. People are still quitting their jobs. When a person quits their job, that generally creates an unfilled position. Most companies will not eliminate that position, at least not quickly. That sits there as an unfilled position. But if I'm reducing my hires, I'm just slow walking hiring, and I'm just not hiring as aggressively because I'm nervous about sales. And I don't want to lay off workers because I know

I'm going to need them down the road. But that's different than not hiring and filling open job positions. I'm just taking my time to fill open job positions. You could get what you observed in the Jolt's data, right? Elevated quits, elevated unfilled positions, weaker hires, and overall job growth that's still strong, again, it's still strong, but moderate. Does that, does that resonate with folks? Yes. Yeah, it's just that the job openings are soft. They're not hard openings. They're not hard. Yeah, or they're temporary, or, you know, it takes a month or two or three to work them through. Or it's a free option, right? Why not? Yeah, there's no cost to it, right? If someone comes around.

Right. Why wouldn't you do that? Why wouldn't you keep the open position, right? Yeah. Especially given this uncertainty, right? If we don't go into recession, then you're going to need to ramp up quickly. Also, I'm speaking as part of a large multinational organization with a big HR department, which fantastic HR department.

Let me just let us make that clear. I love the HR department. But, you know, you don't, if you think what we're going through is relatively temporary, and it's not going to be that severe. And I think that's generally the case. You don't want to shut down your HR function, right? Because if you shut down your HR function, it is incredibly painful to get it back up and running again. You got to hire HR people.

You got to train HR people. You got to get them going again. You got to get them, collecting resumes again. Just stopping the process of HR hiring. is that's a big deal. That's a big deal in most big companies. So I just, I don't think big companies are doing that.

They're saying, hey, hey guys, take your time. Don't hire, you know, this quarter. Let's see what the next quarter looks like,

you know, that kind of thing. But, you know, we're not going to take this unfilled position down. We still want to see the resumes, right?

Maybe we do want to do some soft interviews, you take our time here, but we don't want to shut this thing down. That's what it feels like to me, you know, this point. So except, sorry. So I agree with that characterization. I think, I think you have to look beyond job openings, right? It's, it's what our company is actually hiring people. So to say that hiring is like, has weakened quite a bit. It has since the beginning of 2022, but. Well, let me put it

this way. All of the adjustment in the labor market is less hires. We know job growth is slowed. That's right. Right. It has slowed. We were, We were 5, 600K a year ago. I don't know what the underlying trend is. Let's say you said 250. That sounds about right to me. So we have slowed. We know you,

we know layoffs are very, very low relative to pre-pandemic. In joltz, in UI, they're very low. All of the adjustment that's occurred so far is hires. That's where the adjustment's occurred. You know, all of it's been higher. So, and again, to me, that feels like the most graceful way for the labor market to adjust. I mean, a way that would help us, you know,

avoid an outright economic downturn. Yeah. Any other? The one other note on Joltson, I thought was interesting. I thought it was maybe just, you know, sort of a weird data point at the time, but, and I think like you, I discount the level of job openings at this point,

you know, sort of, you know, it's not a good comparison to pre-pandemic, but that big increase that happened in December was almost entirely concentrated in retail and leisure hospitality. openings across every other industry were basically flat or even slightly down. And the big jump was in those two industries. And that aligns with what we saw in terms of a jump in actual job gains and retail and leisure

hospitality. Again, it doesn't guarantee that it's right. But it does sort of give an extra data point to say that maybe demand did pick up a little bit in retail and leisure hospitality, you know, at the end of the year sort of more than we would have expected. So are you saying I kind of missed that? So are you saying a bulk of the unfilled positions are in leisure and hospitality? The increase in December, right?

We saw that big opening. Oh, okay. It was entirely captured in retail and leisure hospitality. Yeah, okay, okay. Okay, so, all right, so you're sitting at the Fed. You know, obviously looking at all this data, trying to figure it out and trying to digest it and make a decision around what it means for the conduct of monetary policy. What do you do with this? Do you, well, how do you handle this?

What do you think about this? Chris, what do you think? What do we do or what does Jay Powell do? What does Jay Powell do? Well, we know, okay. Christopher Waller or Lyle Brinerd or, you know, what do they do with it? Yeah, so I'm asking because, you know, there's what you might think they should do in theory, but versus what they've already declared that they will do.

And I think they raise, right? 4.4% on the average value earnings while improving, still too high, right? So I think they'll continue to step on the break. Yeah. So I think the markets, the financial markets are now anticipating, I think even, interestingly enough, I think the markets, the equity market, the bond market, futures market for Fed funds is kind of in the camp we're sort of in that. Yeah, maybe it shows the labor market's more resilient than we thought, but I discounted it big time, right?

Because stock markets down, bond yields are up, but not a lot compared to where they were. Yeah, so the markets seem to be saying, hey, this is not that big a deal. At least in terms what it means for monetary policy. So it feels like the markets are still saying a quarter point, another quarter point rate hike in March. And then I don't know, are they starting to discount one now in May as well? Yes, before this report, they were saying just one more in March. I think they're split. They're split.

Okay. I mean, moves around. Yeah. So is that, would, would that be consistent with your kind of, if you were on the Fed, you were, you would be, would you concur with that one more, maybe quarter point in March, another quarter point in May and see what, pause at that point? and see what happens? Yeah, so I think the market is right here in terms of, yeah, March is almost guaranteed,

I would say. And then the next May would be dependent on what the data shows between now and then. So that 50-50 split probably makes sense too. But yeah, pause. But I think the market might be raw. Or some market participants may be wrong in the sense that they're anticipating these cuts at the end of the year. Yeah.

I don't see it. Yeah, I don't, yeah. So what you're referring to is that if you look at the futures for Fed funds, the rate the Fed controls, they have the rate going up to round five, and then staying there for maybe the first half of the year and then starting to come back down in the second half of the year going into 2024.

And you're saying, of course, the Fed's telling them that's crazy, we're not going to do that. And you're saying that doesn't make sense to you either. Or they're challenging the Fed. I guess they must be as, that inflation will be coming in much faster than it's, or they're anticipating recession, right? Right, right.

Yeah. What do you think, Marissa? If you were on the Fed, how would you digest all this? I wouldn't like this report, but yeah, I agree. I mean, there's certainly, and in the minutes from the meeting the other day, you know, they, Chair Powell said we're pretty much definitely going to keep raising. rates. He did not indicate a pause. They're certainly going to raise in March, I think. And yeah, I think it's just really data dependent. See what we get on the CPI and the other, you know, the February

jobs report will come out before they meet again. So I think they're just taking it report by report here. Yeah. But I would be, I would be a little confused. by today, certainly. Yeah, like everyone else. Dante, if you were on the Fed, any, how do you think about all this? I think the best thing is that they can essentially ignore this report, right? I mean, because they have so much other data coming before they meet again.

So I think that's a good thing. I'm glad this report didn't come a week before the next meeting, you know, where they have to sort of use this as their only point to determine off of. So, you know, we can hope that February turns back closer to trend and sort of gives them sort of more of the same story we've been seeing at the end of last year as opposed to sort of what we saw today. And I totally agree with that. And that's what I tweeted, right, Dante? Ignore this report.

Although I don't think that's what you were, or I think you were saying ignore it because you didn't believe it, not because it doesn't matter to the Fed, I think, is what you said. Oh, yeah, yeah, yeah. Yeah. Well, I discounted because I do think there's all kinds of measurement issues going on here. And I, it's one of, again, it's one of those reports that happens every once a year or twice a year where it's just, you know, it happens and it gets washed.

out in subsequent data. And I totally agree with you. Thank goodness it happened two days after the Fed met, because now they've got, as Mercer pointed out, they've got at least one more jobs number and two consumer price inflation reports between now and then that they can digest help set policy at the May meeting. But I do agree with you, Chris, that at least a May increase, I should say, the next meeting is in March. Another, the one in May, I say, I say that's 50-50. I may agree with the markets there. I can see, but that's data dependent. And then they sit and wait, and I just don't see them cutting rates later in the year. I just don't see that. That would require a recession, I think, and I just don't see that, you know, kind of a recession

that would cause them to do that. Okay, let's play the game. We agree. What's that? We agree. On no recession? No. Oh, wait, whoa, whoa. Yeah. That's taking a little too far. Okay. We'll come back to that. We'll come back to them. Let's play the game, the statistics game. And the game is we all put forward a statistic. The rest of the group tries to figure it out with questions and clues and deductive reasoning. The best question is one that's not so easy. We get it immediately, not so hard that we never get it.

And, of course, if it's apropos to the topic at hand or recent data, that would be a bonus. So with that, I think, as I said last podcast, it's tradition to start with Marissa. So Marissa, you're up. What's your statistic? Okay. My statistic is plus 440% in January. Plus 440%. Is it in the jobs data, jobs report?

No. Okay. Is it in a report that came out this week? Yes. It's an economic statistic. Yes. Okay. Okay. Is it in, it's not completely fair, but is it in the Joltz report, the job opening labor

Turner or survey report? It is not. No. Okay. 440 percent, guys. Is it a price, some kind of price measure? No. No. Is it a labor market measure? Yes, it is. Oh, it is a labor market? Okay. Is it in the UI claims? Yeah. No. No. Oh, my goodness. Yeah. She's dug deep into the bowels of some labor market report. In the ECI. Oh, ECI. No, it's not.

No, it's not. That's came out. Ooh. Labor market related and employment came out this way. One of the regional manufacturing surveys? No, it's not. Should we know this? Should we know this?

Is it really something that we should know? You know it. It's labor market related. It came out this week. Yeah. It is covered by us in real time on economic view. Oh, my gosh. All right, Don't know.

It is not a statistic we typically pay much attention to or talk about, though. I see. Dante, do you have any or you I? No, she said no. She said no. Not ECI. Shall I just tell you? Is it something from the conference board?

No. The conference board survey of conference. confidence came out this week. Goodness, are we going to be embarrassed when you tell us? Oh, I don't think so. You're talking about job. Challenger, the Challenger report. Yeah.

Oh, oh, that, yeah, that's a good one. Yeah, so this is the percent increase over the year in the number of announced layoffs in January. So the number of announced layoffs was about 103,000 in January. And that compares, if you just look at it. a month prior, that compares to 44,000 in December. So according to Challenger, there was a huge uptick in the number of announced layoffs in January.

And that's the largest January reading since 2009 when we were coming out of the financial crisis. So over 100K and what was the average kind of average monthly increase in 2022? It felt like it was. It was like 30,000 a monthish. And of course, there's a lot of tech. I guess health care I saw. Yeah, it was retail, maybe.

It was retail finance, health care were the biggest. Actually, the largest contributor was tech. Yeah, they had, they announced. And this is announced, right? So this is an actual people being laid off, 42,000 layoffs in tech in the first month of the year. And that was like 40% of all of the announced layoffs. Right. That's a good one.

So how do you square that number with the very low layoff totals in the jolts and the very low unemployment insurance claims? How do you square all that? I think that the job market is so strong that people are being laid off, but they're being rehired somewhere else very quickly. We talked about this a little bit on the last podcast, but if you look at the labor force, in the household survey so you can look at the people that people's status from month to month following the same people. The number of people that are remaining employed from month to month is trending higher and is elevated from, you know, where it was if you go back to 2018 to 2019. So not only are people keeping jobs at the higher pace, if they are getting laid

off, they're finding work really quickly, probably so quickly that they're not even filing unemployment insurance claims. And I was going to say, if you look at the details of the payroll survey in January, you do see declines in banking, declines in the information services. You know, if you go under the like super sector level, so that is consistent with these layoff announcements, right, that there are net job loss. in some of these very detailed industries, but the rest of the job market is so strong. I just think people are becoming employed again very quickly.

Could it also be a case? Sorry, go ahead, Chris. I was wondering on those layoff announcements. This is always nag me. Do we know that those are primarily or exclusively U.S. based, or could it be, if Microsoft says we're going to lay off 10,000 people and they're in India, right, does that get captured in this layoff data? or?

I think it could because they do say that they, so they, the way Challenger does it is they, I guess they see an announcement in the news or something or in a warn notice and they verify it with the company. But the layoff could be either at a specific site or it could just be attributed to where the corporate headquarters are. And they don't make that distinction. So you see a lot of layoffs, for example, in this report, you see a lot of them in New York, the Bay Area, Seattle, right?

But that doesn't necessarily mean that's where the people are being laid off. So I think it could be outside the U.S. I don't know. Dante, do you know? Yeah, I don't know for sure. I'm guessing they don't have any way to sort of guarantee that it doesn't happen. My guess is, you know, if there's any specificity in the announcements, then obviously they'll take account of that.

But, yeah, I don't think there's any way they can guarantee that it doesn't bleed over into other. I think generally you just give a number, right, in those corporate announcements. Yeah. Could it also be the case, and this is a more pessimistic perspective or optimistic depending on your point of view, but could it be that it's just a matter of time that, you know, it takes time for these announced layoffs to actually be implemented and then because of severance issues, maybe it doesn't show up in the UI claims right away, you know,

just takes time for it to filter through. And this is year-end, beginning of the next year, that's when corporations kind of tend to make these big changes. And then it takes a few months for it to just kind of show up in the data. Is that a possibility? I think it's a possibility. But we've now been hearing about massive, at least in the headlines, right? We've been hearing about massive layoffs, particularly in tech for, I don't know, seems like maybe six months, four to six months now. right so you would think that certainly many many people have been laid off so we would be seeing it

in the data i think by now it could be gathering momentum they could be getting bigger and eventually they'll become so big that these people can't be absorbed very quickly um but and yeah a little bit of an uptick in ui claims back in november when the sort of like the first wave of tech layoffs were announced it was not big you know they never got above 230,000 200,000 40,000 and it pretty quickly came back down. So I do think over the next couple weeks, we could see claims come. Again, they're below 200,000 now. So I think certainly come back up a bit, but I still don't think I've seen enough happen that would, you know, cause them to spike above 240, 250. Right, right. Okay. All right, Dante, you're up. What's your statistic?

Between two, I'm going to go with minus 5,000. Minus 5,000. Is it in today's jobs report? It is. Okay. Is it an industry? It is not. Is it in the payroll side of the survey or the households? I should ask, is it in a payroll side of the survey? No.

It's in the household side. Okay. Okay. So something in the household employment survey fell by 5,000 jobs? Not jobs, no. No. Not jobs. Ooh.

Have you adjusted this for the popular? population control. Yes, it has been adjusted for population controls. Okay. It's something in the labor force. Yes. Yes. Change in the labor force if you adjust for population control.

Oh, right. So, you know, the published change is very large, but they're saying all of that change is due to the shift in population controls. If you take that adjustment out, they estimate the labor force actually shrank slightly in January. So it's down, the labor force, it contracted. by, it was basically flat in the month of December. We have obviously seen pretty strong labor force growth here in recent. Yeah.

And again, you know, it's one number. It could be an anomaly, but certainly that would not be a positive sign for how things are going to go. Can I ask, though, and you may not know the answer to it because you haven't done the calculation, but if I look at year over year on the population-adjusted, population control-adjusted labor force, what that number, what that increase is? because looking at the unadjusted, I saw 250, almost 300,000 per month. You know, it's 2.6 million divide by 12. I guess that would make it less than that would be like 230,000 per month in labor supply.

So, but you don't know what that number is. You know, they don't publish like a fully adjusted back year. They just do that. Oh, that's right. They only adjusted. Yeah. But if I take that, that number adjusted. for the population control

compared to what it was a year ago, that wouldn't be fair to do. You couldn't do that? I mean, it feels like you could do that, right? Give you a sense of the underlying growth in the labor force. Well, you can still look at within 2020, obviously the underlying trend labor force growth is still very strong, right? Yeah, okay.

Here in January, that doesn't flip the script of what we have seen for the last year. But certainly, if we get more readings of sort of flat-ish labor force growth, that's going to make it tough to keep things going, I would think. Right. Yeah, because I have taken some solace in the strong labor force growth, labor supply. That's labor supply.

So labor demand is strong. And I concur, I think underlying labor demand job growth is $250K per month. That's what it feels like to me. And that was pretty close to what I thought underlying labor force growth was. So I take some encouragement in that, which means if demand and supply are roughly equal to each other, the labor market's not getting any tighter. It's not easing up, but it's not getting any tighter. And I took some solos in that.

Yeah, I think that's still the right way of thinking about it. Until we, you know, unless we get more sort of downbeat readings on the labor force. Yeah. Okay. All right. Chris, what's your statistic? All right. This one's easy, but it's important.

Easy. Whoa. It's easy but important. Yes. Is it 3.4%. No, it's three. It is 3%. That's the unambority.

employment rate for no. It's the, it's in the ECI. In the ECI. Is it? No. No. Is it in the labor market?

Is it in today's jobs? I guess it's not that easy. No, it's just embarrassing. Yeah. Now it's just embarrassing. No, it's not in the labor market report. It's not. Employment report.

Three percent. Oh, I think I know what it is. Oh, as you're saying, it's not in the labor market report. I was going to case three. Okay, so. Is it a labor market statistic? It is. No.

Not really. It is no. Was it released this week? It is kind of. Well, maybe it is. Yeah, it is. It is a labor-related statistic. It's not related to.

How can the answer to that question be so hard? I mean, neither it is. Or employment. It's not wages or employment. it. 3% was it in the Jolts? Nope.

Because you said it was labor market related. It's kind of labor market. Pretty much sure. Is it a statistic that was released this past week? Yeah. Yes. And Dante knows it.

Oh. Because he covers it on EV. He probably writes through. Oh, no. I don't know that he covers it on EV, but we discussed it in the past. It's one of our. our,

uh, I goodness. Oh, productivity growth. Yes. Oh, yeah, yeah,

yeah. I, you know, I like this jobs report. Like, I'm just discounted. Probably not a believable number. So I've put it out of my mind.

Oh, yeah. No, that, that, that was a good one. And we should have gotten it right away. But so,

um, explain. Why did you pick that number? 3% output per hour. That's the annualized, uh, growth for Q4, 22.

that was strong. It had been very weak last year overall, right? But that boost in productivity growth, that's a very positive sign. That, you know, that gives us a chance to get through this with just a slow session versus every set. Right, we need that type of productivity growth and that can help to justify some of the higher wages we have. So if that is true and that is sustained, that that bodes well for the. future. The 500K of employment though would work against that. If we're adding a lot of people, when you don't expect to add a lot of output, right, that could reverse things. So yet another

reason perhaps to be cautious when looking at that 500K number. But 3% productivity growth, again, very strong. I think that's too strong. I don't think that's trend, right? But it's a is a very positive sign after a long period of a very weak and negative productivity growth. And that positive number kept it above the pre-pandemic trend. It looked like it might crash below the pre-pandemic trend, and that kept it above, if only by a little bit. So it's obviously a positive too. Yeah, I think we were talking about this with Jason Furman when he was on the podcast. I guess that was last week or the week before.

And he was pointing out that average annual non-farm business productivity growth since the pandemic hit is one and a half percent per annum, and that's exactly equal to the non-farm business productivity growth in the three years prior to the pandemic. So it's been three years since the pandemic hit. In that three years, it's been one and a half percent. And the prior three years, it was one and a half percent. So it feels like pretty strong evidence that underlying productivity growth, extracting from the ups and the downs and all arounds in this data, is one and a half percent. That's what it feels like.

I think that's the hope. Well, yeah, I mean, you're right. You had this huge spike and then you've had this big decline. And then first reading where it looks like maybe it's starting to stabilize. Yeah, because you're in the 1% camp. We're going back to 1% or something, as I recall. Maybe not all the way to 1. But I think I'm in the below sort of one and a half camp where I thought the data we've

seen recently is more telling than just volatility. Right, right. Okay. But, okay, that was a good one. That was a really good one. Okay, mine, you ready? I'm not sure whether this is hard or easy. I think it might be on the hard side, but it's important.

It's two statistics related of 4% and 3.7%. 4% and 3.7%. Are these unemployment rates? No. Oh, their wage growth rates over the year? not over the year. Annualized growth rates. So which...

Three months annualized. What wages are we talking about? You can spit it out. UCI. DCI, Employment Cost Index. Is it your wage and salary, private workers X incentive occupations? It is indeed.

Very good. Which one is, which of those four to three or three point seven is that, do you think? That's four. No, it's 3.7. It was one or the other. And this is, and this is what? Annualized over the past three months?

Yeah. Annualized in the fourth quarter. In the fourth quarter. Okay. Yep. And what's the 4%? So the 3.7 is private industry workers, wages and salaries,

excluding incentive pay, which I'll come back and explain to everybody why that's important. But what's the four? Total comp annualizes it. Yeah. Total ECI. Total comp.

That's wages, salaries, benefits, the whole shoot match, across all workers, all civilian workers. So 4% annualized, and this is the employment cost index. It's the best measure of wages we have because it controls for the mix of occupations and industries in the labor market. The reason why we don't focus on it often is because it's quarterly data. It only comes out once a quarter, not every month. And we just got that data for the fourth quarter of last year this week. And I took a lot of comfort in that data. Top line ECI, employment cost index across all workers grew 4% analyzed in the quarter. Now, you know, you can't put too much weight

on any given quarter. And if you look at it year over a year, it's still 5% year over year. But it definitely feels like it's moving in the right direction here. And then the if I, the one measure in the ECI report that I think is most representative of underlying way of underlying labor market pressures and wage growth is wages and salaries for private industry workers excluding incentive pay. So you don't want to include, you know, pay for, you know, sales bonuses and that kind of thing. And that came in in a quarter to quarter, fourth quarter, annualized at 3.7%. And, you know, I took a, again, a year, every year, it's still elevated around 5%, but it's coming in, you know, and moving in the right

direction. And it's, you know, very, this, this weakening that we're observing in wage growth. And you see it in the average hourly earnings data that we just got today as well, is consistent with the theory that we've been talking about that the surge in wage growth that we got back a year ago is more related to the jump in inflation expectations that occurred. when Russia invaded Ukraine and we saw this spike in energy, oil, gasoline prices, food prices, and less with the tightness in the labor market. You know, the labor market is tight, 3.4% unemployment.

But it's not, you know, that's kind of sort of where the unemployment rate was pre-pandemic and we didn't have extraordinarily strong wage growth. And we thought, you know, labor market was, you know, tight, but it wasn't overly tight. And this would suggest that that's the case here. I mean, if 3.4% was the problem, then wage growth would not be decent. accelerating here. It would be accelerating and it's decelerating. And that's consistent with the theory that, well, now the worst of the fallout from the Russian invasion is behind us. Prices of oil prices have come in. Gasoline prices come in. Inflation expectations have

come in and wage growth is moderating consistent with that. So I take a, you know, a lot of solas in that. And of course, that's what the Fed is most focused. on right now, right? It's the cost of services, excluding housing, and they're focused on that because that's what they feel like they can have some impact on with interest rates affecting the labor market wage growth. And these industries obviously very labor intensive and price increases in those industries are tied back to the cost of labor. So, you know, if I add that all up, it just feels like, you know, consistent with the story, the narrative that the, you know, we can get inflation back in the bottle without having to experience a significant decline in

employment or a big increase in unemployment. Now, that was a long soliloquy. I think based in data, what do you think? Does that resonate? I know I've said that a few times does it resonate, but I need confirmation for my guys, my team that I'm on the right track here. What do you think? Does that make sense? Yeah, I think if there's something you're going to hang your hat on here, you know, is wage growth, right? I mean, obviously, if you want to discount the strength and job growth and assume that that's going to sort of get washed away in the numbers. But, you know, if you see wage growth continuing to come in, I think that's even more important than job growth moderating sort of as quickly as we might have wanted it to.

So, yeah, I would agree with that. What do you think, Chris? I mean, that's kind of sort of not exactly how you would frame it. But, you know, what do you think? I think that's the goal. That's the reasonable path, right? My fear, as usual, is that there's still some other shock to occur here, or the Fed is going to be stubborn, right? And wait too long to adjust.

But otherwise, I agree. those data points are pointing in the right direction. Yeah. Mercer. Yeah, I think you're right about inflation expectations, both coming from market signals, but also consumers who've been much more pessimistic overall about the prospects of the economy and inflation,

but even those have been getting better for the past few months. So I agree. Yep. Okay. All right. Let's turn to listener questions. And this is a new feature of the podcast. We've tried this out a couple, three times.

We'll give it another shot. And we've been collecting questions. And please, listener, fire away. If you have questions you'd like to post to the group, please do. You know how to get a hold of us through Twitter, LinkedIn, our websites, help economy at moody's.com. Please feel free. But for this part of the podcast, I'm going to turn it to you, Mercer, because I know you're the keeper of these questions.

And I should say, correct me if I'm wrong or so we have not seen these questions right these are no you haven't de novo okay so so I have obviously you have okay but yeah you guys haven't yeah fire away all right there's a lot of good ones um there's a let me package a few of these because there's a lot of questions about the yield curve and the 10 year yield oh god and how should we interpret the 10 year This is plaguing me, this damn yield curve. Okay, go ahead. So, yeah, I mean, the question is, what's going on with the 10-year yield?

How do you interpret it? How can you understand the behavior right now of long rates? Right. Great, great question. Chris, do you want to take a crack at that first? or I already did my soliloquy. I don't want to give another one. I can do it, but maybe you go first and I'll comment on what you say.

This is the yield curve. What is the yield curve actually saying here, Chris? The yield curve is saying recession risk is elevated. Okay. That difference between the 10-year treasury and the two-year treasury or the 10-year and the three-month treasury or your favorite, I guess, is the 10-year versus the Fed Funds rate, all deeply inverted at this point. The short-term rates are higher than long rates

are inverted. Correct. Inverted. And historically, when that happens, recessions follow. That's right. Yeah. That's right. So you're saying just take a take this literally. If you take it a face value, is that way if we should take it a face value? Should we take the yield curve at face value? I think that would be the a good starting point, right? If something has happened, if something has been a good prediction.

in the past, right? The onus is on suggesting why it's different this time or what are the conditions that make it unreliable this go around. Yeah. Okay. That's fair. And I'm going to do that in just a second. Well, Mark can do that.

Yeah, I can do that. I can do that. And by the way, you're right. I mean, I think this is one reason why the majority of economists that forecast for a living think recession because they are looking at so-called leading indicators. And the yield curve, the shape of the yield curve, the inversion of the yield curve is a very prescient leading indicator. You know, it has done the good job.

And so that really influences, I think, the way people, economists in general are thinking about this. One point to make is historically the lead time between an inversion of the curve and a recession is a long time. It's 12 to 18 months. So the curve, at least the, I guess the 10 year, two year curve inverted probably what, in six months ago or so. So that would suggest.

Independence Day, right? July. Oh, was it July 4th? Yeah. Oh, it was July 4th? Okay. Early July. That's a good way to remember.

So that would suggest, again, face value, literal interpretation, recession, second half of this year, maybe going into 2024 or something like that, right? Yeah. Yeah. Okay. Dante or Marissa, do you want it before I jump in here? Is there anything you wanted to say about this? I know what you're going to say.

Okay. You go for it. Okay. Well, I'd take a couple things. First thing I'd say is the other financial market leading indicators don't seem to be signaling recession. The yield curve is incongruous with the equity market. The stock market fell in the first half of 2021, but since, Senate's been basically going sideways. And that decline in the beginning of 2021 is all around

interest rates. That's when the Fed started a jack up rates and PE multiples, the multiples stock prices over corporate earnings fell. So that correction had nothing to do with any expectation about corporate earnings or the economy. Because if you look at analysts' expectations, forecasts, they are still positive. They're not negative. Oh, sorry. Oh, just let me finish on that one. And then the second one, and then you can push back because then we'll move on. But the second is the corporate credit spreads. I mean, you know, if investors were nervous about recession, they would be saying, oh, we're going to see corporate defaults or we're going to see businesses, corporations not being able to pay back on their debt in a timely way. And I demand a higher

interest rate on that debt to compensate for that risk. And so you would see yields on corporate debt rise relative to risk-free rates like the 10-year yield. And that, That definitely has not happened. That difference in yield is unchanged. So, okay, so what do I have wrong there, Chris, in terms of the way I frame that? Well, equity, Mark, you know, there's the old quip. What is it? The stock market has predicted 11 of the last six recessions, right? Yeah, yeah. So it's not a very reliable indicator versus the yield curve itself, which has been, has much better track record in terms of recessions. You do make a good point about the the spreads, but one way to interpret that would be okay. There may still be a high probability

of recession, but the severity of that recession seems to be almost universal. The consensus is that a recession, if it does happen, is unlikely to be very severe or prolonged. So from that standpoint, the chances of corporate defaults may be still pretty muted. Okay. Okay. Second thing I'd say, is the bill curve isn't foolproof, right? I mean, it did invert prior to the pandemic recession. Are we saying that it predicted the pandemic? Who knows? You were calling for a recession in 2020, Mark. It did predict the conditions for recession.

No, I was. That was in jest. Our forecast never had a recession. Right. I mean, never had. It was with the economy was weak because we had the trade wars, you know, And parts of the economy were contracting like agriculture manufacturing was contracting. So you're saying we don't know the counterfactual, therefore it could have been right. We could have gone into recession in 2020 without the pandemic. Correct. Okay. That feels like a stretch, but okay.

But it's a signal. It's not causality, right? Okay. Just because it inverts doesn't mean isn't causing the recession. It's just a signal. Yeah. Okay. Let me give you then now let's turn to the yield curve.

And it feels like we're going to get to one question because that was a doozy. But I turn to the yield curve as a predictor and you're saying, okay, why would this time be different? Why wouldn't the yield curve be a good predictor this go around compared to times past? I'd throw a couple things out there. First, quantitative easing. The Fed has bought a lot of treasury securities and mortgage-backed securities, taking those out of the bond market. They've taken duration out, so-called duration out of the bond market. And, you know, the estimates suggest that, you know, that is having some meaningful impact on long-term interest rates relative to short-term interest rates.

A lot of debate as to how much, but that could be, you know, 20, 30, 40, 50 basis points. That's 0.5 percentage points. So the yield curve is, was flat. matter coming into this in this period than it typically would be because of the QE, the buying that the Fed did. Now, it's QTing now, meaning it's allowing the securities to wind down. But what really matters for interest rates, long-term rates, is the stock of debt, treasury bond securities that the Fed holds on its balance sheet. And that's still very, very large. I think it's, I'm making this up, but eight, eight and a half trillion, four, four and a half trillion above what it was pre-pandemic.

So that's one thing to consider that this time feels different. Second is forward guidance. The Federal Reserve is being extraordinarily clear about, you know, what it's going to do with, you know, policy here. You know, it's trying to tell markets exactly where it's going. And markets know that given inflation is going to come in, you know, here one way or the other. and that, you know, if you look out into the future, the, the fund rate's going to be settling around 2 and a half percent. You know, that's kind of the, you know, what people think, we think, the Fed thinks is kind of

the long run equilibrium yield. So the amount of guidance the Federal Reserve is giving, giving to bond investors today is extraordinary. It's just more than it ever has in the past. I mean, over the years, it's gotten more transparent and provided more guidance. But, you know, what it's been doing in the current. period is just, you know, very different than what it's done in the past. Let me give you a third reason why this time might be different.

This does go to, you know, potentially there is some causality here. You know, the yield curve is not only a predictor of recession, but it influences the environment and it creates the fodder for recession. Because if you look historically in the good times before recession, and they're generally boom times when the economy is operating at a very high level, people are taking a lot of risk, borrowing a lot of money, credits really flowing, banking systems providing financial systems providing a lot of credit. And then when the curve inverts, when the Fed steps on the brakes and the curve inverts,

those financial institutions, those banks can't make money anymore because, you know, they borrow short, short-term funding rates and they lend long at higher rates. And when the curve inverts, they can't, that spread terms negative. and their net interest margin, you know, vanishes, they can't make money. So they stop lending. They tighten down on credit very aggressively, which matters a lot in most times historically because those folks that borrowed a lot of money in the boom times need the money in the tough times. They got to refinance, particularly businesses.

They say, hey, I got to refinance this debt. I can't pay you back. But they can't afford the terms and the interest rates when you get into a world of an invertecournard curve in a negative net interest margin. That matters a lot less in the current period because we never saw that rapid credit growth, you know, that you typically do coming into a recession, probably because we're on the flip side of the financial crisis and live through a credit crunch. And so we didn't see a lot of credit growth. If you look at the amount of debt that businesses need to refinance in 2023 going to 24, it's actually quite low. I mean, either

bonds or loans. So that causal link between the shape of the yield curve and the recession is not evident today. It's certainly not to the degree that it has been so historically. So there's a three reasons why this time may be different, you know, that the yield curve isn't as prescient as it has been historically. I'll stop there. I said a lot. Curious to your reaction in those in what I said just there. That's you, Chris.

That's for me. All reasonable. All reasonable. I'd even throw out another one. Oh, okay. Go ahead. To support that view, which would be, why is it so U.S. centric, right? If you go to other countries around the globe, you don't see the yield curve having this predictive ability.

So that would suggest that, you know, it isn't causal and very well could be these other reasons. I guess what gives me pause is just the extent of the inversion now, right? So you're right. These other factors could. could make a difference, could lessen the importance, but it's just so deeply inverted. I have a hard time giving it up. You know, can I just throw out one other thing? And this is a work in progress in my mind.

As I said earlier, this is plaguing me. I'm plagued by this thing, this question. If you look at the inversion of the curse since Independence Day of last year, most of that decline has been related to, particularly if you feel like a 10 versus 2 year, most of that inversion is related to a decline in the 10-year yield. And if you're not an increase in the 2-year-old, that had already happened. So, and if you look at the 10-year yield and decompose that decline into, you know, what is behind that, it's one of three things. It's lower inflation expectations, a shift in expectations around the real after-inflation federal funds rate target. And the third is the term premium.

I'm not going to go to any of this because we need a whole podcast. And maybe I should get Campbell Harvey on. He's the professor from, I think he's a Duke who popularized this measure as a leading indicator. So we have this conversation in depth. But most of the decline in the 10 year and therefore most of the decline and most of the inversion of the curve that we observe is a move in the term premium from positive to negative.

And that's not consistent, I don't think, with recession. If it were recession, that would be around inflation expectations or, you know, around, mostly around the real federal fund rate target. And I don't think that's the case. But just throwing it out there, fodder for, you know, future research is a work in progress. I'm not sure exactly. All those things are difficult to measure, right? Even when inflation expectations, right?

So it's all, yeah, you're right. There's measurement issues. Yeah, exactly. Decomposing is not easy. That's what you're saying. Yeah. Yeah, that's very true. Okay.

That was a great question. And I think. maybe we'll hold the other ones for the next round because that was a really good one. I do want to quickly end because this is getting, as I want to say, long in the tooth this podcast. So very quickly, just because we've been ending this way for these podcasts now for the better part of the last six months or so. What's the probability of recession in the next 12, 18 months?

Let's say going into 2024. for NBER defined National Bureau of Economic Research, broad-based, persistent decline activity, that's the definition of recession. What's the probability? And how has that changed over the last week, two weeks, whatever? So, Dante, what's your probability of recession? I think last time I was on, I was at 50%.

And I'm going to stay. Before this morning, I was considering edging a bit lower than that, but I think I'm going to stay at 50 given the report today. cautious man. Yeah, that makes sense. Yep. Marissa? Wait, so the strong jobs report makes you think that there's a greater probability of recession

because you think the Fed will just keep hammering. Yeah, I think it just raises the risk. And overdo it. Yeah. Yeah. Yeah, maybe things will reverse next month and, you know, there won't be an issue. Yeah. I'm still at 50%.

50. Yeah. And that hasn't changed that much. No, but I've, you came down earlier, but now you have that hasn't changed for a while. Yeah. And I would say I was, I'm becoming more, it's more of a soft 50 than a hard 50. You know, I'm, I'm thinking the risks are more to the downside than to the upside on the

probability of recession now. What does that mean? Lower probability? Like I think, yeah, like my bias would be that it's under 50. Yeah. It's 45 to 50, something. Yeah. Okay.

Okay, good. So you're 50 with an arrow pointed down. Got it. Chris, what's your probability? You know, the Groundhog saw its shadow. It did? I didn't know that. That's a data point that came out this week. That's a good leading indicator, I think. Kind of like the yield curve, I'd say.

Apparently the Groundhog's been the right 69% of the time. There you go. Better than most economists. And what is it happening? 60%. I'm going to nudge my probably down to 60% from two thirds. Hold on, wait. Yeah, big move.

Six down to 60? Yes. Ooh, interesting. But it's really around the timing, right? What does that mean? I still am very pessimistic, or somewhat pessimistic. But in 2100? Is that what you're saying?

No, it might be into 2024. Okay. Okay. All right, fair enough. That's not unreasonable. Maybe we should start saying recession probability in 20203 and recession probability in 2024 because, you know, that may be an important distinction. So we'll start doing that in the future. But you're saying over the next 12, 18 months, you're down to 60%. Right. Got it. Okay. I'm still at 50 with a down arrow. I'm with, I'm with Marissa. And I do, I will point out that we run this same question at our macro meeting. with all our economists, and the group is moving in the same direction this group is. If you go back, I think it was in November, that was at the height of the angst around recession. I think the group was close to 70% probability of recession. It's now down to below 50. It's at 47%.

So the group has gotten more optimistic here. But great. Well, that was very good. Well, anything else? I know it was hard on everyone. I apologize for that. I was on a little bad mood because of the numbers. I had written all these tweets under the assumption that this would be down the fairway kind of report.

And then I had to rewrite all my tweets. So I was in a pretty bad mood, you know, coming into this. So I apologize if I was too hard on anybody. But no, you're all good with that. Okay, good. All right. Well, with that, we're going to call this a podcast. Dear listener, we'll talk to you next week.

Take care now.