Moody's Talks - Inside Economics - Mixed Messages and Moderating Jobs?

Episode Date: December 3, 2022

Mark and Cris welcome back colleague, Dante DeAntonio of Moody's Analytics, to analyze the November U.S. Employment Report. Is the jobs market moderating? Depends who you ask.Full episode transcript.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, my trusted co-host, Chris DeReedies, Chris, good to see you. Good to see you, Mark. Yeah. And we also have Dante, Dante Di Antonio. D. Antonio is a regular on Jobs Friday, and today is Jobs Friday. How are you doing, Dante? Well, thanks for having me. Yeah, it's good to have you. This is a little later than we normally record the podcast. It is now 5.34 p.m. Eastern time. I've been trying to try. I was in New York today, so we're taping this a little early. So I think we're all probably a bit tired, ready for the weekend. Maybe we'll keep this one a little shorter.

I know I always promised that. It never ends up that way, but I think you guys will strangle me if we don't keep it to about an hour. So a lot of things to talk about today. Jobs Friday. So any words of wisdom, Chris, before we get rolling here? Anything you wanted to bring up? I'm just looking forward to hearing how you're going to say this is exactly according to the script and nothing changed and your odds of recession have actually improved.

But let's roll. You have pinned me. It nailed me. That's so funny. And I am drinking because it is late in the day, my glass of Pinot Noir, so forgive me if I take a break every once in a while and do that. Okay. Hey, Adante, let's turn to you first. You want to give us your sense of the report?

What did it say? Sure. I feel like this is probably the same thing we've said several times in the last six months, but it was really a report of, I think, mixed messages, right? So I think the top line number. Can I stop you for one second? Yeah, you can. Has there ever been a report in your lifetime that doesn't have mixed messages?

I'm just asking. I would say there's ones that are mostly positive or mostly negative. This one would seem more split down the next. middle. Okay, but I don't think there may be in my lifetime a half a dozen. Now I need to dig one up. Yeah, where everything is in one direction and says this is definitively what's going on. Okay. Well, that's why it makes so interesting. Sorry. Sorry for interrupting. Go ahead. The headline number, 263,000 jobs out. It was obviously higher than consensus expectations. It was roughly in line with where job gains have been over the last couple of months.

We actually saw an upward revision to gains last month, so it was actually higher at $24,000 than it was before. By industry, there is some mix there. There was some weakness in transportation and warehousing, some weakness in retail trade. A lot of that is likely seasonal adjustment issues, a lack of a ramp up in hiring, which we can get into the details a bit later on, I'm sure.

But the weakness, again, sort of for the, you know, several times down in the last couple months is on the household survey side. You know, the unemployment rate held steady, which is good, but the labor force declined. Employment to population ratio declined. Participation rate declined. Employment as reported by the household survey declined. So, you know, it was pretty much a almost a purely negative story from the household survey, even though there was, you know, some optimism on the actual job gain side. And, you know, sort of that positive as a negative wage gains actually ticked up in the month, which obviously is sort of good news for workers in the short term, but probably not good news

in terms of, you know, potential for a soft landing longer term. I think that's the main story from the report. Yeah, a lot to unpack there. So in the survey of businesses, the so-called payroll survey, 263,000 jobs were created in the month. and that was a bit above consensus. Consensus was what? A couple hundred K? About 200,000, yeah.

Yeah, okay. Well, that's what's in spitting distance for these numbers, right? I don't know. Do you consider that to be a big difference, a meaningful difference? No, particularly. I think we, yeah. The expectation has continued to be that job games will moderate more quickly than they have to this point.

And, you know, they seem to be sort of holding up better than expected month after month. Which I don't get. I really, I mean, if you go back to the beginning of the year, average monthly job growth was double this, at least. I mean, it was probably, I think it was closer to 600K. So when I say underlying, I mean, abstracting from the kind of monthly vagaries of the data, just take a three-month moving average of the data, you know, something like that. And we're half of what we were at the start of the year. So it just feels like it's hard to imagine it would be much fat. Actually, I'd be a little nervous if it was much faster than that. Maybe suggesting

the economy is going to struggle and go into recession. I don't know. It just feels like we are expecting this thing to happen all of a sudden. And it's happening. It feels like it's happening. Yeah, it just feels like we're increasingly in a world where I don't know how this can continue to happen where job growth is, you know, 250, $300,000 a month when labor force growth has been extremely weak in recent months.

How do you continue to sustain that level of job growth? Yeah, but even there. I mean, if you, you know, take a, you know, that because that's now that labor force numbers from the payroll survey. I mean, excuse me, for the household survey. And that's a small survey. And it goes up and down all around month a month a month. I don't read much into the month, month movements. But if you look at year over year on that one, we're creating labor force, labor support has been growing to 250,000 on average per month.

And in the last six months, you know, pretty solid growth. So it doesn't feel like, yeah, labor, employment's strong. it's slowing, it doesn't feel that much different than labor supply. And that'd be consistent with stable unemployment. The unemployment rate's been stable. I don't think it's changed much, I don't know, what, for six, nine months. It's probably not changed very much. And the employment to population ratio, which you mentioned for prime age workers,

that actually, that's no longer rising. If anything, that's declined, right? So that'd be consistent with the idea that you're getting enough labor supply to meet the labor demand, no? Yeah, I think the problem is just the different story from the two surveys, right? I mean, because in the household survey, you've got labor force declining, but you've also got employment declining. So that's, you know, that's where you get sort of the stable unemployment rate and employment to population ratio that's coming down. But if you put, if you try to compare the two surveys against each other, that's where you get these sort of things that don't seem to fit together

quite right, I think. Yeah. And so I think we talked about this in previous months, but the household employment numbers are, they're softer, they're much softer, right? I think household employment, employment is measured by the survey of households has effectively gone nowhere since the beginning of the year. Payroll employment, that's the rate of monthly increases slowed sharply as we just discussed, but still pretty solid, 263 is still pretty solid. Do you read anything to that? I mean, are we should, these surveys will ultimately converge.

They never, they're not. going to gap out forever. They're measuring the same. They're trying to measure the same thing, and that's employment in the economy, and they will ultimately come back. Do you have a sense of, you know, which is leading the way here? Is it the weaker household survey or is it the stronger payroll survey? In most cases, I would say, look at the payroll survey, ignore the household survey, and, you know, move on with your day. I think, you know, three or four months ago, I saw the divergence, and I said, you know, I'm not really worried about that. Let's wait. and see what happens. But now, the difference is pretty stark. I mean, you mentioned, if you look back

over the last eight months, right, in four of those eight months, household survey employment has declined, right? The total gain in household survey employment over eight months is 12,000, the total gain, not the average gain. Oh, is that right? It's only, it's like flat as a pancake. And over those same eight months in the payroll survey, you've added just shy of 2.7 million jobs. Is that adjusting for the payroll concept? in the household? That's not adjusting for the, if you do adjust for the payroll concept, the gap is, I think, about 1.8 million in terms of jobs that have been created over the last eight months, either with adjustment or without adjustment, that gap is the biggest that it's

been ever in an eight-month period, aside from the initial impact of the pandemic when measure. Yeah. Yeah. So it's historically large. I agree. It's likely that it'll still start to come back together. But it is getting to the point where it's unusually, it's an unusually large divergence at this point. Right. I mean, one, the theory I've heard is that the, you know, when you're in a turning point for the economy, when things are moving up or down.

Yeah. The household survey tends to do a somewhat better job of picking the turn because it is able to capture what's happening. with business failures or starts, you know, and the payroll survey, the survey of establishments, businesses can't really do that by construction. So if the economy, that would be, it would suggest that the economy is slowing and the payroll surveys is not there yet. It can't capture the fact that businesses are failing or scaling back like the household survey again. Yeah, I've seen that same argument. I don't want to hang my hat on. I went back and looked at the pre-Great

recession period. So if you look at the eight months leading up to the official start of the Great Recession in December of 2007, the household survey declined in four of the eight months leading up to December 2007, where the payroll survey essentially didn't decline at all. Job growth in the payroll survey was three times as strong as the household survey in those months leading up to the start of the Great Recession. Yeah, but Dante, Dante, this time is different. And I wouldn't hang my hat on that, you know, history repeating itself here, but there is some evidence to show that Chris is getting so sarcastic over there.

That's right. That's right. It's the end of the day. Yeah, yeah, yeah, yeah. Hey, go get a glass of wine, buddy. Take an edge off. Oh, he's already, the elbows are already being flung around. Oh, no, yeah, yeah, yeah.

All in good fun. Okay. All right. Fair enough. So in your synopsis, you didn't bring up like wage growth or maybe you mentioned it. Did he mention wage growth? Did you mention wage growth? Okay. I missed it. Sorry. Okay. And there I have one quite more technical question. Of course, this is average hourly earnings. It comes from the payroll survey of businesses. And it doesn't, it can be heavily influenced, certainly month to month by mixed. effects, meaning if you've got a lot of job losses in lower paying industries or occupations, that could push up the measured wage growth. Or conversely, the, you know, the opposite. Kind of sort of 5% is kind of where it's been since, well, really the beginning of the year that's kind of has been hanging there, and that's high.

It's not consistent with the Fed's 2.5% inflation target. But did you get a sense of this, whether this month had anything weird going on with that, was there mixed effects there, or was that, do you think that's a real read on what's going on with wage growth? I think you could certainly make the argument. You know, you did have some job losses in retail, which, you know, is obviously at the lower end of the pay spectrums. I mean, you could argue that maybe that's a little bit, it got a little bit of a boost from

mixed effects, although, you know, historically when the payroll reference week doesn't include the 15th of the month, you get a little bit of a week read on. wage growth and this was an early reference weeks. If anything, you would have thought wage growth would soften a little bit this month just for sort of timing issue, timing reasons, but it went the other direction. So I think mixed could be part of it, but I do think it's certainly not a positive trend for where we want to see wage growth heading. If you look at the last three months on an annualized basis, it's up to, I think, 5.8%. So that's certainly not the direction we want to be headed that you know if you look at like the three month annualized that was as soft as

four percent you know mid year this year so it's it's ticked back up in a pretty meaningful way if you sort of if you believe the number and don't think it's just purely a mix effect going on yeah i mean i didn't have a whole lot of time today i was in new york meeting with clients but on the train i did look at kind of average hourly earnings growth by industry quickly and not comprehensively. And I couldn't find any industry where it actually accelerated. If wage growth continues to moderate across most industries, not every industry,

I'm trying to think, construction, interestingly enough, construction wage growth has remained very strong. But I didn't notice any acceleration. Did you happen to take a look at that? I did know. Okay. I mean, it gave me the sense that maybe there's some kind of mix effect going on here, that might be affecting it.

Okay, take a step back. You know, we're in the weeds here, deep into the weeds. Let's just step out. And I'll bring Chris in just a second. In the context of this, the need for the job market to cool, for job growth to slow, for labor market slack to start to develop, but the market's been very tight,

and for wage growth to moderate sufficiently so that, inflation starts to abate, what do you think about this report? How does it fit into that kind of discussion debate? That's the bottom line here, right, at the current point in time. When you look at it from a 30,000 foot level,

or go down to a 10,000 foot level, how does this feel to you? How did this report feel to you? Let me ask you this way. I'm a stock investor, I'm a bond investor. You saw what happened. Stock market and a bond market kind of sold off on on this and then came back by the end of the day.

You know, by the end of the day, people said, I'm not really sure. You know, where do you stand? I mean, would you have been selling stocks, you know, thinking that the Fed would be more aggressive as a result of this report or not? I think it's middle of the road to me. I don't think it moves the needle in either direction. It wasn't overly positive in that, you know, this is great news for the Fed, but it also wasn't, you know, the world is, you know, the sky's falling kind of news either.

I think it's a middle of the road. Yeah, we need to see improvement, but this is just sort of another month along along the road to that improvement, I think. Okay. All right. Very good. All right, Chris, you're up. So what do you think? Any gaps in Dante's kind of analysis and what's your perspective?

No, I think he covered it nicely. And certainly that the difference between the household and the payroll surveys is something that, is interesting. I mean, it's troubling it perhaps. Troubling? Yeah, it gives you some pause. I agree household survey is small sample. You don't really want to pay a lot of attention to it, but the trend is there, right? That gap has been consistent now for a while.

So perhaps we are missing something in the payrolls and the labor market is a bit weaker than what they would suggest. So I worry about a bit of a head fake for the Fed, right? If they're really focusing on that payroll number, right, and not taking account that it may be misleading, they could make a misstep. I don't think that's going to happen next week, two weeks from now, but something to consider. The wage. I mean, I think. Before you're going to the wage? So are you saying that it feels like the labor market might actually be a little softer than the top line payroll employment?

a game might suggest that the household survey because of the weaker household survey. That's what it would, yeah, if you take it at face value. And would you view that as a good thing or a bad thing? So if it's, if the Fed believed it, if that was reality, right? The problem is we don't know which one is, is real, right? If it truly is softening more than the payroll surveys would suggest that would give the Fed cover to not be quite as aggressive, right? It adds credence to the soft landing narrative.

Narrative. There's a chance there. Okay. Do you see how I got that out of him, Dante? It took a little bit of work, but I got it out of him. Yeah. The whole full discussion. All good.

But then we go to wages, right? Okay. Yeah, there you go. Okay, let's go to wages. And the wages, you're right. Okay, there might be mixed issues here. But so maybe the 0.6% is overstating the case. Okay, shave it off.

0.5.4, that's still pretty hot. Yeah, from the Fed's perspective, right? So that would suggest the labor market is quite tight and the wages are still pushing up. I did take a peek at the Atlanta Fed wage tracker. That's still quite positive. It's not showing, actually had a little bit of a tick up. And the labor market maybe continues to be quite strong, which moves in the other direction. suggest the Fed has to be even more aggressive here.

The Atlanta wage tracker, I'm sorry, the Atlanta wage tracker, just for the listener, that tracks the same worker over, through time, and therefore controls for mix effects. That's right. And mix effects we were just talking about. And I think the issue there is it's kind of 12-month moving average or something, so you don't pick up near-term movement, so it's hard to get turning points there. But it's still nonetheless. Nonetheless, right?

Yeah, nonetheless. And you're saying that that remains strong. The growth in that tracker range strong. That's right. Yeah, exactly. We're piecing together. We look at the ECI. It has each of these.

Employment cost index. Yeah. Correct. Each of these measures has their own issues. But it does suggest that wage growth remains quite strong. Services, right, continue to grow here. Right? Some of those wage pressures may be increasing there.

So from that standpoint, I worry about the Fed having to be more aggressive to get inflation down because the wage inflation is creeping up here. Yeah. Do you think we're just being impatient that we expect things to turn too quickly? I mean, it feels like we always do this in economic forecasting, that we know something should happen. Everything is suggesting that it should.

And therefore, it should happen right now. You know, instead of, this is going to take time that this all works over a long period of time. I mean, just take the job growth. I mean, at the beginning of the year, everyone, all businesses were rip-rorn, hiring as fast as they could, doing everything they could to retain workers. Of course, that's the Federal Reserve had interest rates at zero. And to turn that ship around to get HR departments to stop hiring, but then start thinking about, oh, well, even laying off workers, that takes, it takes. time and actually execute on that takes time and that for that to show up and the data takes time and we're just expecting too much too fast in terms of the data flow that you know you know that

263 of payroll employment gain is about as good as you could expect you know given the the fact that this process only started a few months ago you know the switch and businesses going from hiring to saying, okay, I'm not going to hire and I may even begin to lay off. No? Sure. These things do take time.

Long variable lags, right? We've been talking about the delays in monetary policy all year. I don't know that, and it's right, but I don't know that we have the luxury of time, right? Markets can move.

It's the expectations if the expectation is that things should be moving faster than they are, then in some sense, that is reality. That's the reality that the Fed has to cope with, right? Yeah, I'm not so sure we need to move any fat. All we need to see is inflation moderate. And, you know, my sense is that inflation will moderate in the near term in the next few months simply as the supply shocks of the pandemic and the Russian invasion fade.

You know, energy prices are now flat. They're actually, I don't know if you've noticed, but gasoline prices have come down quite considerably. And on a year-over-year basis, we're not going to see some real improvements in the inflation statistics because of just flat-to-down energy prices. And the supply chains are starting to continue to ease despite what's going on in China and the no-COVID policy. And it feels like goods prices are starting to moderate, and we may even see some declines

in new vehicle prices here pretty soon. Rank growth is rolled over definitively, and that's going to, flow into the measures of the cost of housing services and the inflation indices by this time next year. So these are all good things that are going to happen with regard to inflation. Do we really need to see, you know, a moderation and wage growth? And this is key for service price inflation, services, X, housing, and energy anytime soon. I mean, we're going to see improvements for these other reasons well before.

The last thing that's going to happen is the moderate. and wage growth and the moderation and service price inflation. These other things are going to happen before that. So maybe we don't need to see it turn that fast. I don't see it. You don't see it. I think, you know, if we're not seeing inflation, wage growth slowing, regardless of all these other things,

the Fed's going to be on the war path. Yeah. Yeah. So it's my take it. Yeah. No, no, no. Yeah. It may be the case.

Maybe very well be the case. Dante, you did say one thing that factually I wanted to check, unless I heard it wrong, you said the revisions to the previous employment gains were upwards. I think on net they were down. On net, I said last month was up. Two months ago was actually, I think two months ago down where revision was actually bigger. So yeah, it was down on net, yeah. Yeah.

So you impress how careful, how much detail I did soak in here? Yeah. So the small, it was a small net downward. Yeah, not a huge impact. It's got to fit with your narrative, right? That's why you. Now, I'm looking at all the data. I am looking at all the data.

Okay. Okay. So, Chris, same question to you that I asked Dante. Yeah. 10,000 foot looking down. You know, how do you feel about this report in the context of this desire to see the job growth cool off? the job market to cool off and and take some of the pressure off of inflation.

Does this report change your, you're thinking around that at all? Not really. I think that in terms of the near-term strategy, right, 50 basis point hike from the fact, I think that's still in play. I don't think this changes that materially, right? If it is moving, in my opinion, here in the wrong direction.

So if we continue to see this very robust labor market in terms of job growth and wage growth, particularly, then that certainly does change the strategy going forward. But I think this one report alone doesn't really move the needle all that much. So if you're a stock investor, a bond investor, you wouldn't have bought or sold today based on this report? No, I don't. Yeah. I think it was a little bit. You don't buy or sell anyway on anything.

You're a, you're like, I take my paycheck. I take my savings. I put it in the bank and it goes where it's supposed to go. And I don't even look. Who says that? Oh, okay. Oh, yeah, that's right. He's the crypto guy.

He's day trading on the side. Day trading on the side. There you go. Okay. All right. Farmland. All right. Okay.

Well, I'm in your camp. And that is that I don't think this kind of this report today signals anything has changed. You know, the labor market is slowing. It needs to slow more to be consistent with kind of inflation that we're all comfortable with in the Fed's inflation target. and if I were king for the day and I could control the economy with a few dials, I would have rather seen instead of 263, probably 163, I think, something like that. Fair enough. So I think that's right.

But I don't know that based on this, I would jump to the conclusion that the labor market isn't slowing in a consistent way that would be instead. with the idea that the economy can avoid, you know, that the economy can avoid much higher interest rates and to quell inflation and, and, and, avoid an economic downturn. There are a couple of other statistics that are just thrown into the mix that I think are important in this discussion around, you know, what this all means for inflation and whether the job market slowing. One is hours worked.

I don't know if you noticed, but the number of hours worked. work per week fell down to 34.4. And that's now come full circle. That kind of jumped during the pandemic. It's now back down firmly to where it was pre-pendemic. In fact, in the 10 years leading up to the pandemic, it was pretty rock solid, 34.4, 34.5, 34.3, something like this. So we're now back to where we were. And it's come down pretty considerably in the last few months. And that's a leading indicator of job growth because businesses tend to cut hours before they of their workers before they actually lay off workers, particularly in manufacturing. And I noticed that there was a, I think overtime hours were also down in manufacturing, I believe. I think I got that right.

So that's one thing I'd point out. And I think that does augur or suggest that we're going to see even slower job growth here dead ahead. Also, I'd point out that we saw, Dante, you did mention we lost jobs in retail, I think in transportation distribution. The other sector that lost was temp help. Temp help is also been pretty, you know, it's not declining a lot, but it's declining. It's been declining now for, I don't know, three, four, five, six months. And that's also a leading indicator, right? Because, you know, generally, you know, businesses will cut their temp help work before they

actually cut their own staff and people that they employ. And so that's starting to come in also. Another indication that we're going to see weaker job growth debt ahead. So, you know, from my perspective, you made fun of me, Chris, but I think you're right. You nailed me. It feels pretty close to the script. Yeah, not exactly what I would want if I were king, but it's pretty close to script. It feels like it's pretty close to script.

The labor market is moderating, strong, no doubt, but moderating, you know, here going forward. are that it will continue to moderate, you know, going forward that we'll get. Well, one thing I do want to say just because I think it's important that we say it is, you know, we're talking about a weakening job market. We're talking about, you know, things like more layoffs. We're talking about less wage growth. We're talking about for the person listening to this, they go, what the heck are you talking

about? How can that be good, you know? Oh, oh, no. You know what it's not. It's not, that's not what we're saying. What we're saying is that's not sustainable because if you have such strong job growth and start to start wage growth, that means inflation is going to be a problem. That means the Fed is going to jack up interest. And that means we've got a recession down the road.

And nothing's worse for the American worker than going into recession. So, you know, we need some slowing here so that we avoid a collapse, you know, in the economy. So that's important to keep in mind. Right now the good news is bad news The kind of the bad news is good news So we're kind of in this weird world that we're in right now Okay, anything else on the jobs report you want to point out? Well, I was going to challenge you on the counterfactual, right?

This is going according to script. Yeah. What would have to happen next month to cause you a concern? Right, if we print another 250K. Is that now so he can't change his mind next month? No, 250. I mean, I think underlying job growth is $250K. I mean, I think, you know, month a month, I'm not all that worried.

Let me put it this way. Okay. If we get into, say, early next year, February, March, April, and we're still at $250K,000, that's a problem. Okay. Okay. If we get into February, March, April next year and we're 150K to $200K, I'd say that's okay. I'll tell you what. I think we're all going to get very nervous once we, things really slow.

You know, once you're below 100 and you're like 50, you're going to say, oh, yeah. You know, the whole psychology is going to shift here. We're going to say, oh, we're going into recession, right? So, you know, we want a slowing, but we don't want it to go, you know, we don't want to go negative, you know, at least not in a consistent way. But anyway, that would, no monthly number is going to change my mind to a significant degree. But if we get in the next spring and we're still at $250K, I'd say that's a problem, particularly in the context of, you know, 5% wage growth, you know, and 3.7% unemployment. If we get there at $250K and labor supply has improved dramatically for whatever reason,

then I'm not as worried about it. But, you know, you know what I'm saying. So, you know, but we're getting close to the moment of truth here, you know, on, all this. I think we're going to know who's right or wrong on this pretty soon. All right, let's play the game, the statistics game, and I got a lot of good statistics guys. I got way too many, but it got a few of my back pocket here. The game is we each proffer a statistic. The rest of us tries to figure out what that is.

The best statistic is one that isn't so easy that we get it quickly, not so hard that we never get it and it is apropos to the topic at hand, the labor market order came out this past week. And there's a lot of data that came out this past week, a ton of data. So maybe I'll turn to you first, Chris. What's your statistic? 2.3%. I know exactly what that is.

You only tell you? It's a good one. It's a good one. It's a good one. I'm going to give Dante a chance. And I'm going to whisper to Chris. Okay. What is it, Dante?

I do not know. I'm going to give you this. Come on, man. You've got to know the statistics better than me. You're a young guy. Look, you got all that hair. Look at the hair on that head.

Damn. I have no hair. I've done my hair. I know that statistic and you not know that statistic. That doesn't make any sense. Yeah. All right. Ready?

You want me to tell you? Put you out of your misery? Yeah, do it. All right. The personal saving rate. You got it. Oh, I don't have a bell here. I'll wait.

Do I got one? Where's mine? My wife keeps moving things around in this room. This is the not elsewhere classified room. Did I tell you that before? I probably did. If we don't know where to put whatever it is and we got whatever it is, all kinds of whatever it is, we put it in this room.

Yeah. Like I'm looking at junk drawer. Yeah, I'm looking at, you know, dear mom, I hope your Valentine Day was great. This was my, this was 20 years ago. For my daughter. It's like, but I like, you can't throw that away.

You cannot. No, are you kidding me? I mean, there's like zero probability. Yeah, I've got like, I don't know what this is all about.

I got a, uh, a disc drive over here. Yeah, who uses this, I don't even think I could use a disk drive. Could you? If I gave you a disc drive,

could you get anything off that disc drive? Probably that people out there don't even know what a disc drive is. That's what I'm thinking. I'm trying to remember if I've ever seen before. That's so funny. Anyway, Was I? 2.3%

Yeah, 2.3%. So why did you pick that, Chris? It is very low. It's the second lowest on record. 2005 was a bit lower. And it's just an indication that U.S. consumers, yes, they are continuing to spend, but they are having to use more of their income. They are dipping into their savings. They are going into credit to finance that spending that they are doing.

something certainly to watch 2.3 it isn't sustainable over the long run certainly but okay does indicate some of the weakness out there Dante this is I'm going to test Chris the test oh boy okay Chris what month historically had a lower saving rate than 2.3% Dante look I look I see Dante's face he's incredibly impressed by 2005 April I believe Oh, that's good. I thought it was July. Oh. Dante, can you check that?

Can you check that? I'm going to say Mark's right and just go with it. Yeah, just go with it. Yeah. Okay, I'm duly impressed though. That's very good. Yeah. Okay, so, but Chris, how do you view, I mean, on face value, you'd say, oh, that's a problem, 2.3% at low saving rate.

Do you view it as a problem? Not at the moment because that is the saving rate, right? That's how much of income is being set aside going into savings. People have a lot of wealth, a lot of savings still in their back pocket that they're using to support their spending. So excess savings, our calculations is $1.8 trillion. So it's not as though consumers are totally tapped out here. Some of them are, but in terms of the big picture, right, it's just an indication that higher prices are stretching those monthly budgets. So something to watch.

If it continues for a long time, it gets more troublesome because those savings that they do have squirreled away, the wealth they have scored away, does start to run out. Yeah, I mean, not an immediate red flag. Yeah, I mean, it goes to the excess saving. All that saving built up during the pandemic, right? I think. And, you know, by our estimate, the excess saving peaked in September of 2021 at $2.5 trillion. That's 10% of GDP. That's a boatload of excess saving.

And as of October, it's down to $1.8 trillion. So we went from $2.5 to $1.8 is a $700 billion decline. that if the consumer spend that excess saving, it's saving sitting in their checking accounts, that reduces the measured saving rate because the measured saving rate is a difference between current income and current spending. So this is, they can spend more because of the, they just drew down this asset, their, their checking account. But it's still $1.8 trillion.

It's still a lot of cash. Now, you're, you know, I agree with you for that cash, that excess saving, that $1.8 trillion, sitting in the bank accounts of high income, middle income households, not in the check accounts of low income households, probably the bottom third at this point, I would say probably blown through the cash. But, you know, for the aggregate economy, paying with a broad brush, abstracting from the differences across income groups, that's still, that's where the bulk of the spending occurs. So it would suggest that consumers still have firepower here

and they can continue to spend in the face of pretty high inflation, at least for a considerable period. Would you agree with that? Yeah, certainly at the macro level. At the macro level, particularly those middle and high income. Yeah, I do worry, though, that those lower income households are going along with really based on credit. when those bills start to come due after the holidays and the first quarter, if we get that

type of slowdown in employment, if inflation is not moderating fast enough, you will see delinquency and default rates creeping up here on credit cards and personal loans. Yeah, totally, totally. In the macro view, maybe that's still not quite an event, but we're definitely going going to be feeling it as a broader economy. This is, you know, whether we go into recession or not formally, you're definitely going to see some financial pain out there. Yeah, I, that's very much the case. And there, in no way do I want to suggest this isn't going to be, this isn't very painful, particularly for the high inflation and particularly for low income households.

They're getting crushed by this financially. But from a broad macro economic perspective, you know, staying out of consumers in the game, spending an aggregate, sufficient to keep us out of recession, feels like there's still a fair amount of firepower, you know, financial firepower out there to allow them to keep on spending. And even for the low income households in terms of the credit problems that you described, it doesn't, the numbers aren't big. Right? I mean, no. No, it's still relative to. I could be like a credit card receivables or unsecure personal loans. They're up what? A couple hundred billion from where they were pre-pandemic, something like that. Yeah. Not not, again, not, we're not at crisis levels here. It's not a red flag event, but definitely there are some sectors that are, or some segments of the population that are under stress and they're going to continue to feel stress for a while here. Yeah. All right. Dante. What's your statistic of the week? It is 48.4. Oh, is that an ISM?

Chris, he's really really diving right in there. Yeah. Yeah. Was it the ISM manufacturing? That was 49, wasn't it? I thought it was 49 for, but maybe this is one of the components of the ISM. And I'd say it's the employment component of the ISM. You know me too well.

Yeah. Okay, that's a pretty good one. Yeah, very good. You want to explain? Yeah, so you had brought up, you know, some potential future weakness in manufacturing employment maybe down the road with hours starting to come in. The employment component for the ISM manufacturing index has been below 55 out of the last seven months.

And historically, you know, on a month to month basis, you know, it's pretty volatile compared to employment. But historically, if you get, you know, sort of a consistent reading below 50, that's typically consistent with manufacturing employment that's either flat or even declining. So it would certainly be sending a red flag that manufacturing employment could roll over here at some point in the next few months and actually start to show some declines. It's been moderating like the rest of the job market, but it's held up pretty well up until this point. I've been a little surprised we haven't seen more job already job loss in manufacturing. You know, given the tech layoffs, I guess those though might not show up in manufacturing.

They might show and trade. Oh, maybe we're seeing it in the Amazon layoffs and the trade. the trade in the transportation and distribution. But I would have thought some tech would have shown up by now, but no, not in that. Here's the other thing I worry about or worry about in the context of we need to see a slowing in the job market to cool, cool off inflation, wage and price pressures, is could it be the case that we don't see the kind of job losses we typically do in manufacturing and construction, these are rate-sensitive sectors of the economy for idiosyncratic pandemic-related

reasons. So, for example, in manufacturing, the vehicle industry has been very depressed because of supply chain issues. Now the supply chain issues are moderating, we're getting more production, and we wanted to see the layoffs in the vehicle and vehicle-related industries that we typically do, and therefore we don't get the manufacturing allows broadly that, you know, would help cool off the labor market. And in the construction trades, we are, I think we are starting to see job losses on the residential construction, on the single family residential construction side. But maybe we were

not going to see the kind of layout we typically do, and that is the most rate sensitive sector of the economy, because workers are going to go over and work on multifamily projects because there's such demand for rental property. And now we've got the infrastructure bill legislation kicking into gear. That was a piece of legislation that bipartisan, infrastructure legislation that was passed back, when was that? That was probably about a year ago now, wasn't it? And I think that money is starting to get out. It's going to really kick into high gear in 23 going into 24.

And these are things that are idiosyncratic to the period, this current environment, and we don't see those job losses that we typically do in those right sectors. And that becomes, that's good news is bad news, right? Again, I'm not saying I want to do. to see layoffs, but we got to see layoffs somewhere if the job market is going to cool off to a meaningful degree. Does that resonate what I just said, Dante, Chris, anybody want to respond to that? Yeah, I would agree.

Oh, go ahead. I think there's some reason to think that they hold up better than they have in past cycles. I do think you'll still see employment declines at some point, but they may not decline nearly as strongly as they have in previous cycles. Yeah. Okay. What are your thoughts on the reshoring for building chip factories and battery factories and what that? Yeah.

I mean, if you look at manufacturing construction put in place, so this is actual construction of manufacturing facilities. Right. It's booming. And it's taken off. And it's got to be in part related to the bringing back of supply chains, the reshoring, as you said, for reasons. of resilience. I mean, companies are very nervous about these long supply chains in the context of the pandemic and all the conflicts with China that are, you know, in train here. So yeah, I think that's true. That's a good point. Something to watch. Okay, that was a good one. I was going to say

one other thing. I can't remember. So, oh, ISM non-manufacturing. That comes out next week. Right. Okay. So we'll see what that shows. Okay. You want me to give you a My statistic? Laid on us. All right. You ready? You ready? Ready.

Six million. It's a really good one. There's a Joltz number. Joltz. Job opening labor turnover survey report. Six million. Dante, you should know this one, too. Hires.

Hires. Okay, baby. He's coming on. He's finally coming on. Oh, is that a few days ago? Yeah, very good. Just yesterday. David. I got another, I'm going to do another one, though, related in a minute. But six million is the number of hires in the month in the month of, I guess it was the month of October. Because it's one month lag compared to the, the jobs report we got today, which is for November. And that's exactly equal to the number of hires when? This is a good test. Right before the pandemic.

Exactly. February of 2020, on the nose, on the nose. So the number of hires has come full circle. It peaked at 6.8 million back in February of this year. And they've come back down to about 6 million. And so, you know, hires have normalized. And I think that's consistent with the idea that the labor market is, you know, moderate is normalizing. It's starting to cool off, cool off. Okay, here's the other one. 1.4 million layoffs. Ah, very good. Yeah, yeah, very good. You knew I was going to say that, 1.4. Here's the issue. What was it before the pandemic, pre-pandemic? So there was 1.4 million layoffs in the month of October.

What was it in, you know, the months leading up to the pandemic in late 2019, early 2020? Still a little bit higher than that, I assume. I don't know, 5, 1.6? No, 1.9. Oh, 1.9. In fact, in February of 2020, if memories, if I've got it, I've got it in my mind's eyes, I'm not exactly right. I think it had $2 million in February of 2020. Yeah. So that's the, that's where, that's a different. That's the key difference between this labor, this labor market and the labor market, you know, pre-pandemic, which was pretty tight. And it goes to, you know, we probably, if we're going to get a cooling off in the labor market, sufficient to, for stall more aggressive Fed hikes and ultimately a recession, we need to see a normalization in layoffs that we're still not quite there yet, got a ways to go. I thought that was pretty interesting.

I will say the Joltz report, the job opening labor turnover survey report, all of the measures in there kind of sort of suggested the labor market is moderating, though. Hires were down, layoffs were up a little bit, quits were down, the number of people quitting their jobs was is moderating, and the number of unfilled open positions still very high, but coming in. So everything is moving in the right direction. Sticking, as I would say, to script. Sticking to script.

Sticking a script. A script. Maybe not the script, but A script. The script. Okay. So, Chris, what do you think this all means for monetary policies? And so, you know, just a level set. and the probability of recession.

So here we are getting close to the end of the podcast. I do want to go back and see if your odds of recession or change for what you're thinking about this, about any of this has changed. But just to level set, in our current forecast, we have the Federal Reserve raising the funds rate, another half point when they meet, I guess it's next week,

quarter point in January when they meet, quarter point in March, and that raises the federal funds rate target. get the interest rate they control from just under 4% currently to just under 5% by, I think it's March or April next year. And then they keep interest rate stable until we go into 2024. And at that point, inflation normalizes and they start, they, oh, geez, there goes my white wine glass.

I'm sorry. It's not an expensive wine glass. So no worries. And I had already drunk my wine. So no big deal. No dry cleaning. No dry cleaning. Yeah.

Don't tell my wife. So that's the path. We go back to the equilibrium funds rate in 24 and 25. So you got another hike in there in March. Yeah, we put that in. Sorry, I should have said that. Yeah, we did put that in. Do we have that last month?

I don't know that we did. Yeah. So we'll put one more in. So you're a little concerned that inflation doesn't moderate fast enough here? Well, it's more that that's market expectations, and that's what's embedded in, I think that's market expectations, right? Yeah. That's what investors are pretty close to what investors are thinking. So that's what's embedded in stock prices and mortgage rates, the value of dollar, that kind of thing.

So just, you know, I think that, just to be consistent with market expectations, and I think that's reasonably, that's reasonable. So we incorporated that. But, and so how do you, does that sound like a reasonable forecast at this point? Are you expecting even more rate increases? Would you expect one rate increases? No, I expect that's the case. Yeah. Also, because I expect that after that comes the recession, right?

So they won't get a chance to hike further or what they won't need to hike further. Do you think they'll get to 5% or not even get it there? The four and three quarter to five, I think he'll get there. I'll get there. That'll be the last straw, if you want. Yeah. Actually, your forecast is pretty consistent with market expectations, isn't it? I think market is the market investors, if you look at futures for Fed funds, they have the

interest rates coming back in in the second half of 23, particularly in the first half of 24. I don't know if they're discounting recession, but they're, well, they are actually. They definitely are, right? They definitely are. Minus 80 basis points, Mark. On the two-year tenure spread. And the 10-3. And the 10-3.

So investors by that inversion with short rates rising above long rates and the expectation that are going to be cutting in the second half of next year, first half of 24, we'd be consistent with the idea that bond investors think a recession is coming. Right. Yeah. Okay. So what is the probability recession in your mind at this point? I'm going to stick with 70.

I'm tempted to go to 75, but I want to see a little bit more data. And because why are you tempted to go to 75? The wage data here makes me, and the labor market data we talked about earlier in the perhaps mixed signals, right, that may lead to a Fed policy error. I see. Okay, but you're sticking to 70 right now. Yeah. I'm giving you benefit of the doubt there.

Okay. All right. It's so interesting. Dante, I can't recall. What was you last, you were on, were you on a month ago for the last jobs number? Two months ago, yeah. Two months ago. So what was your probability of recession two months ago?

I think it was 50. He's either 50 or 55. Okay. And what is it now? I would say it's 50 now. I would say it's probably unchanged from two months ago. My mood hasn't really changed since then. But it sounded like you might, if anything, you've become a little more optimistic.

No? No. On the margin? I'm neutral. I mean, maybe be slightly more optimistic on the margin. So you're, but you said 50, you're at 50%. Yeah. Do you hear that, Chris? Yeah.

Does that surprise you? It does. It really does. Mark has brainwashed me. He's gone to the dark side. You're for your dark side. You are the dark side. I'm your dark side. You're my dark side and I'm your dark side.

Dante's definitely gone to the dark side. the dark side. I'm not sure which dark side he's going. Is there a light side? Is there a good side? It's all dark. It's all dark. It's all dark. That is interesting. You're sticking with 50. Okay, Dante, you know how when people do a forecast, like a GDP forecast for a calendar of 20203, and then sometimes they show an up arrow and a down arrow, meaning the risks to my forecast is up or down. So take your 50% Is your arrow up or is your arrow down? Chris's arrow is down.

No, no, it's up. It's up. It's up. It's definitely up. On the probability recession, is your arrow up or down? I would say I'm at 50, but my arrow is up. I think there's a bigger chance that I raise those odds in the next three months

than it is that I bring them down. Okay. Interesting. Okay. So I'm at 50% probability recession. And we're talking about recession in the next. It's through the end of 2023. Yeah.

The recession will start an NBER, National Bureau of Economic Research, defined recession. It will start between now and the end of 2023. I'm still at 50%. I've not, I haven't changed. But my arrow is down. My arrow is down. I'm feeling better about this. Yeah.

I really am. Did you see the inflation statistics this week? The core. Noir. Does that, you know? Huh? Pino noir. Yeah.

It's a Pino noir? Yeah. A little glass of wine. It's a peanut noir talking. Maybe you're right. Probably should have had a whiskey. Then it would say, and then it would have gone down to 45%.

And the gin and tonic. Yeah. I'm off gin and tonic. I can't. I can't contain more gin and tonics. Done. I'm done with that. Okay.

All right. Well, I think we know where we stand. And as I said, I think we're getting closer and closer to the moment of truth here. I think we'll figure this out. Any other thing we want to talk about before we call it a podcast? I promise that we were

going to keep this to about an hour. I think we're pretty close to time. Any other issues you want to bring up? Dante, anything we missed? No, I would just say you said we need to be patient with the job market. I think I would prefer to see some actual moderation here a little bit more quickly in the next couple months to make me happy. It's moderating. What are you talking about? You're saying faster moderation? The last four months. 292, 269, 284, 263. That doesn't feel like a whole lot of moderation in the last four months. That just feels like we're stuck there at 270 or whatever that average is.

It just feels like we haven't gone. He's got a point. He's young. He's impatient. And the month before that was 537. That's certainly, that was a, not a good. What was it at the beginning of the year, my friend? Well, January is 504.

There you go. July, it was 537 again. There you go. Okay. Okay. You know, I think I want to start. We've tried this in the past. Let's try it again.

I'd like to solicit to our listeners. If you have questions that you'd like us to answer, you know, something that's really bugging you about the economy, obviously. Fire away. And, you know, send us an email. We're all both on Twitter. Are you on Twitter, Dante? I can't remember.

No? Okay. I guess fewer people are on Twitter. days, but if you're still on Twitter, you know, send a DM and ask a question, and we will address that on the air on our podcast. And I think other listeners would value it. So if you've got a question you would like to ask, please fire away and we'll take it up in future podcasts. Okay. With that, we're going to call a wrap. Thanks, everyone. Take care now.