Moody's Talks - Inside Economics - Making Sense of the Jobs #

Episode Date: June 8, 2024

In a rare Saturday morning taping of the podcast, Dante and Matt join Mark (where’s Cris and Marisa?) to disentangle the considerable crosscurrents in the May jobs report.  Surging immigration is complicating interpretation of the numbers. Next week’s all-important report on consumer price inflation was also the fodder of discussion, as was Mark’s Washington Post op-ed arguing the Fed should cut rates. Guest Hosts: Matt Colyar - Assistant Director, Moody's Analytics, Dante DeAntonio - Senior Director, Moody's AnalyticsHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn 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, but not the two you might expect. Chris D. Redis and Marissa D. Natale, my typical co-host, are AWOL. And I've got, though, two other colleagues. Thank you for joining, Dante D. Antonio and Matt Collier. Good to see you. Collier. Collier. Got that right, Matt. I would say so, yeah. That was above average. Above average, not quite quite. Not quite. there yet, but a little bit better than average. That's good. It's good to see you guys. Good to see you, too. And thanks for stepping in. We had to do this this Saturday morning, June the 8th. So the day after Jobs Friday, we typically record this on the Friday, but I was at the

CBO Congressional Budget Office yesterday. My favorite day of the year. How did that go? It's really cool. There's a panel of advisors, economic advisors, that provide advice to CBO. And actually, this is, this happens twice a year. They get together, the economists and CBO staff get together and discuss issues that are critical to the CBO work and forecast. And so, you know, very interesting topics, you know, very practical. Well, you know, the CBO, because they're forecasting, right? The economy and the budget, just for everybody who doesn't know, the CBO is the non-artisan group that does the budgeting for the budget forecast for the U.S. And they have to do an economic forecast, right? So they have the same issues, problems that we have in our work. And so it's very, very relevant and very much enjoy.

And the other economists, they're, you know, pretty cool. You know, there are a lot of very high-powered accommodations and practitioners, and it's really a really cool day. But it's an all-encompassing day. I couldn't break away and do the Inside Economics podcast. So that's why we're here Saturday morning. Last week was also, we had our conference, right, Dante? You were there. I was, yeah.

I thought of what you were. You were mono-a-mano with Chris DeReed. He's on productivity. That's right. I missed the session. Well, who won? I think we both tried to claim victory at the end, so I'm not really sure that there was a clear consensus on who won. I think we both felt pretty good about our arguments.

Yeah, and that's the problem with productivity. You can argue both sides of that one pretty easily, right? It's right. Strong, weak, you know, so forth and so on. But you were the skeptic. I am the productivity skeptic of the group, yeah. Yeah, right. And Chris is the optimist.

So I'm sorry I missed that. But you're going to do it again. Are we? Yeah. Oh, you didn't know? Yeah, we've got two more conferences. One in Southern California, I think Irvine and Chicago later in the year. I'm not sure exactly when.

But we're going to reprise the D.C. conference this past week. Gives me a chance to refine my argument. Exactly. Exactly. You get another data point or two. There we go. And those productivity numbers have been on your side. like most recently, right?

Yeah, they haven't looked great recently. So we'll see what Q2 looks like when it comes out. Yeah. Okay. All right. Very good. Okay. Well, the big news, obviously is a jobs report, right?

Yeah. And Dante, do you want to just start us off here? What do you think of the report? Sure. I think it's a good report. You know, in terms of top line job growth, obviously very strong, stronger than expectations. We're sort of back in that pattern that we had in the first quarter of the year where, you know, job growth is, is coming in a little bit hotter than people expect.

Certainly there are some holes in the report that we can talk about and discuss. But in terms of job growth, the broad-based, more so than it has been in recent months, it's still health care sort of leading the way in terms of job gains, but you've got, leisure and hospitality that picked back up again, public sector hiring picked back up again. Professional business services had its strongest month of job growth in a while. So all those contributed to the 272,000 headline job number. Still averaging right around 250,000 over the last three months, which has been pretty stable. Even if you go back a year ago, that three-month average is basically the same as it was a year ago.

So we've had some ups and downs over the last 12 months, but trend drop growth looks like it really has not moved a whole lot over the last year. Revision's were pretty small, not anything to really be concerned about this month. wage growth maybe is one thing that gets people a little bit concerned. I think we had a good month last month. Wages were only up 0.2% over the month in May. That doubled. They were up 0.4%. Brings year-over-year wage growth back just above 4.1% on a year-over-year basis.

Again, I don't know that that's anything to be super concerned about at this moment, but certainly a little bit stronger than I think we'd like to see weekly hours held steady, which I think is probably good in this context. We've seen it deteriorate a little bit over the last six to 12 months. And so, you know, I think holding steady or improving slightly is good at this point. You know, the big unknown, again, comes from the household survey where it looks like you're- We move on to the household survey. I mean, so you've been focused on the establishment survey, the survey of businesses.

And lots of jobs, surprising number of jobs. And it sounded like he said underlying job growth, abstracting from the monthly vagaries of the data is about 250k, is that right? That's right, yeah. Yeah, if you had asked me, you know, a year ago, five years ago, 10 years ago, what job growth, sustainable job growth, underlying job growth would be today, I might have said 50K or 100K, not 250K. Agreed, yeah, I think obviously there's a different dynamic at play on the supply side of the market,

I think, than we would have expected those years ago. where certainly I think immigration is helping fuel the supply side of the labor market more so than we would have thought and allowing for job growth to stay this strong with the unemployment rate, you know, holding steady and actually edging a little bit higher here over the last couple months. So what you're saying is that we can sustain this pace of job growth, at least for as long as immigration remains as strong as it is. So we've got all these folks streaming across the border. They're getting authorization to work. They're going to work. That's showing up on the payrolls of businesses in the numbers we're seeing. So the fact that we're creating this many jobs isn't, it's a good thing.

And it's not a problem because we've got plenty of labor supply because of the immigration that we're experiencing. Yeah, I think so. I mean, we haven't, again, we're seeing that level of job growth without seeing the unemployment rate move lower without wage growth. Actually moving up, right? Right. Actually moving up. Your wage growth was a little bit hot this month, but that's not a trend at this point.

So, you know, it seems like we're able to generate that level of job growth without pushing wage growth higher without the unemployment rate, you know, without the labor marketing tighter, essentially. So that's a good sign. Yeah, before we move on to the household survey, Matt, maybe I'll bring you into the conversation. Any, what do you think of that kind of diagnosis or description of the payroll survey and what's going on there? I think that's all the main points. I think that 250K underlying job growth being surprising we can sustain that and see the unemployment rate tick up. But like I'm mentioning, so just as surprising is the level of immigration that's pulled that whole level up. Right, right.

Okay. Okay. But the report is schizophrenic. The jobs report is schizophrenic, right? Because, as you were just going about to say, about the house. So there's the establishment survey and then there's this survey of households, which is the basis for the unemployment rate. And as part of that, the Bureau of Labor Statistics estimates jobs and labor force. And that's telling a very different story, right? Dante? It is. Yeah. I mean, the, the size of the labor force fell. The number of people employed as measured by the household survey fell by just over 400,000 compared to a, you know, a gain of 272,000 in the payroll survey. The result of that dynamic is that the unemployment rate ticked slightly higher to 4%. That's the first time we've hit that 4% threshold since January of 2022, I believe. So we'd been sub 4% for more than two years at this point. And again, it just, it feels like you're reading a different report when you look at the household survey compared to the payroll survey. Again, it's not, I don't think flashing that a recession is dead ahead, right, with unemployment

at 4%, but it's certainly weaker than the payroll survey in terms of what it's signaling about the labor market. Okay, so why? I mean, the payroll survey saying great guns were creating a boatload of jobs, a household survey saying not so much, you know, that's not happening. where's the immigration effects in the household survey? Yeah, I mean, I think we've touched on it a little bit before, but yeah, I mean, I think the immigration effects are harder to pick up in the household survey, right?

The household survey is benchmark two or the population controls that are used are based on Census Bureau estimates of the population at that time. We know that the Census Bureau estimates of population are severely undercounting immigration today. And so, you know, we're sort of controlling that survey. to a level of population that's probably not accurate, which is essentially pulling down those estimates from what they could be. Again, the effect of that probably has minimal impact on the unemployment rate, because if you're sort of misrepresenting the size of the labor force and the number of people employed

and the unemployment rate all to a similar degree, it shouldn't have a huge effect on the sort of calculated rates that we get. And I think that's part of why we haven't seen the unemployment rate drastically start shifting around as a result of this, but it gives you these sort of wacky-looking results in terms of, you know, how are we adding 272,000 jobs, but the labor force is actually getting smaller, and, you know, the employment that we're measuring in the household survey is falling by more than 400,000. You get some of those sort of strange results in level terms, but the unemployment rate still

looks pretty good. Yeah, so just to reinforce what you're saying, you're saying the household survey actually isn't picking up the immigration because ultimately, that survey is, let's call it, benchmark to actual population, to population estimates. Those population estimates are coming from the census, and the census hasn't incorporated the surge in immigration that we've seen over the last couple, three years into their numbers. Therefore, they're understating population, labor force, and therefore what's going on with jobs based on the household survey.

There may be other things going on in terms of survey responses by, you know, immigrants, although I've heard that argued on both sides. I mean, one argument is these immigrants, their asylum seekers, are going to be nervous about talking to government survey takers. They just, they don't want, they don't want to participate, although I've also heard the other argument that, you know, they do have a court date. They're here in the country. They're in the country and they don't want to run afoul of the government. Therefore, if a government, the statistician knocks on the door, so to speak, that they're going to respond because they don't want to run skewed to, you know, a government statistical. You know what I mean.

It's Saturday morning. I haven't been hard time getting my words out. I have had my coffee, but I haven't had my cereal yet. So, but you get my drift. Is that, so it feels like the real problem here is the population counts, not the survey responses. Yeah, I would agree. I mean, I think of anything, it's probably, you know, they're less likely to be picked up in the survey in the first place and whether or not they would answer the questions or not. I don't know that it matters a whole lot.

I think they're less likely to be, you know, picked up just because they're just recently into the country until you sort of work your way through that process and can be sampled into the survey. You're just less likely to get talked to in the first place. And so we know that the immigrants coming in have a strong. proclivity to work. And so if you're not capturing, you know, sort of that dynamic of, of, you know, them going to work pretty quickly, it's, you know, going to weigh on some of those labor force and employment numbers as well. Yeah. Okay. Matt, anything to add on the household survey? Dante, I know, I think you've looked at at the 16 to 24 year olds. They're just getting out of college and there was a really wacky number there that I think explains a lot of that decline.

Do you decline in what? The household employment. number. So the minus negative 4. 58, I guess that's the adjusted to CES measure. But, although now you're saying a lot of things that no one understands. You're right.

So, so you're saying household employment fell. And you're saying if I, one thing we have to control, consider is that the household employment definition is

is not the same as the payroll. And if you make a correction to put it to apples to apples, did the household employment number also fall if I put it on a payroll survey-based definition? It did. Okay. And you're saying that fell largely because of a decline in the number of young people working. Yes. And to an unusual degree, I mean, there's a lot of seasonal stuff going on, as you could probably guess.

It's May. Kids are graduating college, high school, picking up jobs. And it was kind of a strength in March and April, almost as if those jobs started earlier. So now in May, when you're expecting a lot, there was not. So there's this huge adjustment negatively to kind of smooth things out over the course of a year. And that explains most of the decline in the household survey. I don't know if you have a difference of opinion there, Dante, but that's how I saw it. No, yeah, if you look at just prime age workers, right? If you look at just 25 to 54 year olds, you know, employment in the household survey actually rose. The labor force actually grew slightly for that group. So, you know, if you sort of take out the more volatile 16 to 24 group and then you take out the sort of more volatile 55 and over group in terms of movements in the labor force, you know, the prime age group looks much better, right? They're working more, they're more likely to be in the labor force than they were a month ago. So I think that, you know, that negative number on the labor force and, uh,

employment is a little bit skewed by what's going on in the sort of youngest and older workers this month. Okay. Okay. All right. But let's take a step back. We've been in the weeds down into the bowels of these numbers. Let's just take a step back. If I look at more broadly at the labor market data,

I'm not really sure what to make of it. I mean, the top line is that monthly payroll employment gain the $250,000 per month. You look at that, you go, everything feels fine. The economy's resilient, strong, creating a lot of jobs. As you pointed out, it's broad-based across industry. That all feels pretty good. And then if you, one other point, if you take the job growth and the growth, and the growth in wages, average hourly earnings, that does suggest a lot of income being

generated. And that income obviously is the fodder for consumers to continue to spend, which has been the key engine of growth. So the fuel for that growth seems to be in place, no problem there. But then if I look at kind of other labor market indicators, I don't feel quite as sanguine. like, you know, hiring rates are way off from where they were a year or two ago. And just anecdotally talking to, you know, people in my world, young people in my world looking for work, it's not, it's not easy. They're struggling. It feels like they're struggling a little bit to find jobs.

If I look at unfil, and that goes to unfilled positions, they're elevated, but they've come down a lot and they seem to be falling pretty fast here. quit rates are down, attempt jobs are down, hours worked are down, you know, everything you look at except for, you know, the job creation, which goes back to the low, I guess the other, the positive is layoffs are still low, but the, you know, the other kind of dynamics in the labor market kind of looking under the hood don't feel particularly good. So how do you add that all up, Dante, in your thinking? Yeah, I saw somebody with a similar sentiment, I think yesterday when I was reading, you know, that said it's not a great, it's a great labor market if you're already in it, but it's not a great labor market if you're trying to get into it, right?

So if you're looking for a job, it's not particularly good because, you know, as you alluded to, there's definitely some softening in terms of the demand side of the market, right? We've seen job openings, whether we believe the job openings level or not, there's a pretty clear trend there that, you know, job opening. have come in a lot over the last 18 months or so. I think it's pretty clear that firms are sort of less interested in hiring today than they were 12, 18 months ago. And so I think the dynamics there are not great. I think it's a question of whether hiring continues to slow, right? Whether this is sustainable, right?

Depends on whether hiring sort of holds at where it is. And it, you know, it's been roughly stable now for about six months. You know, there's a little bit of volatility month to month. But the big decline in hiring looks like it's open. And so if that sort of holds up, we can maintain current level of job growth. You know, the level of layoffs is still very, very low. You know, again, a little bit of volatility week to week, month to month. But I don't think anyone has any major concerns on the layoff side of the equation.

So it's really a question of, you know, is there enough appetite among firms to keep hiring, given, you know, sort of this decreasing level of job openings? And excuse me, will that continue to hold up? I still think so. I think to me the risk is still stronger that the labor market starts overheating again, then it sort of falls off the rails here. Really? Yeah, I think marginally, at least based on this last report, has me a little bit more concerned.

I'd rather see job growth at 200,000 and sort of be sure that wage growth is settling in. And I think it's pretty clear that job growth right now is stronger than that and doesn't look like it's slowing down anytime. soon. I'm curious, Matt, do you have a similar sentiment? The concern being, so right now the job market is doing what we need it to do. It's creating a lot of jobs and it's creating a lot of income. Concern is, well, is it going to, is it weakening from here like I was articulating or to Dante's view? It's the risk is that re-accelerates. and reignites inflationary pressures. Do you have a perspective on that, Matt?

I think the number of data points in your bucket there that are looking at soft is growing. I don't think I panic until I see weekly unemployment, claims for unemployment insurance start to hover around 230, 240 on an average. They were 229 last week, Matt. I saw it. But it hasn't been consecutive weeks, Dumpet? Okay. As a student writer.

I need trend closer to 240 in that range to say, okay, that is a plateau that we weren't at for a long time. So until I'm a little, I wouldn't say I'm as afraid of a reacceleration, as Dante said, but I'm not totally confident that we're on a downward slope as much as a plateau for the time being. And that also means wage growth isn't going to slow. So maybe that puts me in the middle between you two. Okay.

Yeah. The other thing on layoffs, and I think it really does boil down to layoffs, right? I mean, you're right. If we maintain hiring rates where they are and layoffs where they are, we're going to continue to create a lot of jobs. But on the layoffs, it's confusing to me or it's not satisfying to me the explanation for why layoffs are so low. You know, we're saying, at least the prevailing theory I've heard, and I haven't heard. heard a better one, is that because businesses have struggled with a very tight labor market, more or less for a long time, pre-pandemic, during the pandemic, post-pandemic, they're low

to lay off, because if they lay off and get wrong-footed, you know, demand improves and they need to hire people again, that, you know, they're going to scramble, they're not going to find the workers they need. So therefore, they're not going to lay off at this point in time. that that's the labor so-called labor hoarding kind of argument that feels it okay maybe but that feels like a pretty tenuous kind of explanation and even if it's true it feels pretty tenuous that businesses are going to hold on to that for very long if demand starts to weaken no dante yeah i agree i mean i i think it's a to me it seems like kind of a strange that can't be everything that's happening right now. It's not like every firm would start laying people off if they weren't

worried about being able to rehire workers. I mean, the economy is still strong today, right? I mean, we're still adding jobs at a pretty good pace. So there's still, firms are still looking to bring more people on. So it's not, I think that there's some segment of firms out there that likely would reduce headcount today if it weren't for concerns about being able to rehire people. But I don't think that's the sort of prevailing reason why layoffs are low, right? I think layoffs are low because the economy is still strong. firm still be workers. You're saying demand strong enough to make to.

Yeah, I think that labor hoarding is a part of it. I think it's a small part right now. Yeah, to your point, I don't, if that was. But the layoffs are extraordinarily low. I mean, or they have been extraordinary. I mean, lower than you would expect in a kind of a typical well-functioning economy, right? Right. I mean, I think, you know, more recently jobless claims have risen, but, you know, claims had been

at, you know, say, 210,000. That's very low. So maybe labor hoarding explains why they were at 210 instead of 2,000. 30 over the last couple of months. Okay. So to me, it's like, okay, well, if firms stop doing that, if they stop hoarding labor, layoffs pick up a little bit, but I don't think the labor market falls apart if they all of a sudden decide to stop doing that.

I don't think that's enough to derail the whole thing at this point. Yeah. It doesn't feel like it. Yeah, the other thing I worry about is, you know, being part of a large multinational organization that does a lot of hiring, it feels like businesses. are looking to each other for signals as to what they should be doing, you know, around barrels. If one company decides to start laying off, then it feels like others follow suit pretty quickly. They're all kind of looking at each other. And it just feels like we can go

from low number of layoffs to somewhat higher and then high layoffs pretty quickly. this feels pretty tenuous to me. Yeah, I mean, I think we saw an example of that in tech early last year when you had a sort of wave of tech layoffs. It was contained within tech, so it didn't have a huge impact. But if that starts to sort of broaden out across industries, then it could create a problem. Yeah, okay.

I think if you square that with consumer business sentiment, how negative everything is pretty consistently been, that I think that aligns nicely too. Okay, the sky is falling as we expected it to. and I think everybody runs at the same time in a kind of brittle way. So I'm curious how we ever respond to a negative jobs report, say, even if it's revised a web. I've always kind of thought about that.

But. Yeah. Well, here's the other thing that, you know, it kind of adds to the angst. The rise in the unemployment rate, you know, there's that old kind of rule of thumb if it rises by what more than a half a half a percentage point, you know, from its low in a period of a year. So you could go back over the past year and the unemployment rates up a half a point or more in that period.

And I might be, I might be butchering that a little bit, but that's, that's kind of roughly right. That you get into this very kind of self, to Matt's point, self-reinforcing negative kind of cycle, The higher unemployment causes people to lose some confidence. They start to pull back on their spending. That causes a weakening in demand. Then businesses start to lay off a little bit more. You can see how you can get into this kind of self-reinforcing cycle. And historically, when the unemployment rate rises by more than a half a point within a year from the low, you go into recession.

and I read four, I think the low was three and a half, wasn't it? About a year ago. So I haven't looked, but on a year-over-year basis, we might be up about a half a point, no? There's some rule you're referring to. Yeah. But it's the three-month moving average. Oh, three-month moving average. So we're close.

I think we're 0.37 up from the three-month moving average low of about a year ago. So you take, we get this monthly. data on unemployment, take a three-month moving average of it. Right. Then you look at the unemployment rate today compared to its low point, and you're saying it's up 0.37. That's right. Not 0.5.

Close, but yeah. And it starts to rise. So we can afford a little bit and a little bit more slow increases in the unemployment rate without hitting that threshold. Right. But Claudia Assam, who invented the rule, has also kind of stepped back from it as in like, hey, it's not sure fire. It's just been historically true.

So there's some reasons to be a little bit. Yeah, it's like, okay, fair enough. That's by definition true. You know, so, yeah. But Dante, any reason we should be worried about that? Or is that, that this goes back to your point about, squirrely kind of numbers related to young people going from school ending and going to work, that kind of thing?

I mean, I wouldn't say we should be totally unconcerned, if only because, you know, the average consumer, you know, the unemployment rate might be the only thing they see in terms of labor market performance and they're not thinking about the, you know, technicalities behind why it's going up. So if, you know, if I'm sitting there and I'm seeing the unemployment rate creep higher month over month, then I'm just, you know, sort of the average consumer out there, that might start to concern me if I'm not consuming other information about the economy. I would say, you know, sort of offsetting that is that I would have to go back and check. But historically, I would think when we're starting to trigger that half a percentage point increase, we're not typically doing it when we're also creating 250,000 jobs a month, right? So if you're at least consuming two data points, you see the unemployment going up, but you also see that lots of people are still getting jobs every month. I think that sort of takes away some of the sting and some of the concern that that creates. So if you're talking about, you know, me sitting here, I'm not concerned about it at all. I would say I'm a little concerned just from the psychology of it of, you know, if that's the only thing consumers see, kind of like gas prices, right?

consumers are digesting a couple of data points that just sort of matter to them about the economy. And if the unemployment rate is sort of a big thing they see about the labor market and it continues to creep a little bit higher here over the next, you know, the second half of the year as we, I think expect it to. I think that might, you know, create a little bit of concern amongst people. And again, I think we're in a sort of fragile enough state where, you know, any other bad news is, is not going to help in terms of consumer spending and consumer confidence. Yeah, of course, I'm thinking of all this in the context of the 5.5% federal funds rate target with the Federal Reserve putting its foot flat on the brakes here.

It just feels like to me, and I wrote an op-ed in the Washington Post this past week with Jim Parrott, a good friend and good researcher at Urban Institute, arguing that the Fed has achieved its targets of full employment and inflation. at the 2%. If you, you have to read the piece. I won't go into detail. But one of the arguments I was making or one of the points I made was that we made was that, you know, the labor market feels a little fragile. And, you know, if the funds rate target was kind of closer to its equilibrium, meaning it was, it's not restraining economic growth, I'd be less concerned. But when you have a 5.5% funds rate target, that's a pretty high interest rate. Yield curve is still inverted.

Short rates are still higher than long rates. And in that kind of world, given all the other things that are going on the labor market, it just feels like this is the time to start cutting interest rates. At least start slowly and see what's going on. Yeah. If you don't want to get into it now, we can wait. But do you think, you know, the Bank of Canada, and ECB cut it, you know, now that we're starting to see some cuts globally, do you think that

lays into the Fed's decision-making at all, or do you think they completely ignore it? I think that I don't, I think it's kind of on the periphery, you know, I don't think that's, they have a reaction, so-called reaction function where they're looking at lots of stuff, inflation relative to target, unemployment, relative full employment, financial conditions, so forth and so on. But going back to businesses, look at other businesses, when making decisions about, you know, their payrolls. I think central banks look at other central banks, in part because they have to,

particularly if you're not the United States, because if you're falling out a step with each other, then currency markets start to get more volatile and problematic, and, you know, you have other kinds of balance of payment issues. So, but in this case, it's the differences are, you know, it might be a matter of months before the, the Fed starts cutting interest rates. So I don't think so, but all else being equal, yeah, I mean, they must be looking at

what the ECB did, the European Central Bank and the bank of a candidate. They cut rates. And I think that very good policy. I think that's the appropriate policy that they should follow that here. So I worry about the labor market's resilient. It's done a great job navigating things so far. But the longer you keep race as high as they are, you know, at some point, things start. to start to break and this feels like the labor market is a lot more wobbly than the 250,000

an underlying monthly job growth would suggest just to view. I highly recommend the Washington post op-op-ed. Folks should go read that. Okay, we're going to come back and talk about the inflation numbers that are coming out in this coming week. And of course, the Fed meets this week, so we can talk a little bit about that. But before we do that, let's play, we're going to play the game. You guys up for that? We don't have Marissa, so maybe someone else is going to be able to win here. And the game is we each pick a stat. The rest of the group tries to figure it out through cues and questions, deducted reasoning.

The best stat is one that we don't get quickly. It's so easy we get it quickly, one that's not so hard we never get it. And if it's apropos to the topic at hand, that's all the better. So, Matt, you want to go first? Let's do it. 2.3% In the jobs numbers?

No. Is it an economic release? Yes. This week? This past week? Yes. Is it our current estimate of GDP for the second quarter?

No. No, okay. That's 1.9. Yes, 1.9. For the record, yeah, you're close, but just for... 2.3%. What else came out this week? I've been so busy with conferences and CBO and is it inflation related? Is it jobs related? Both in an ancillary way, tertiary relationship. So it's neither. Neither. Is it a growth rate? Yes. Is it a year over year growth rate?

Yes. Is it productivity related? Yes. Productivity growth. Productivity growth. Productivity growth. Over the last year, I used the four quarter moving average, but if you guys got this close. So I know Dante's the long term.

I think I got that. He kind of snuck in there in a slightly rudish way. He did that. He tied every I can get, you know, deviating outside of the jobs report, I'm struggling here. I took him all the way to the finish line and he put his nose in front of me. Marissa's not here, so I got to make sure I sneak in there and be right by him. Okay. All right.

Sorry, Matt. Go ahead and explain. Dante's the doomsayer when it comes to productivity, I know. But the 2.3% growth, that's over four quarters, it's a volatile series. It's not, you know, it changes quite a bit. But if we could sustain 2% productivity growth, I think that's important of an economic indicators you can get. But apropos to right now, the Fed says that wages can grow 3.5%.

No, the Fed doesn't say that, do they? That's what everyone else says. I've always attributed it to the Fed. Is this slander? I don't think they've actually said that. Have they, don't they? I don't know. That's kind of the conventional wisdom.

I don't know. I feel like I can picture pal saying that. So if I'm wrong, I'll have to forgive me. I don't know. It doesn't sound like something the Fed would say, though. He could be parroting what everybody else says. But the 3.5% rule of thumb wage growth is compatible with 2% inflation because the difference is made up in productivity growth.

So not all of that 3.5% wage increase would be passed through to consumers. So goes to thinking. So one way, I think that if wage growth does plateau, it's a little over 4% right now. One way that that could become compatible with 2% inflation, the Fed's inflation target is if productivity growth picked up. I'm more optimistic than Dante. I'm more in Chris's camp. I think there's more reasons to be optimistic than there's pessimistic when it comes to. Picking a fight, Dante.

This is the second time he's picked up. Wait, Chris isn't here, so he feels like he's got to defend his honor, I guess. Sure. Yeah. And I look for any chance I can to go at Dante. So I think it's really important figure. I think long term that that could be sustained for a lot of reasons. And I'm also less optimistic about wage growth.

I think there's a chance that it does plateau where it is today. I think it's moved sideways for a bit. When you say less optimistic, what does that mean? What does that mean? The labor market's going to continue to loosen and pay growth is going to slow. further and further like we expect inflation to. I think we're kind of structurally tight, and I think 4% annual wage growth is reasonable to me. So for that reason, I watched productivity statistics closely, and I'm relatively encouraged in a long run. Right. Dante, you want

any retort there or anything you want to say? No, I mean, I agree, right? I think given current productivity growth, right, I think wage growth is fine. I don't think there's any issue with wage growth today, given what we know about productivity growth recently. I think there's a, you know, I have a question about whether that's sustainable and whether wage growth can, you know, stay at 4% permanently or whether productivity growth is going to, you know, sort of loosen here a little bit over the next couple of years and wage growth would have to come in a bit. But I don't think that matters so much for the current concerns around inflation, right? I don't think wage growth is inflationary right now. I don't think in the span of time between now and when the Fed decides to start cutting rates. I don't think wage growth is the thing that matters, right? And I think even they've made that, I think, pretty clear where their focus has turned almost exclusively to inflation of late. They're certainly still watching the labor market, but I don't think, you know, their level of concern around the labor market is very small relative to how they sort of view inflation

on a month-to-month basis. So, yeah, I don't have any issue with wage growth. I don't disagree with Matt's take that, you know, I think we're in a place, we're in a good place in terms of how wage growth and productivity growth fit together right now. Yeah, in that productivity and cost report, which is the basis for the number you're putting forward, there's also a compensation measure. It's another measure of kind of labor cost and also unit labor costs, which is compensation per unit of output. So it accounts for compensation and productivity. And unit labor cost is kind of critical, most critical to businesses' profit margins,

which ultimately goes to their decisions around pricing. So if unit labor costs are rising, compensations rising relative to productivity growth, and their profit margins are coming under pressure, they're much more likely to raise prices more aggressively. Inflation picks up. But the good news here is that on a year-over-year basis through the first quarter, and that's the data you're using that for productivity, unit labor costs were only up 1% on a year-over-year-over-a-year-a-year-a-old.

basis. Now, I hesitate to put too much weight on these, even the year-over-year numbers because they bounce around a lot and they get revised too. So I don't want to put too much weight on it. But that gives me some solace, right? That, you know, labor costs are under control. Therefore, profit margins are going to be maintained and if profit margins are maintained less pressure on businesses to raise prices more aggressively. Does that all fit together for you, Dante? Yeah, I think so. Do you know, I haven't looked at this in a while, but that comp measure, compensation measure that's in the productivity and cost report, how is that different from the other, like the

employment cost index or the average hourly earnings or the other wage measures that we use? Have you looked at that at all? I have not looked at it closely enough to know what the specific differences. No, me neither. It might be something good to take a look at them. Yeah, it'd be good to look. I think it's a broader measure, you know, it includes other forms of compensation. other than obviously average hourly earnings and wages and salaries.

ECI does as well, employment cost index, but, you know, they try to account, I think they try to account for stock options and that kind of thing, you know, all kinds of stuff.

So it might be worth taking a look at that. Okay. I was a good one, Matt. Dante, what's your statistic? Let's go with, which one should we use? Let's go with 83.6%.

Labor market related? It's labor market. related. Household survey? It is household survey. Is it a participation rate? No. It is a participation rate. Oh, it is? Wow. That's a high

participation rate. So it's a participation rate for some demographic group. Correct. And I'm right, that's a pretty high participation rate. That's why I picked it. Yeah, yeah, yeah, because the, I think

the overall fell a little bit to 62.5, which I'd like to talk about maybe after this. But so who's Matt? Who has that kind of participation? I mean, white males between the ages of 45 and 46? Uh, what's a little, it's a little broader than that. Or is it, but it's kind of in that ballpark? Prime age. It's, it's, it's, it's, it's prime age. Prime age labor force participation. That's all, that's the only cut you need to make, just prime age workers. Oh, really? 83.6%. It actually ticked up a little bit this month. It's the highest of this cycle.

It's the highest actually going back to, I think, either 2001 or 2002. And so it's another, the household survey looks sort of weak on its surface, but there are parts of it that look very strong, right? I mean, we're talking about an overwhelming amount of prime age workers that are wanting to work and at work.

If you look at the prime age employment to population, ratio. It's similarly high, right? It held steady this month. It's, I think, slightly off of its cycle high, but it's still... Do you know what it was? I think it was 80.8. Yeah, exactly. So it's a, it's a tick off of its. Man, Dante knows your stuff, Matt. I had an extra, you know, 12 hours to review this. Yes, it's left. Okay. Okay. What was it? What was the E-pop for Prime Age a year ago? Oh, a year ago? That I don't know. slightly below that, I would assume, you know, 80.5 maybe.

I think, I think it was, I think it was 80.6, I think. I'll take that close enough. Yeah. But you should be impressed by me. Like, I was impressed by you, but that's, I'm even more impressed by me. Do I have to say it? Is that, do I have to admit to it? Matt knows it. Matt, come on, Matt.

Wouldn't you agree? I'm scrambling to verify this, so. Yeah, thank you. Let's fact check that. That's a good point. You better verify. He better verify, right. What is it?

You said 80.6. 80.6, May of 2023. Well, the thing that's surprised, the reason, distracting from the exact number, it's just been amazingly stable at a level that's just historically consistent with full employment, not more, not less, like right on the button, you know, pretty amazing. It's actually 80.7. Oh, okay. It really hasn't moved much at all.

It really hasn't moved that much at all, right? Yeah. Yeah, very interesting. But I digress. What were we talking about? Oh, you're right. Primate. So despite some of the weakness in the household survey, a lot of it, I think, is just, it's, it's on the peripheral, right?

It's its young workers. It's older workers that are creating a lot of this noise and volatility months to month where if you look at primate workers, you know, participation, employment population ratio, all of those are very strong and have been that way for a long time and not really signaling weakness at all. So I think it just sort of adds to that story around the labor market being strong. That's actually a good way of looking at it, really. Because the prime age is kind of the core of the labor market. That gives you a real sense of what's going on fundamentally.

And then you've got all the stuff going on for young people and older people. And that moves around month to month because smaller groups, so forth and so on. Right. Not to say that those groups don't matter, but they're smaller. And they're much more seasonal in a lot of cases. So it's harder to get an accurate read month to month. And so, yeah, I think just sort of honing in on prime age makes things look a little bit better. Okay.

All right. All right. I've got one. And here you go. Two numbers. 2,756,000 and 216,000. And 216,000. I'll repeat.

$2,756,000. I'm being obviously very precise. And the other is 216. 216. I'm going to write them down just so I don't forget them. Yeah, right. So one is 2.76. The other is just 0.26.

I'll see. You guys see what Matt does. He divides by 1,000. Okay. Are they both, are they labor market related? They're labor market related. Jobs, are they from the jobs report? They're from the jobs report.

immigration related they're not no not directly no no household survey related or payroll survey both one one from each is that

yeah there you go so to the 2.7 56 million that's got to be jobs added based on the payroll survey over the last year probably okay and then 216000 is Is that jobs added in the household survey over the last year?

Based on the apparel. Adjusted concept. Adjusted concept payroll survey. That's two and a half million apart. That's the... Yeah, I mean, that's pretty amazing, pretty significant, right? It's huge. And I, you know, if you go back last couple three years, you know, that gap has been

steadily growing. And, you know, it just reinforces the point about immigration, you know, how significant the immigration effects have been, we think. There have been other times historically when there's been a big gap between the household survey and the payroll survey. I think if you go back into the 1990s, and I don't know why, you know, that happened back in the 1990s. But so there, you know, it's, there may be other things going on here, but it feels like the most likely explanation for, you know, why this gap between the payroll and household survey is the immigration, that the household survey is just not picking that up because they're using the census population counts that don't

include the immigration, the surge in immigration. By the way, the surge in immigration has been so significant. And, you know, ultimately, the question for us is, as forecasters, what happens next? I mean, you know, the Congressional Budget Office estimates immigration last year was 3.3 million, right? typically it's a million or so, a little over a million. That goes to the surge of immigrants coming across the border. And the question is, well, what's next? Are we going to stay at 3.3 million?

Are we going to come back down to 1.1 million? Presumably we will at some point, but, you know, over what period of time. And it has enormous implications for everything. We've been talking about jobs, but think about what it means for, you know, everything, housing and so forth and so on. So really, really pretty significant question, something we're grappling with in our forecasting. Okay, very good. Why don't we turn back to, so the conversation so far has been about what happened over the past week. Now, let's talk about what's coming up in the coming week, because this is Saturday. And we've got the,

The next key inflation report coming up is the consumer price index for the month of May. And Matt, I know you've been doing a lot of work here trying to estimate what that report's going to say. You want to tell the group? Yeah. So CPI, the consumer price index is always our first read on a month's inflation data. So on Wednesday next week, we'll get May's CPI report. we expect a 0.1% increase in headline inflation, which if it sounds low, it's because it is lower than recent months. And a lot of that is owed to moderating energy prices. So headline inflation includes

energy and food where poor CPI does not. So if we are right, that would cause the annual headline inflation number as measured by the CPI to fall from 3.4 to 3.3%. And then ignoring food and energy, which in this particular month is a negative contribution. So core CPI, we have rising by 0.3% currently that would pull the annual growth rate down a touch from 3.6 to 3.5. It's lowest in the post-pandemic inflation cycle. So a moderating report, and we're right at the rounding between point three and point two, I probably could be persuaded, maybe, but that's maybe a different conversation. The, so, yeah. I'm saying, because you send me an email, and I'm very much focused on the second and third significant digit.

Sure. For a core CPI, excluding food and energy, for the month of May, you have that increasing 0.2. 26 something, and therefore you rounded up to 0.3. That's right. But 0.26, if you analyze that, you're close to what, 3% something like that? That feels right. Is that right? Close to 3.

And that's pretty close to Fed's target, right? I mean, because the Fed is targeting the consumer expenditure deflator, the PCE so-called PCE deflator, and the target is 2%. And because of definitional and other factors, there's about a percentage point gap between the CPI and the PCE. So if we're at 3%-ish on the CPI, that would suggest we're close to the 2%ish on the PCE. Or am I reading too much into it? Of course, it would need to be sustained. But the logic, of course, yeah.

A 0.26 is a pretty good number. If we get 0.26. Yeah. And I think that's the little consensus, other forecasts that we have, that's not out of range at all. I mean, I think that's the general expectation. So the consensus is what, 0.3? 0.3 as well. And you get less rounding data.

So I don't know the second and third decimal points for a lot of stuff just yet. That stuff comes out closer to the report. But yeah, I mean, in general, there's point two's out there. There's point three's. I talked with our car guru Mike Brisson, who's on top of all things, auto-related about some of the stuff our model is spitting out. He is trying to talk me into used car prices being softer than we currently expect. But that's maybe a little too into ways. He was trying to talk you into it being softer?

Softer. We have auctioned data from a couple months ago. The whole set, like used car prices, what they were going for two months ago. Now they're on lots. those are the prices of the consumers pay. So we kind of look at this lagged effect. And then prices were flat a few months ago. So we're looking at pretty much flat growth in May where Brisson is saying, no, use car prices are crashing. Go low. Go low. So I see. Oh, really? Oh. Yeah. So you're saying the risk to your point 26 is to the downside. Yes. Oh. Especially since we're right there,

yeah, at 0.26. And I've learned never to argue with Brisson. I remember you said that. Apparently you've not heard that lesson. No, I, I trust everybody from Western New York. So he is making a good case. What does that mean? We have Justin Pegley. What the hell is that mean? I trust everyone from Western New York. What?

Not Eastern New York? No, I cut them off. But Justin, Justin and Mike Brisson are two colleagues of mine that are from that part of the state. Beckley's from Western New York? He's from Buffalo, yeah. Oh, it all makes all fits now. Doesn't it? Yeah.

So I say that any chance I get, I'd lump those two together in Western New York. But so yeah, the bias is low. Could be point two. I think that would be very encouraging. I don't think it puts a July rate cut on the table, but I think in line with our forecast of the first rate cut in September, that would be, yeah, consistent with that. Okay, okay.

Any other wild cards in the data in the CPI number? No. I mean, auto insurance has been up and down. It's mostly up. mostly up. So it's very hard to know where that's going to be exactly. But I think as with shelter, there's this incremental rolling over that we're expecting in, at least for auto insurance, that, you know, given what we know about vehicle prices, repairs, auto repair prices were flat in April. We expect kind of similar sideways movement now. And if that is the case, then that's a pretty

strong source of relief for consumers. So probably one of the first two or three data points I'll be looking at when Wednesday's report comes out. Yeah, of course, there's all the owner's equivalent rent. And you're just assuming that that kind of continues to throttle back slowly over time. Right. That's the cost of homeownership, the implicit cost of renting your own home if you were a homeowner, which is incredibly problematic.

To my point, in the Washington Post. I again, go read the op-ed in the Washington Post. Pretty good. Pretty good op-ed, I thought, I thought. Did you read it, Matt? I did. At the risk of spoiling the op-ed, I think the most persuasive case you put forward is you highlight all the wackiness with OER, the way that we met, the government measures shelter inflation. So put that to the side.

but the Fed is waiting on shelter inflation to come down. And until it does, they're going to keep interest rates high. But keeping interest rates high makes construction financing really hard, makes existing homeowners stay in their house. They have a 3% mortgage. If interest rates are really high, why move? So it's keeping supply really constrained, really constrained supplies, keeping prices higher, which is flowing back into government through rental prices.

They're certainly related. flowing back. It's keeping rents up too. It's keeping rents up. It's built multifamily units. I mean, right. And so to me,

like that cyclical problem that you describe, I thought was persuasive. And I hadn't seen it put so explicitly. And I think that's certainly the case. And I'm certainly a skeptic of OER. Yeah. I think then my contention would be that you suggest, okay,

we should probably weigh OER less. And maybe the Fed should articulate why. I say throw it out altogether. I think zero weight. And you give it, you attribute it. You think it'll be a short-term credibility problem? I don't think. I think that wouldn't be the case.

I think they can't move the goalposts. I think they can't give anybody. I'm not saying, I'm not saying change the PCE deflator. I'm just saying, you know, like, P. Chair Powell called out so-called super core service inflate. So, hey, I'm looking at this because this really helps me decide what monetary policy should be. He's not changing the consumer expenditure deflator as the target. And I'm arguing that either, at least not at this point in time, because I do get the credibility argument.

But I'm saying, hey, instead of calling out this wacko super core service inflation, which, by the way, has got all this kind of imputed stuff that's meaningless anyway. Because financial services costs are tied to the S&P 500. Does that make any sense? No. So why are we looking at that? Look at the so-called harmonized inflation measure, which is keep everything in, exclude the owner's equivalent rent because we can't measure that and it's all messed up. And no one else does in the rest of the world anyway because they know it's all messed up. And therefore, if you do, it makes a lot easier for them to start easing monetary policy

and without losing any credibility. That's the argument. That's the argument. anyway, you got me riled up all over again. But the Fed meets this week. And of course, they're not, I mean, we're not expecting. Nobody's expecting them to cut rates now. I guess is this the meeting where, I think this is the meeting where they're, they released the new updated economic projections. So that'll be useful.

Are you guys? Dante, are you expecting anything out of this? What do you expect? Any guidance here? I mean, I don't expect anything to happen, obviously, in terms of rates. I am curious. I asked you earlier about whether sort of other central banks moving will have any impacts. I'm curious to see if that enters into the conversation at all.

I don't think they're going to explicitly call it out as a reason to start moving. But I'm curious to see if that sort of shows up anywhere. To your point, I think it would be good if they at least started talking about sort of a harmonized measure of inflation, you know, excluding shelter, even if they're not moving the goalposts, they're not talking about a different target, but if you start, you know, sort of conversationalizing that, hey, we're also looking at this measure without shelter because there are these known problems, you know, so this gives us a sort of better read on what we think is really underlying price growth is. So it'd be nice. I don't know that I have that something

I would expect to happen in the next couple of meetings, but it'd be nice if they at least started talking about it a little bit more to get it out there. the thing I to me is it feels like there's only downside risk here this week with the inflation report right it feels like for everyone's going to say okay great that's what we want but we need to see more right we we had all these bad reports in the beginning of the year so that okay that's one piece of good news we need more good news but if it's a bad report the sky is falling you know a rate cut in September might get thrown out the window you know so it just feels like you know a good report isn't going to lock in that they're going to start cutting rates soon, a bad report could very easily, you know, sort of push that conversation out. So it feels like we're not,

we're not going to get much good news this week, right? If best case things go according to script and, you know, we keep hoping for more good reports moving forward, worst case, you know, it looks bad and they sort of make explicit that we need more time and, you know,

maybe rate cuts don't start until the end of this year or even next year. Well, if Matt's right, point two, much more likely we hit a point two than a point four. I mean, If it's a point three, that's just a basis. But you're right. If we go to point four on the CPI, the core CPI, that, I think that, well, maybe with good reason.

Right. Yeah. So it just feels like we're, you know, we're in a no-win situation where a good report is still good, but it's tied to this idea that we need to keep seeing good reports moving forward. It doesn't really get us anywhere today. Right. Well, hopefully Powell does bring up harmon or somebody brings up harmonized. inflation and then I'll claim that I had some influence over the whole thing. There you go. The op-ed had some influence. Okay, well, very good. I think we covered it a lot of ground. I need to eat my cereal.

So, you know, I'm like starving, my blueberries and my cereal. I used to be on an oatmeal kick. Now I've got so sick of oatmeal. Now, I've found this really great cereal. Great grains cereal. Do you know what I'm talking about? I'm probably eating nothing but sugar and that's why I like it so much. But there's blueberries, so you're fine. Oh, well, I always have blueberries. We balance it out. Yeah, blueberries and some raspberries. But anything else you guys want to add before we call it a podcast? No. Covered a lot of ground. Okay, very good. Well, we'll do this next week.

Well, thank you, dear listener. I really appreciate you listening in. And yeah, we'll talk to you next week. Take care now.