Moody's Talks - Inside Economics - Jaw Dropping January Jobs (Redux)

Episode Date: February 2, 2024

Dante joins the podcast to break down the January employment report. Fitting for Groundhog’s Day, the jobs report delivered an eerily similar upside surprise to what we saw in January 2023. Following the January meeting of the FOMC this week, the team discusses what the Fed is likely to do in light of recent data.To access the 2024 Election Model Whitepaper click here Follow 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 I'm joined by two of my colleagues, Chris, Chris, Cretes. Hey, Chris. Hey, Mark. No, Marissa today. And she, what's she up to? She's taking some well-deserved time off, I think.

Oh, okay. Good for her. We'll miss her on Jobs Friday. Big Data. I don't know that you should be taking a day off on Jobs Friday. That doesn't feel like the right thing to do. She gave me her forecast before she left just to show how dedicated she is. And she did take the upside to her credit, but not far enough, apparently.

Oh, yeah, that was a big number, which we'll come back to. And we've got Dante, Dante D. Antonio. Hey, Dante. Hi, Mark. How you doing? Good. You must have been surprised by the number. It took me a few minutes to gather my thoughts, Sam, before I started writing about it.

Well, good. Well, we are going to talk about the jobs number for the month of, January. A lot of labor market data came out this week. Give us a good sense of what's going on with the economy. The Fed met this week. I think we should talk a bit about that. And I also published our election model results for 2024 with two of our other colleagues, Brenda Lasserta and Justin Begley. So maybe we can talk about if you guys are curious, did you guys look at the results of that election model? I saw the headline.

Yeah. A quick look, yep. Yeah, okay, we can talk about it. And the winner is, we'll talk about that. Anything else we should be talking about on this podcast, do you think? That's a lot, but just asking. I'm sure something will come up. Okay, sounds good.

All right, okay. Well, let's talk about the jobs numbers. Dante, you want to give us a sense of the numbers? Yeah, sure. So headline job growth came in just over 350,000 in January, which was just about double consensus expectations on our own forecast. So certainly a upside surprise in a big way. Big revisions, at least to December, not so much to November, but upward revisions the last two months totaled just over 125,000. So on a three-month average basis, you know, last month and we got the report, job growth was average. 165K. And now after revisions and the January number, the three-month average is 289. So quite a big shift in terms of what job growth looked like over the last three months. Much broader job growth across industry. So we had been talking towards the end of last year about sort of the narrowing

of job growth into, you know, mostly health care and the public sector and leisure and hospitality. That seemed to widen back out a bit in January. Almost every major. industry added to payrolls except for mining. Even manufacturing got a bit of a boost, a bigger gain that we've seen sort of outside of the strike effect for about a year or so. Biggest gains were still in health care, not surprising. But we also got a big gain in professional business services, which was a bit of a turnaround after a sort of a sluggish stretch of job growth in the second half of last year. Retail trade put up a pretty strong number for the second month in row, although there's always some, I think, skepticism around seasonal adjustment,

particularly around the holidays in retail trade. So I'm not sure how much to read into that in terms of an actual turnaround. Yeah, but on the industry side of things, things look pretty good on the household survey side, there wasn't a whole lot of news. The updated population controls that they put into place every year in January didn't have a huge effect. The unemployment rate held steady at 3-7, labor force participation held steady. So there really just wasn't a whole lot to write home about on the household survey. Most of the attention, I think, will be on the payroll survey side of things.

With wage growth probably being close to the top of that list, wage growth over the month was up 0.6%. It's the biggest monthly gain since early in 2022. Year-over-year growth is back up to 4.5% now by that measure. After it had gotten as low as about 4% a few months ago, so sort of moving in, the wrong direction there from the Fed's perspective, I would assume, although we can certainly talk about other measures of wage growth, which are probably not quite so volatile and not telling quite the same story. The one thing that I think maybe caught me off guard more than anything was average weekly hours was down by two-tenths to 34.1. If you rule out the sort of initial

pandemic impact, that's the lowest level of average weekly hours since mid-2010, sort of in the throes of the Great Recession. Again, it's one month, so I don't know how much to read into that, but it certainly was a big surprise on the downside, especially given the sort of ongoing strength and job growth that we're seeing. Yeah, a lot of cross currents in this report. Of course, this is for the month of January, and I think that's difficult for the Bureau of Labor Statistics to keep her the data to get right, because seasonally fewer people are working. They try to seasonally adjust the data to make it agnostic to the seasonal patterns in the labor market. But doing that is not easy, particularly post-pandemic because the pandemic

scrambled all the numbers and really made it difficult to tease out the seasonal patterns and the data. So, you know, there's big positives, big negatives. You add it all up, a lot of noise, but what's the bottom line? I mean, how's the economy doing? do you think based on the number based based on all you all your gut instincts and you know do you throw everything into the pie you stirred around you've looked at these data many times so what is it how do you read read these numbers yeah I mean the economy is still obviously doing well I don't

think this changes my expectation of what happens in the labor market in 2024 you know I still think on net job growth is will be slower in 2024 than it was in 2023 and I don't think you know one strong reading here in January changes that expectation for me. Okay, so the economy's fine, doing well. Okay, now every month I ask you, I think almost every month, you know, what is the so-called, what I call the underlying rate of job growth. So abstracting from the vagaries of the data, these seasonal adjustment issues, and I guess weather might have also played a role in January? I don't know. We had a few big storms. I'm not sure. Maybe that affected the hours worked number. I think that might have played a bit of role. But, you know, extracting from the vagaries of

the data, what do you think underlying monthly job growth is right now? I still think it's in the 175 to 200 range, closer to where the average was in December than where it is now. Right. Okay. And that feels like it's consistent with underlying labor force growth. I'm mixing and matching employment series here now. But unemployment is, it was 3.7%, 3.7% and rock solid, right? I mean, it hasn't budged all that much in, I think, two years, right? It's been pretty amazingly low and stable. Yeah, that's right.

Okay. All right. There was also a bench, so-called benchmark revisions. You want to describe that just a little bit? It turned out it didn't really change the picture very much, but I think it's important just to call that out, too. Again, adding to the storyline that there's a lot of statistical things going on in this report that make it a little bit more difficult to interpret.

Sure. So once a year, the Bureau of Labor Statistics benchmarks the employment data that happens with the release of January data in the beginning of February every year. And that's essentially a process of setting the level of employment to match what we get from the QCW program, the quarterly census of employment and wages, which is a almost full universe, a full census count of employment. So what happens is that you have to look backwards pretty far. So the level for March of 2023 was benchmarked to that QCW level. Right. So the level of employment that had been previously reported by the payroll survey is adjusted. to match that new March employment level, everything forward of that. So from April, 2023 through December, that data is then reestimated off of that new level. So when you're talking about the revision that happened in December, it's the results of not only the sort of normal reasons for revisions where you get additional sample data coming in

over the next two months, but it's also sort of confounded by the benchmark change as well, where we're sort of estimating job changes off of a different level of employment than we had before. To your point, it didn't have a huge impact this year as a small downward revision sort of by historical standards. I think it shaves something like 20,000 jobs a month off of the average 20, 23 gain. So, you know, in terms of I think what we're thinking about and what's important moving forward, I'm not sure that it really impacts the story much at all, but certainly does convolut some of those changes and revisions that we're talking about.

Okay. All right. Chris, what do you think? Anything is any gaps in Dante's assessment here? Anything you'd call out that he didn't call out or? No, not really. I think he covered some of the cross currents, as we mentioned, that payrolls are strong, but the work hours are lower.

So the average, there's an index of hours. that actually total hours, that actually fell, right? Aggregate hours, sorry. So, you know, we hire more people, but they work less. We have some conflicting signals there. I think the average dollar earnings, certainly getting a lot of attention in the markets, but again, to Dante's point, I don't know how much to read into that for one month, but certainly something on the Fed's mind that we need to follow closely. here. Again, I don't know that at this point, I don't think the report changes Fed policy of what they plan to do. There's another report before they meet again in March. Yeah, well, I'm sitting there

eating my cereal. I had my blueberries. I had my raspberries before 8.30. I wait till 8.30 to pour my cereal so I can, you know, look at the report while I'm, you know, eating my cereal before I tweet out something. And I see 300, is it 355,000? Was that the number? 353. Yeah. 3503. And I go, ooh, whoa. The immediate thought in my mind was, well, everyone's now going to think the economy's going to overheat. Yeah. Everyone has been saying economy's going to go into recession. That obviously is not true. But what could happen is the economy could rev back up and inflationary pressures revive. And the Fed not only doesn't cut interest rates like everyone's widely expecting, it has to start raising rates again. You know, kind of the,

and I think that's not a, you can't rule that scenario out. That's a scenario. So I'm looking at that. And then I can see the average hourly earnings and I go, oh, my goodness, that, you know, just adds to that concern, right? That, okay, average hour. At, you know, four, and a half percent year over year, that's kind of on the high side of the comfort zone. I say it's north of the comfort zone because you want earnings growth to be consistent with productivity growth and the 2% inflation target. And if you do the arithmetic, that comes in south of four. It's not north of four, certainly not four and a half percent, that kind of thing.

Unless the productivity we saw this week sticks, right? Yeah, exactly, exactly. That could be the case. Well, I'm just, I'll come back. I'm telling you that my thought process, it's taking me a long time to describe what was happening in my mind in nanoseconds, but, you know, this is kind of my thought process. And they go, oh, but look, hours worked fell and hours worked is pretty low in the grand historical scheme of things. I mean, I think is it 34.1 hours? That's the average weekly hours, 34.

That's correct me if I'm wrong, Dante, but if you look in history, at least starting the last decade or so, that's really low. I mean, you have to go back to the teeth of the pandemic shutdowns to find it as low as that. Am I right? Yeah, I mean, it basically only happens in recessions. You know, if you look back in recent history, you only get hours worked that low during a recession. Okay. And then I look at the household survey.

Okay, you know, the payroll surveys, the surveyed businesses, and we all look at that first, that's the $353,000. Then we go, okay, let's look at the household survey. It's a survey, I think it's 60,000 or so. I think it's maybe more than that. Maybe it's 80,000 households. I can't remember. And we get a, that's where the unemployment rate comes from,

but we also get an estimate of employed and employment and labor force. And if you put, that declined, a household employment actually declined, I believe. And if you, correct me if I'm wrong, Dante. Am I wrong? So it did as reported, but they changed the population controls in January and they don't actually revise the historical data. So they do publish an estimated change if you sort of remove the effect of the changing population control. So if you do that, the employed series was actually up in the household series. Oh, but but if you put it on a payroll survey basis.

That I actually did not look at. So yeah, you go take a look at it. It's a big decline. Okay. So maybe we even I'm pretty sure even with the population controls. I mean, I'm not I'm not sure they published that data, but I'm guessing because the decline in the household survey based on the same kind of measurement as the payroll survey, I'm speaking from memory, but I think it was down 250,000 jobs, something like that. And, you know, even with the population controls, I bet you it's still down. So I guess my point is, you know, I immediately go in one direction, then I go in the other direction, And then the bottom line of all this ziggin and zagging is,

eh, nothing's changed. The economy's fine. The economy's fine. And prospects are good. Okay. I mean, anyone disagree with that assessment, bottom line assessment? No. No.

Yeah. Did you revise up your December getting this? Did I revise up my December? Oh, because there were upward revisions for the December number, although some of that's convoluted by the benchmark revisions. Yeah, no, no, because I don't want, I want just right. I mean, the number number previously was just right. Now it's not quite just right.

So actually diminishes my giddiness a little bit. Okay, fair enough. Although having said that, I think we might need to start revising or thinking about what is the sustainable level of employment growth, at least for the, you know, near-term, You know, not forever, but, you know, next year or so going back to the fact that we're getting so many immigrants into the country, and that looks like it's really juicing up labor force and allowing the economy to create a lot more jobs and otherwise would be the case without generating inflationary pressures.

Oh, and the other thing I just wanted to point out, going back to wages, we got the employment cost index this week, didn't we? The ECI. We did. Yep. Yeah, it's all a blur. So what did that say? And when you put much more weight on the employment cost?

index and the average hourly earnings number? I would. Yeah, and it actually came in slightly below expectations for the fourth quarter year over year growth at the end of 2023 in the ECI is 4.3% for private industry workers. And that's, you know, so that's obviously not that far off from the four and a half percent here, but the sort of pattern, I think, makes a lot more sense in the ECI. You know, it peaked at 5.7% back in mid-2020 and has been on a pretty stable downward trend to 4.3%, right? It looks like it's still moving lower, whereas in average hourly earnings, there's a lot more noise month to month and, you know, it sort of bottomed out around four

and now looks like it's coming back up again. So just, I think it's a little bit more confusing to try to figure out what's going on. Yeah. So the ECI felt, you know, I definitely is, and it's just, I think you said it was 4% on the nose, wasn't it? ECI is 4.3% year over year. Okay. And then a quarter of a quarter annualized, I think it was, I think it was 4% on. probably around 4%. Yeah. And that, I'd say, is very consistent with kind of the Fed's inflation target, given underlying, or given where productivity growth is at certainly at the moment. Okay. Okay. So, you know, bottom line, a lot of noise. The signal, though, is the same. The economy is fine. And all the trend lines, at least in the near term, look pretty good. And anyone disagree with that?

No, no. Okay. Chris, I don't have you been following markets this morning? How are they taking this? What are the, is there interpretation similar to our interpretation? What's the stock market doing? What's the bond market doing? Do you know?

The initial reaction, I haven't checked recently, but the initial reaction was some readjustment of the Fed's reaction here, that March is clearly off the table in terms of a rate cut. and increasingly, you know, pushing it out to May, even June. Right? So bond yields rose equity market fell. I don't know. Again, might be, might have already. Yeah, I'm looking right now.

Adjusting right now. The stock market is basically flat. The S&P bows down, NASDAX up because we've got great earnings from Amazon and the meta. Meta, yeah. And this SMP is up a little bit, a little bit of green. But the big change is in the 10-year treasury yield. Although that was weird. That's weird too because it has been falling pretty sharply in the last couple of days, which I quite get.

I didn't understand. And now with this surge today with the employment report, I think the 10-year treasury yield I'm looking right now, it is just over 4%. Yeah, 4.04%, which is exactly where I'd expect it to be, right? So I'm not sure. I'm not sure what to read into that. There's some noise this week. Right. Right. Right. Okay. Well, you brought up the Fed, the Federal Reserve Board, and they had their meeting this, the FMC, the Federal Open Market Committee, had its meeting this week to set monetary policy. And no surprise, they didn't change policy. I guess the big surprise, if there was one, at least to some market participants, was that the Fed, at least Chair Powell, J. Powell, indicated that March rate cut was unlikely.

to happen. Any takeaways, Chris, from the Fed meeting that you want to point out? Was that a surprise to you? No, I didn't think March was going to happen for a while now. Obviously, there's still some room here to make some adjustments. But yeah, I don't think the Fed's statement was all that surprising. I think Powell was, as expected, a little bit cautious in terms of monetary policy going forward, really need to see inflation coming down solidly towards the 2% target for sustained period of time

before they rush in to cut. Dante, anything on the... It didn't seem surprising. I mean, it seems like the sort of natural progression of them shifting language in favor of, you know, cutting at some point soon, you know, a couple months ago, there was still. rate hikes on the table and then they've sort of gradually taken that off the table and, you know, but still making clear that they're not immediately going to cut. So I would assume in March, you know, barring some major change in data coming in that they're going to sort of

increasingly push that language in favor of rate cuts starting, you know, in May or June. Right. And I think, you know, we have in our forecast and have had in our forecast a, the first rate cut being May, thinking that, yeah, they'd probably be cautious cutting rates, at least initially until they're absolutely sure that inflation is back to target. But the inflation statistics all feel like they're moving in the right direction here, right? I mean, the core consumer expenditure deflator, a measure of inflation, which is the measure the Fed uses for gauging its 2% inflation target, that was a little south of 2% I think annualized over the last six months of last year. So I'm sure that overstates the case. I don't think we're there yet. I don't think we're

at the 2% target, but we're close and closing in on that target, I think, you know, relatively quickly. Here's the thing, though, that I'm in a little bit of difficulty with. Okay, you're the Federal Reserve. You have two objectives by law. Your mandate is one, full employment. You want to keep the economy at full employment. I'd say, correct me if I'm wrong.

mission accomplished, you know, 3.7% unemployment. We've been there, sub 4%. We've been between 3 and 1⁄2% for two years, two years, two years. Unemployment is low across every demographic. I was just looking at some of the unemployment rate for different ethnic groups, and they're very low. So I think we can all conclude full employment. The second mandate is getting inflation back to target. They've set the target at 2%. And as we just discussed, we're not quite there there yet, but we're pretty darn close. And it feels like we're going to get there, certainly by the end of the year, probably may even be earlier than that, sometime in the second half of this year. So if that's the case, you're now on the FMC at the Fed and you're, you know,

September, October, November, December, you've achieved your mandate, you've achieved both objectives, full employment, inflation, and target, wouldn't that argue that the federal funds rate, the interest rate the Fed controls should be at its long-run equilibrium rate, meaning the so-called R-star, that rate that's consistent with monetary policy, neither restraining or supporting growth? And doesn't, I mean, all the estimates out, the Fed's estimate of what our star is is 2.5%. That's at least implied in their forecasts that we see every quarter from the summary of the economic projections. That's where they put the funds rate at in the long run, 2.5%. I suspect it's higher than that. In our forecast, in our forecast we have it at 3.

But okay, let's say say 3%. Funds rate's currently 5.5. That's a pretty big gap between 5.5 and 3. what does that mean? Chris, any views on that? I mean, I've got to view what it means, but what does it mean? I think you're, if that really was, if things stuck at that, at that level, we are at equilibrium, then yes, it would, by definition, it would suggest it has to be higher. R-star has to be higher. Higher than three?

Yeah. If indeed, we're cruising along and everything is just, You know, inflation is... Oh, that's your view. Your view then is that the funds rate is going to settle in at a much higher level than the Fed's 2.5% and our 3%. Well, I'm not convinced that that's equilibrium, right? Yeah. I think there might be more weakness ahead, right?

Okay. So I think that... Okay. I don't think we stick at 4 or 4.5. I think we're... Right. That's interesting. Okay, that's not my takeaway from all this.

Your takeaway is maybe the equilibrium rate's a lot higher than we think it is. It's not two and a half. It's not three. Maybe it's four. Maybe it's four and a half. Well, no, I don't, well, what you described was a world where we are at equilibrium, right? Unemployment is fixed. Inflation is not, is, is solid, right?

Well, that's the world that's the world that our forecast says we're headed to. and that's the world that it looks like that's coming, right? That feels like the world that's dead ahead, no? Yeah, well, but our forecast suggests that the Fed does have to cut in order to hit that objective, that we do get back to 3%. Well, I guess, well, no, this is, okay, Dante, what's your perspective on this? Yeah, I mean, I think I see what Chris is getting at. I mean, is there, is the expectation that inflation stays on this glide path and just

stops at 2% if the Fed doesn't do anything. I think that's what you're suggesting. Could that be possible that we're just in equilibrium now? Inflation gets to 2% and stays there, even if the Fed does nothing. I don't think that's true. So our star is not 5.5%. No, to Chris's point, like our forecast has inflation getting back to Target and staying there, but that's under the assumption that the Fed obviously starts cutting rates and goes down to 3% over time. That's what's necessary to sort of keep inflation around 2% instead of it falling much below that. You know, is it 3%? Is it 3.5%? I mean, I think that is probably a fair debate, but given how much room there is to cut to get to 3% at this point and, you know, it doesn't

feel like the inflation dynamics are such that it's going to go to zero all the sudden if the Fed doesn't do anything. It feels like inflation will still stick, you know, somewhere in the positive range, even if they stayed at 5.5%. So, yeah, I think there's, like you said, it's a, it's a big gap that you're talking about closing and what impact does that have on inflation over time if you do that. Okay. Well, my sense of what this means is the Fed is going to have to be cutting rates very aggressively in a short period of time.

And the longer they wait, the more likely they're going to have to be cutting, you know, they run the risk of causing the economy, the banking system, the financial system, the economy to start to really weaken. and seize up, and they're going to be under pressure to move very rapidly when they start to move. So it may not, like in our forecast, we've got the Fed beginning to lower rates in May. They lower rates four times this year, a quarter point each time, four more times in 2025, a quarter point each time. Then I think a couple times, you have to do the arithmetic, a couple times in 2026,

and you get back to three and a half percent, or excuse me, get back to three percent. percent. That's the equilibrium rate in our forecast here in the immediate future. I guess what I'm asking or arguing or just wondering about is maybe they have to go a lot faster than that, you know, I mean, because you've hit your mandate, right? And if you, if the R-star actually is 3%, then you're playing with fire, you know, with keeping rates elevated for an extended period. You're going to have to cut rates a lot more quickly than our forecast would suggest, which is very consistent with, I think, most forecasts of the funds rate going forward. But does that, go ahead, go ahead.

But does that, you know, this idea that cutting rates much faster, does that fit with a labor market that's adding 200, 250,000 jobs a month and wage growth is on the upper end of 4%. Isn't there some concern that if they start cutting rates more quickly than we expect that that has some sort of positive impact on a labor market that already feels like it's running, you know, on the verge of hot, right? Well, then what you're arguing is that our star is a lot higher. You're arguing that the economy is going to be much more resistant to the interest rate, to the high interest rates, and that our star is not two and a half, it's not three.

It's something a lot higher than that. It's four. It's four and a half. That's what you're arguing in that scenario. Yeah, I guess. Aren't you? I mean, right? Well, right. If the labor market can stay strong with rates at five and a half, then sure, I guess that's an argument. Yeah. Yeah. Right. So that could very well be the case, by the way. I mean, the economy does feel like it's rate insensitive for lots of different reasons, which we've talked about. Like households and businesses have done a very, and I'm speaking aggregate and aggregate with a broad brush, not everybody, but households and businesses. have done a very good job locking in, did a very good job locking in the previously low

record interest rates. And so even with the higher rates that the Fed has engineered here over the last couple of years, you haven't really seen debt service, you know, the cash flow businesses or the income of households going to servicing debt rise because they've locked in. So it makes them less. There's other ways that higher interest rates affect the economy, no doubt about it. But that's a way, an example of why the federal rate, the equilibrium rate actually might be a lot higher. So, you know, I guess what I'm saying is either the equilibrium rate is a lot higher or they're going to be cutting rates a lot faster than anyone thinks they're going to be cutting, you know, once they start cutting. And the longer they

wait to cut, the faster they're going to have to cut, you know, to get, to make sure that they don't wreck the economy, push the economy. Again, if our star is higher. Is that, am I, am I, am I, am missing something, Chris? No, I guess I'm thinking of what is the long run, right? What period? So it could very well be that our star is 3%, but to your point, it just will take this cycle, it's going to take a lot longer to get there. Right.

So our star over the next couple of years may in fact be closer to four, right? But then I assume that these locking effects in terms of the interest rates on housing, all the cash that households and corporations have that might be buffering some of that transmission mechanism of interest rates, that that will eventually wear off or that will adjust. But to your point, I think it may take a while to get there. Yeah, and I think this is a statement that really meant to be a question. Uh-huh.

Or maybe it's a question that is meant to be a statement. I'm not sure. Either way, I'm going to say it, and I just get your reaction. I don't think we should think of our star as this kind of in a long run context. I mean, in terms of its usefulness for the conduct of monetary policy, who cares about the long run? I don't care about the long run. I don't care about, you know, on average over the next 10 years. What I care about is what's our star like over the next year or two, you know, that's what I care of.

Okay. All right. So more of a dynamic, our star. Yeah. Yeah, and that's how I think that's how I would think about R-Star. It's not this immutable thing etched in concrete, you know, and changes very slowly over time. It evolves, you know, over periods of time. And so it could very well be the case that, you know, in 2024, 2025, our star is not,

I don't think it's two and a half under any circumstances. Right. And it may not be three, which is our forecast. It actually may be four. before an half percent, you know, something like that. So anyway, that was a good thing to be a reasonable conundrum to conundrum over, don't you think? Yeah, absolutely. Okay, absolutely.

Okay. Okay, anything else on the Fed? No? Okay. Let's play the statistics game. and the game is we put forward a statistic the rest of the group tries to figure that out with questions, deductive reasoning, and clues

and the best stat is one that's not so easy we get it immediately and one that's not so hard we never get it and if it's apropos to the topic at hand, all the better. Dante, what's your stat? So I'm going to preface this by saying this is a little unorthodox but I'm going to use it anyway. 517,000.

employment related it is employment related but not from today's report it's it's backward looking a little bit is it a measure of jobs it is a measure of jobs yeah some revisions it's not revisions it's a

it's a number that was published at some point in the in the past oh it has nothing to do with the revisions no and is it a change in employment or is it a level? It's a change in employment, yeah, job growth. Is it annualized change, a period, over a year?

No, it's a, it was a monthly gain at some point in the past. Oh, oh, was it like one January back January of 2021? One. Just not that far back. Oh, really? Did we get a 2022? January 2020? Even closer. January 2020. Yeah, January 2020. We added 517,000 jobs, which was at the time a huge upside surprise. It's eerily similar to today. So at that time, job growth was stronger. You know, underlying job growth, the three-month average coming into that was about 300K. And we got 517 in the initial report. You know, today coming in. in job growth was averaging 165, and we got 353, right?

So you got about 200,000 above trend in both cases. I went back and looked the title of the podcast from a year ago when we talked about January, jaw-dropping January jobs. You know, so I feel like we could have- We should do that again. I could have copy and paste it, I think, my conversation about the release. It just feels very much the same conversation that we got this big number in January, and then obviously it didn't ultimately matter that much for the rest of the year, right?

job growth average 250k in 2023, so the 517 didn't ultimately matter all that much. So all that is just to come back to, I don't think this number today should fundamentally change the picture about what we expect to happen in 2024 because we've seen the story before. Now, that is so interesting. Is a 517,000 job gain held up with these revisions? It's now at 482. I mean, it's still very strong. It'll come down a little bit, but it's still very strong.

Oh, and so it just feels like this is a seasonal adjustment issue. Yeah, I mean, to your point, January is always tough. I mean, I did look at the seasonals. There doesn't appear to be any big red flag, but January is the month where there's the biggest change in employment on a not adjusted basis. And so, you know, the seasonal adjustment factor matters a whole lot in January. And I think you can get sort of these odd numbers cropping up, you know, because you have such a big change in employment happening.

Okay, this may be a little unfair, but can you explain to us how the pandemic could mess with the seasonal factors? You know, what's the mechanism through? And I'm assuming that January is always difficult, but the pandemic probably has scrambled things to even a greater degree. Do you agree with that? And if you agree with that, can you explain it? Yeah, I mean, I would generally agree. I mean, in sort of simple terms, right, seasonal adjustment looks at what usually happens in this month of the year, right? So in January, we usually see job growth or, you know,

jobs fall by about two and a half to three million, right, on an unadjusted basis. And so seasonal adjustments looking at that sort of average change and it's applying an adjustment to try to sort of get rid of the seasonal component of that, right? So that big part of that drop is just what happens every January and trying to leave you with the trend piece, right? What's sort of new this year relative to those prior years. So because it's based on this idea of comparing a change now to a change in recent history, obviously the pandemic had an effect on those normal seasonal patterns. And so the BLS has had to work hard at trying to figure out, you know, do we exclude some of those

years? Do we include them? You know, are those, you know, the 2020, 2021, 2022 period, you know, are those representative of the seasonal patterns that we expect to see moving forward or are they sort of fundamentally different. So it just leaves a lot of room for, you know, sort of adjustment assumptions around which seasonal pattern is right. You know, do we expect the seasonal patterns to, you know, sort of flip back and look like they did in 2018 and 2019? Or do we think things have shifted since then? And should they really look like, you know, they did in 2022 and 2023? So to your point,

I think it just leaves more room for interpretation, more room for this possibility that you get these sort of odd numbers that might not be really, you know, representative of underlying job growth. Yeah. Okay. That, I mean, that is that is so interesting.

And what's really interesting is I have no recollection of that whatsoever. Do you, I didn't either. I just happened to see, you know, they published the January 2020 number with the January 20, and I saw it was big. And I'm like,

I don't remember that. And I went back and I looked at what I wrote last year. And I was like, oh, yeah, this was a big, it was basically the same story. So.

Yeah. There's only kind of a similar kind of story coming out of the financial crisis. I think it was, I can't remember what year it was. It might have been 2011. So that was, you know, in the wake of the financial crisis. And we weren't quite sure whether the economy was kicking into gear or not. And we had been getting a few months of positive job growth, a meaningful job growth. And then August of 2011, it was like zero jobs, no jobs created.

And everyone kind of went into a tizzy, you know, oh, my gosh, you know, the world's, you know, not what we thought it was. And, of course, that was a head fake, just like presumably this was kind of a head fake. And, you know, it goes back to measurement. August is also a very difficult month to measure for the BLS because businesses are, on vacation and, you know, they get low response rates, which by the way, I don't know, did you look at the response rates to this survey by any chance? Maybe you can take a quick look. I'm really curious if the, what the response rates were to the survey, because that also plays a role. Okay, that was a really, really good one, a really, really good one. Chris, what's your

stat? 3.2%. 3.2% in the employment numbers? No. Is it jobs employment related? Are you? Is it a number to rub something in my face? Could it be productivity?

Indeed it is. Nicely done. Nicely done. Explain? That is Q4 output per hour productivity growth annualized. 3.2% is still a very strong number. And this, I chose this because it's really the key to the outlook, right? If productivity growth can remain strong, above 2%, certainly that makes life easier for the Fed,

makes life easier for consumers, we can sustain higher wage growth. So this is an important number of watch here. Well, you've got to explain Dante's comment about rubbing his... Oh, well, we have... We have a eye, whatever description. We have a long-running debate. Slap them in the face, you know. Long-running debate on future productivity growth, right?

We had historically prior to the Great Recession, you know, sizable productivity growth, closer 2% in the decade since the Great Recession. It's a great recession until the pandemic. We had very anemic productivity growth. And so that certainly is a concern. But since the pandemic, we've seen some revival, right? Well, actually, a little bit of fits and starts, if you will. So we initially had a big surge in productivity during the shutdowns, right? We cut out a lot of labor, but continue to produce at a high level.

And now, so we said a little bit of a pullback. And now we've seen somewhat of a resurgence here. And there's a lot of debate whether this is going to be sustained productivity growth. Is this just, again, due to some temporary adjustments, or is the shift to remote work or the adoption of AI going to kind of usher in a renaissance of stronger productivity growth? I'm on the pro technological change camp here that I think we will get some boost. and Dante is a little bit more dower in terms of the outlook here. Dante's always dour. I don't think that's fair, is it?

Am I, in my negative all the time? That's a little harsh, a little harsh. Maybe he's just a little more, he's cautious. Let's put it that way. Maybe that's fair. Yeah, cautious. So you want to, what do you say, Dante? I mean, I mean, I'm not ready to change my outlook just yet, but I mean,

I think harder to stick by it here quarter by quarter. I mean, we keep getting strong output growth and hours are basically flat to slightly down. And so that, you know, leads us to the assumption that productivity is much stronger. I think my question still is, is it sustained? I don't think, obviously, I think Chris would agree out of 3.2% is sustainable. But so quite what is sustainable over a year, two years, three years? You know, is it is it 2%? Is it above 2%?

Is it below 2%. So the data is volatile. I think it's hard to get a read even over four quarters sometimes about what's really going on. So, yeah, I'm getting closer to maybe edging off my pessimism about productivity, but I'm not quite there yet. Although I'll just point out, I did a little back of the envelope. What do you think average annual productivity growth has been over the past four years? So before the pandemic, go back to 2019 Q4, compare it to productivity. in

2023 Q4, so that four-year period in the post-pandemic, what do you think average annual growth in non-farm business productivity was during that period? And don't Google it,

don't. Since 2020. Since Q4, 2019. I picked Q4-2019 because it got hit in Q1 with the pandemic. 17, one-eight?

Yeah. I was going to say two. 1.6% per annum. What was, Was it in the four years prior to the pandemic? So go back to the fourth quarter of 2015, compared to the fourth quarter of 2019. Cal State probably, one and a half.

1.7%. So, I mean, I don't know. I'm kind of my intuition and my hope is consistent with Chris's worldview here on productivity. I think he's right. But I don't know. I think it's way too premature at this point. I mean, you know, would very much. I mean, I had thought, you know, remote work would be productivity enhancing.

But, I mean, the evidence that we've gotten so far would, is not supportive of that, right? If anything, it might be at least so far a bit of a constraint on productivity. And AI holds a lot of promise, but it's just promise. I mean, at this point, I mean, it feels like more hype than anything, you know, up to this point in time. I don't know. Chris, what do you think? So pessimistic. What's going on, Mark? I appreciate you making my point for me, though. Thank you, Mark. No, I'm just saying. I mean, and, you know, I do think all the quitting that went on,

that probably has helped out productivity to some, it has to have, right, to some degree. I mean, people got into jobs that, they quit jobs that they didn't like, they wasn't suited to their skills and education. talents and they moved in the last couple three years, four years to jobs that are more suited. So that after you get up a learning curve, you would expect that to help productivity growth. Maybe that's what we're observing. But I don't know. That's a one time deal then, right? It's a one time deal.

Yeah, it's exactly right. Anyway, so my intuition is on the side of Chris. But also all the work that we've alluded to, we've mentioned this in the past, Dante and I did this work. trying to understand the demographic effects on productivity and found that, you know, the aging population and aging workforce does is a constraint on productivity growth. And that should, that constraint should, it's still a, the aging is still weighing on productivity, but over time it's becoming less of a weight, right? Yeah, you're going forward.

But, but I don't know. I don't think we've gotten there yet. Anyway. I disagree with that thesis, by the way. Which, oh, the aging. As I celebrate, as I celebrate some milestone birthdays. Oh, I said. Yeah.

I rejected wholeheartedly. No, I think you were quite in the age bracket that we were focused on. Unless you're really fooling me. I don't know. I think I'm the guy who's in the age bracket who's the problem. And obviously you're lifting us all up, Mark. Yeah, exactly. Let's just be fair.

There's the optimist. Beautifully done. There it is, right? I appreciate. that. Very kind of. Okay. You ready for my stat?

308. Sorry, what? 308. 308. No thousands, no units. No, no units. 308. Exactly,

308. Just a unitless figure. Well, what do you mean? Unitless? Is it something... It's the number is 308. Is it from something that came out today? No, it didn't come out today.

This week, though? It came out this week. Okay. Yeah. Is it an index? No. Is it an electoral vote count? Yes, it is.

Oh, there it is. Yeah, that's right. That is excellent. Great job. Oh, wow. Big and deep. What made you think that? That was good.

That was really good. I was thinking the next topic. The next topic, the presidential election. Yeah. So 308 is the number of electoral votes we are projecting President Biden will get in the 2024 election. That's based on our presidential election model, which we've been producing this model at the state electoral college level now.

I think we've done five, six elections. We dusted it off. updated it, we improved it, and with, as I mentioned earlier, Brendan Lacerda, our colleague and Justin Begley, came out with a report. We had a webinar, and it's 308 electoral votes. Just for context, you need 270 electoral votes to become president of the United States. So that's a pretty, you know, he got, Biden got, just for context, Biden got 306 electoral votes in the 2020. election. And so 308 is pretty good. It's close. You know, it's still a very close rate. Five states are within one percentage point. So, you know, they're just enough to swing most of them

over to Biden, but they are very close. And obviously, there's a boatload of assumptions we're making here in forecasts. One of the key assumptions is around turnout, turn out, turn out, really matters, and we're assuming that the Republican turnout is consistent with the turnout that occurred in 2020. And it was pretty high. There was a lot of Republican enthusiasm, and Democratic turnout was very high as well, but we're assuming the same. And, of course, if it's even higher than that, that could swing the election.

The other assumption is around third party candidacies. You know, we're assuming that the number of votes that go to the third parties in the 2024 election is similar to recent elections. And that's been pretty low. And that could be, we could see something very different in this election. There's a lot of potential third party candidates. You've got Robert Kennedy out there. You've got Cornell West, no labels. that's the kind of the nonpartisan self-appointed nonpartisan group that may come forward with a candidate.

And if that happens, typically that hurts the incumbent. So if we get a lot of third party votes this go around, that could be a problem for Biden. But the reason why Biden wins is the economy. You know, in our forecast for where the economy is going to be as we approach election day, we expect the unemployment rate to remain low, real incomes after inflation income incomes to continue to improve. But here's the two variables that matter a lot, which I found a little surprising. Well, in prices, gas prices matter a lot. And if right now the cost of a gallon of regular unleaded is three buck 15 cents, if it rises to closer to $4 a gallon in a consistent way, not just for a day or two or a week or two, but for, you know, a couple, three months, $4 or more, the election will swing to Trump, all else being equal. So that gives you context there. And on the more, the other key variable is the mortgage rate. and, you know, right, it had been at 8% the 30-year fixed. Now it's down below seven.

If it goes back to 8.5% and stays there for, again, not for a week or two, but for a couple, three months. All else being equal, that'll swing the election as well. So the election, we expect Biden to win, but the election is going to be very close and could turn on a few things here. It goes in the opposite direction. What do you think? I guess a question, is it just the level of gas prices or is it the trend? They're coming in. It's the change in.

It's actually the change in. Change in. Yeah. And that's a great point. Most things, most economic factors, variables, it's not so much the level. Although with the mortgage rate, it is the level. We tried to change too, but it's the level. And that may go to affordability.

If you're 8% plus, first-time homebuyer is just impossible with these high house prices to afford to buy a single family home. So they're locked out. So that's maybe why the level matters more. But for most economic variables, it's the change in. We also have real household income in the model. And it's the change in real household income after inflation income per household. interesting. And what's the window?

You said three months prior to the election? That's really the key. Yeah. It's not that people are looking back over. Well, it's kind of the change over that year landing in the kind of the second, third quarter of the election year that matters. Okay. Yeah.

So my expectation is that turnout's going to be low this year. Really? Why? Why do you say so? Because it's a repeat, right? I don't see a lot of enthusiasm. The quantities I expect that the ratings on any debate are actually going to be low. Because I don't see a new message from either candidate.

I think everyone kind of knows what the message is. So that's my take is that it's going to be hard to generate enthusiasm. So what does that imply for? You talked about higher turnout, lower turnout? Yeah, I mean, yeah, I think it, I mean, if it's, it's kind of, it's relative, whether Republican or Democrat, incumbent, you know, a challenger, if, if the, if the say by President Biden's turnout, Democrat turnout is lower than typical or get dinged, it's kind of the relative turnout between the two. Oh, that's interesting that you think that. Because the kind of the rule of thumb historically is you go look at the midterm election, the turnout in the midterm election, and that gives you a really good forecast for what turnout's

going to be for the upcoming presidential election two years later. And, of course, the midterm election turnout was very high. And that would suggest high turnout for 2024. But you make a good point. That would be very interesting. But we'll see. We're going to update the results every month as we move forward here. and we'll do further analysis on the candidate's proposals as they are put forward and try to assess their macroeconomic consequences.

Okay, good. Anything else? You know, before we kind of wrap it up here, we'll keep this relatively short, this podcast relatively short. There was a plethora of other economic data that came out this week. Maybe we'll end this way. Of all the other economic data that came out, what would you call out for listening? to be focused. I've got a couple that are on my list.

Dante, do you have anything that you want to point out that we didn't talk about? Yeah, I think something sort of looking ahead to February and beyond. I don't typically put a ton of weight on the Challenger report, you know, layoff announcements, but they did jump pretty significantly in January. Aside from last year, it was the highest January total since 2009. Layoff announcements were just over 80,000, which sort of mirror. is what we saw at the beginning of last year as well, although the reasons cited appear to be different. You know, we had an uptick in layoff announcements in the first quarter of 2023, and it was largely,

you know, the reason that was cited was deteriorating economic conditions, at least in January this year so far, the biggest reason cited was restructuring. So it's not that firms necessarily feel like, you know, conditions have deteriorated, but they're, you know, sort of cost savings, trying to, you know, right size themselves after a year of pretty strong job growth. So I'm not sure that it has the same, you know, obviously there was a lot of negative feelings about where we were headed at the beginning of last year as, you know, sort of headline layoffs were, were up quite a bit. I'm not sure this generates that same kind of negative outlook for people, but I think something to keep an eye on. And, you know, some of that could carry over into the

February employment reports. Uh, UI claims are creeping up a little bit over the last couple weeks off of a very low level, admittedly, but it was sort of fit with this idea that late in January, we saw layoffs start to pick up a little bit, and so could give some headwind to February's employment growth. Yeah, have you heard this criticism of the UI claims? I mean, UI claims, initial claims from employment insurance have been very, very low, kind of around $200,000 per week.

As you pointed out, they pushed up a little bit in the last couple weeks, but, you know, they're still low. That maybe it's kind of sending a bias signal because one reason is UI eligibility is down. And I have not investigated this. I'm just repeating what I've read. And the other factor is that because of high inflation, UI benefits on a real basis are not that great.

And therefore, people much rather go get a gig job or some temporary job that's going to pay more and better than the UI because it hasn't kept up with inflation. Does that resonate at all with you, those arguments? It does. Yeah, I think it has been years. But I did some work on the eligibility issue. And I think it does have a sort of meaningful, well, meaningfully depress, you know, sort of the level of claims that we can see at any one time because, you know, eligibility has been cut back pretty sharply in a fair number of states over time. I think the other thing, too, is just, you know, the unemployment rate's 3.7 percent, right? So even if you have an uptick in layoffs, the labor market certainly seems more capable of absorbing people that are looking for new jobs much more quickly, right? So if you think your outlook to find a new job is pretty good, you know, you may hold off on even filing a claim because. you think you might land a new job in a few weeks anyway, especially if benefits aren't that valuable given inflation. So I think all of those things together, you know, I wouldn't be

surprised if claims are sort of depressed by those factors. Although I mean, I point out that the jolts, you know, layoffs in the job opening labor turnover survey. Also low, yeah. I mean, really low. I mean, not low, just like really low, consistent with low UI claims. Right. Yeah, it does fit together. Yeah. Okay. Chris, any statistic you want to, because again, there was a plethora of them this past week. Any other statistic you wanted to call out?

Yeah, I was going to call out the Joltz report itself, right, that you alluded to. Just to me, it showed continued strength in the labor market. Job openings remain pretty solid. Nine million quits are a bit down, but that's, again, a bit consistent with the Fed's objectives here. So there's no real surprises here, nothing that screams that there's a real risk of the labor market falling apart anytime soon. Yeah. Dante, any other interpretation of that data? No, yeah. I thought Jolz was positive. We had seen a big dip in hiring and that at least partially reversed. That seems like more noise than anything else at this point. Yeah. Yeah, I thought that was good.

You know, I'll call out the consumer sentiment confidence surveys. You saw the Michigan survey. I think they came out this morning with an update. See a Michigan survey, which has been very, very depressed. And it rose to 79. And just for context, if you go back to November, it was 61.3. So that's a pretty big change in the last couple months. I think the conference board survey, which I like even more than the University of Michigan

survey for reasons we've discussed and we don't go back into. has improved also quite dramatically, or dramatic is too strong the word, has improved meaningfully over the last couple, three months. The other thing that's happened is inflation expectations in the survey, in the University of Michigan survey, continue to move south. And I think they were down again, 2.9% for one year ahead. And I think also for five year ahead kind of inflation expectations, both very good. So, you know, the point being that the economy's been improving looks pretty good, looks very good, but that hasn't really kind of translated into people's perceptions, or at least seemingly hasn't translated into people's perceptions. But even the

surveys now suggest that, well, maybe that's changing. People are starting to feel better about things. Does that enter the election model? It does. I didn't mention it, but we have the conference board survey in there. But the way it enters in is only if it falls to a level that's with recession. So there's a 80, the average, I'm making this up, but roughly speaking, the average through time, and this conference board has been conducting the survey back into the 70s, and you take an average of all the survey responses, it's equal to 100, the actual, that's the index value, right on the nose.

It's now, if it falls below 80, historically, that's a clear, signal you're in recession. So that's the variable that we have in the model. So it falls below that threshold. Just for context, I think, and again, I'm making this up, but memory serves, I think we rose to 114, right, on the survey. Yeah, it's in that neighborhood. We're above average and we're, you know, we're not even in the, you know, recession is not even in the, in the, in, even close to being suggested by the survey. Okay, good. Very good. anything else you want to bring up

before we call it a podcast Chris Dante do you want me to quickly close the loop on response rates I did look it up oh yeah what was the yeah what was the response rate

well so one we should have I don't think we talked about it last month but last month was actually shockingly low on the first release for December data it was the lowest I'm just eyeballing

a table of numbers but I think it was about the lowest first print response rate since 1990 across any month of the year. It was below 50%. So probably shouldn't be surprised that December got a big revision. And even now, in the second release for December, the response rate is still much lower than it usually is. So it wouldn't be surprised to see another big revision to December in either direction when we get the next release of data. For January, response rates, they weren't quite as low as December, but still much lower than they are normally in January. So it opens the door for a potentially bigger revision to January's data as well next month. Probably up to 517. You never know, right? That was the number, right?

517, yeah, 517, yeah, 517. Okay, good. Well, thanks for doing that. Chris, anything else? No, just looking forward to having Mercer back next week. Yeah, it'd be good to have her back. And Dante, always good to have you on Jobs Friday. I really appreciate the insight and expertise.

And with that, dear listener, we're going to call this a podcast. Talk to you next week. Take care now.