Moody's Talks - Inside Economics - Near Perfect, New Probability

Episode Date: August 4, 2023

It’s jobs Friday, and Mark, Cris and Dante discuss the near perfect (Dante’s description) July employment report. Job growth remains strong, but it is moderating, and should help convince the Federal Reserve that its interest rates hikes are over.  The group identified a few nits in the numbers, but the report was so good Cris lowered his odds the economy will suffer a recession in the coming year.  For the full transcript, click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by two of my colleagues. Of course, my co-host, Chris D. Reedy. Hey, Chris. Hey, Mark. How you been? I'm good. I'm good. We went by pretty uneventfully, so all good. You? Yeah, same here. Okay. Very good. And we've got Dante, Dante Di Antonio. Of course, Dante is a regular on Jobs Friday. This is August the 4th, Friday, August the 4th. And we got the employment report for July. It's good to have you, Dante. Thanks, Mark. Happy Friday.

Yeah, you're still at the beach, I see. Yep, getting ready to head home after two weeks of relaxation. I'm sorry to hear that. Yeah. And where do you go when you go to the beach? Ocean City, New Jersey. Oh, that's right, Ocean City. I haven't been to Ocean City in many decades, probably.

Yeah. Probably hasn't changed in decades. No, not a whole lot. Yeah. Nice, nice spot to be in. And home prices have come down. Yeah. They have.

Have you noticed? Have you looked? They're still pretty expensive, but they come down a little bit. Yeah. I think it's Ocean County, New Jersey, or that's the ocean. Is that a metropolitan area, I think, right? Ocean. I believe so, yeah.

I believe it is. Yeah. And so I was looking at, I think it's down more than 10% from the peak in oceans. Of course, it would probably up 50, 60%. during the pandemic. Yeah, yeah, I think so. So, yeah, so prices are coming in a little bit. Okay, the jobs numbers.

I've got a view, as you can imagine. I'm smiling. That might give you a hint. Chris is crying. That might give you a hint. I am very happy that we created 187,000 jobs. True, true. Well, we'll discuss what that means for your forecast in a bit here.

But before we go down that path, Dante, you want to give us the rundown with your view. Just give us a sense of the numbers and, you know, what your view is of what it means. Sure. I dare call it a near perfect employment report given the current world that we're in. Near perfect. As Chris mentioned, we added 187,000 jobs, which is basically in line with where we were last month after revisions. It's, you know, a definitive slowdown over the last three months, six months, 12 months, whatever period you want to compare it to job growth is, is,

definitely slowing. You know, on a three-month moving average basis, we're still over 200K, but it's definitely moving south pretty quickly, and it seems like we're likely to be south of that here in the second half of the year. Across industries, I would say, you know, the breadth of job creation is narrowing a little bit. We had a few more industries where you had small losses. There weren't any sort of glaring weaknesses in the report, but you had a small loss in manufacturing, small decline in transportation and warehousing, a relatively big decline in temporary services, which has been a big negative here and likely a sign that things are going to continue to slow and weaken over the next couple of months. On the positive side,

healthcare continues to just churn out jobs at a pretty brisk pace added just over 87,000 jobs this month, which is the strongest that's been in about a year. Construction holding up well in the face of, you know, whatever headwinds might exist in the housing market, adding almost 20,000 jobs. Public sector payrolls are still positive. They've come in a little bit, and they're not quite as strong as they've been in recent months, but still adding jobs in the public sector. Leisure hospitality is weak again. You know, that had been the main driver of growth early in the recovery that has, you know, definitively pulled back, slowed off.

There haven't been any job losses, but the gains have slowed to almost nothing at this point. Yeah, I think if there's one thing that people will sort of stick and look at as a weakness here, it's wage growth again. It came in at 0.4% month over month, though the year-over-year change is still basically stuck at 4.4%, which is where it's been basically since the beginning of the year. So it's not re-accelerating, but it's also not coming in rapidly, as we might hope. On the household survey side, I guess you could call it a negative that the unemployment rate fell in this environment. You know, tick down to three and a half percent. I'm not sure that I read a whole lot into it. It fell for the

right reasons, at least the labor force is still growing. It's just that household survey employment was a little bit strong again. So I don't think there's anything too negative there. All of the participation measures, employment to population ratios were all either flat or up slightly, which is, you know, you got a positive sign that workers are still coming back to the labor force. So, you know, all in all, it's, it's another positive report, just like it was last month. I think it's hard to find too much negative in the numbers that we got. Great. Yeah. So the only blemish that you pointed to was wage growth, the growth in average hourly earnings. which kind of seem a little stuck here at year over year, around 4.4%.

That's right. And just to give people context, what do you think it should be? I mean, if it was ideal, what would it be? Yeah, I mean, I think there's some debate. I mean, we've long said three and a half percent. If you assume 2% inflation and you assume sort of long-run productivity growth at 1.5%, that would say we can sustain three and a half percent wage growth. I think there's obviously some wiggle room there.

Do we actually think 2% is the inflation target? Do we think the Fed's comfortable with something a little bit higher than that? Do we think productivity might be a little bit stronger than 1.5%? I don't want to get Chris too excited. So if you think there's any wiggle room on inflation and productivity, maybe 4% wage growth is sustainable, maybe something slightly above that. So I think there's not a definitive that says we have to get back to 3.5%, but we probably need to get a little bit closer than we are now.

Yeah. Splitting hairs just a little bit, but I want to do that. You say 2% inflation plus 1.5% productivity growth gets you to 3.5%. And that would be consistent with the Fed's target. Should we be using 2% the core PCE or should we be using CPI, the consumer price index, which would be 2.5% add 1.5% for productivity growth, which gets you to 4. And if that's the number, is that really different from 4.4% given the, all the, we know there's so

many measurement issues here with regard to this particular weight series. Do you have a view on that? I wouldn't argue against it. I mean, I think three and a half percent is the lower bound of where we possibly need to be. I think of anything. The lower bound, the lower value. I think we can sustain wage growth above that in all likelihood.

I think, you know, that's definitively as low as we would need to get if think we we can probably sustain something slightly higher than that. Right. Chris, what do you think about what I just said? I mean, this feels very in the weeds inside baseball economics, but what do you think? Because everyone says three and a half percent, and I'm wondering, well, exactly why three and a half percent. Well, I think it comes down to which series you're talking about as well, right? Because the average hourly earnings as well, we know has its own issues in terms of measurement. So is 4.4 really the growth rate here?

The ECI, other measures might be a little bit higher. So, yeah. But if you're asking, you know, does it need to be three, if it was four, if we were under four, I think the Fed would be comfortable with that, right? I don't think that's to your point that they're. Three and a half percent is kind of this soft bogey. It didn't, if it's below four and not accelerating, Yeah, right. I think so. I think if we're anchoring towards the number, it's four, and then underneath that, then the other factor is, okay, let's take a closer look at the productivity,

which is very hard to measure at the moment. I don't know if we'll get into that. Yeah, we will. Yeah, I'd like to do that. Yeah. And then the wages, it's, you know, there are lots of factors here. Yeah. But you're saying if we're in the, if we've got a sub, if we're in the, we've got a hand three handle on whether it's three nine or three five good enough. Ah, you're going to use the Wall Street lingo here. Yeah. Yeah. Yeah.

Yeah. All right. We are Wall Street, my friend. Aren't we? No. I thought we were suburban Philadelphia, right? No, but you know, we're Moody's. We're Wall Street.

We are. We define Wall Street. We are right. All right. I think. I sort of. Yeah. We're Wall Street.

to Jason at least. Okay, we're all straight adjacent. I like that. I like that. So, Dante, going back to you, so bottom line, you felt pretty good about this number, this report. I feel good about it. Yeah, because I think I discount the sort of negative of wage growth probably more than

others do. So I don't really see anything wrong. You know, the unemployment rate, yeah, we expect it to move up a little bit here. I'm not worried that it ticked down instead of up just because the labor force is still growing, and I think that's the most important thing. We've got a labor force that's growing. We've got job growth that's slowing. That should eventually get us to an unemployment rate that's ticking a little bit higher and then taking a little bit of the pressure off the labor market, but it feels like we're in a pretty good spot all around. Yeah. Okay. Chris, oh, I meant to ask

just factually because I don't think I looked, government employment, because that's been increasing strongly here recently. Did that continue in July? It was up 15,000. The average in the second quarter was 40,000. So it's still up, but definitely slower than it was. Right. Okay. In July. And I think that goes to the fact that state, local, federal government couldn't compete with the private sector back a year ago when wage growth was as strong as it was. But now that it's moderating governments back in the game and they're starting to hire. Yeah. Okay. Okay, Chris, what's your take on the report? Yeah, good report. Right. Certainly. Near perfect report. Indicating moderation.

I have a sense that might be in the title of this podcast, Near Perfect. Isn't it perfect? Near Perfect. There are some Nits. You couldn't end it. And a bit of it is in the eye of it. Your perfect, nits could also be in the title somehow. Let's keep that into mind.

Write that down, Franco. We're already in the titling session here. I'm just on a roll here with the title. So go ahead. I don't think our listeners realize the pain and suffering. We go through to come up with the title each week. That's right. I don't know.

I hope they appreciate the titles of these podcasts because goodness, there's a lot of sweat and blood that goes into those titles. Oh, geez. Anyway, go ahead. Yeah. Overall, good report. Again, there may be some nits, but some of those can be really in the eye of the beholder, right? You can spin them some different ways, right? So I looked at, I saw that part-time workers for non-economic reasons is actually,

up from last year. So is that people voluntarily choosing to work less, take a part-time job? Or is it people who are forced to because they don't have childcare? Or I guess that would be for economic reasons. But how much of this, though, is truly the choice versus the offering of the labor market itself. Wages are higher, so maybe I don't need to work as much. So I don't know. You can find some of these.

Dante, I don't know about you, but that was his knit? I mean, he's really stretching. Another one I said, I say that's like a, like a, I don't mean, what I would call that. All right. So multiple job holders is up. People working both full-time and part-time or two part-time jobs is up versus a year ago. How do you interpret that? Is that economic stress?

Significantly, I didn't see that. It's up half a million. Oh, it is. Okay. And it's not one month jump. It's a trend. It seems to be a trend. Yeah. Okay. Dual drop holders. It's still not a large share of the total labor market, though. Yeah. Can't really say, oh, this is. Right. Does that point to some underlying stress maybe in certain households, maybe. Right. So something to watch, not something that is maybe macroeconomic in nature. But again, you can find little pockets here where, depending on what your view is, you know, could color your outlook. Maybe you could say, well, because the labor market is so strong, there's all these opportunities, people are taking advantage and working two jobs because they, you know, their wages are way up. So making a hay while the sun is shiny.

So how do you square the circle here? Any other nits? Those are two nits. You know, you go into some of the demographics, sure, but you can find things. be an employment rate for different minority groups. Different minority groups or different age or education group. But, you know, you got to be really careful there because there's a lot of of month-to-month volatility.

So I didn't spot anything that really shouted out, hey, this is a real issue here. Yeah. Broadly speaking, is it consistent with the economy kind of threading the needle here, the slowing sufficiently that it'll allow wage and price pressures to abate, get back to the Fed's target, but at the same time avoiding a recession, do you feel like it is consistent with that kind of outlook? I think it's on that glide path. The question is, you know, again, we go back to wages, is that that stubborn, right?

If it had been coming in a little bit more, then maybe we'd be a little more convinced, perhaps, that that was indeed a path. But, you know, if we stick here, then the Fed may have to come in more aggressively, and that certainly could slow things down in a more aggressive or a more severe way. I'm asking another question. So the unemployment rate 3.5% has been more or less 3.5% now for almost a year and a half, I think. I think maybe not quite, but pretty darn close.

Pretty amazing stability. low and stable, you know, 3-6, 3-5. Did we ever get to 3-4? I'm not sure, but, you know, we did one month. Okay. So if, you know, people look at that, they might think, oh, that's a problem. That indicates that the labor market's too tight or beyond full employment. So two questions.

Do you think that 3.5% rate is consistent with full employment or being beyond full employment? and are there other indicators that we should be looking at to gauge whether the labor market is easing up or not? Maybe the unemployment rate, you know, obviously isn't the only thing we should be looking at. What else should we look at and what are they saying about the kind of the tightness of the labor market? That's to you, Chris. Oh, to me. Oh, yeah. So, sorry.

No problem. No problem. No, I, do you want, we can send it to Dante. Well, you can send it to Dante after, but. Okay, go ahead. Fair enough. He can correct my error. So I would say the mere fact that we continue to pull people into the labor market

continue to create all these jobs to me suggest that we if we are at full employment, we're not certainly well beyond full employment, right? Because we keep bringing people back in or taking them off the sidelines. Is it 3.5 versus 38? I don't know. Maybe you could argue, you know, what the specific number is in there. but I don't think that we are well beyond, which would be the cause for concern from an inflationary standpoint.

And I think that's reflected even in those wage statistics. Yeah, they're not falling as quickly as we'd like, but they're not accelerating either. So three and a half percent is kind of sort of consistent with full employment. We don't need, doesn't feel like we need four percent on employment or four and a half percent on employment, which, by the way, if you look at the Fed, the reserves forecast, they produce a quarter, their long-run unemployment rate projection is, I think it's over four. You know, it's like four-one, four-two, I think. So they're saying effectively, that's the full employment unemployment rate. That's the rate that would be consistent with stable wage and price growth, you know, at target.

But it feels like you're saying, well, not, maybe not really, maybe not. Three and a half percent feels like it could be the number. It feels a little bit low to me. me, just, but that may be just, uh, anchoring bias right there. Right. Uh, right. But, uh, again, I don't see it that it seems as though below four is, is sustainable. Right. Okay. Dante, uh, what do you think? Yeah, I agree. I mean, I don't think there's any evidence that were well beyond full employment at three and a half percent. I mean, like Chris said, wage growth isn't accelerating. You know, if any, you know, it's, it's still slowing, maybe not, quite as quickly as we'd like. But if you look at something like the employment cost index,

it is coming in a little bit, even though average hourly earnings have been sort of stuck for the last six or seven months. There is evidence that other wage measures are slowing a bit, which seems counterintuitive if we're beyond full employment. We are still drawing in 150, 200, 250,000, workers into the labor force every month. It seems like, you know, with regularity. By the way, I looked at it. I'm not taking anyone's statistics, but over the past, year, I think the labor force has grown over three million. So divide by 12, you know, that's a lot of people entering into labor force. It's hard to argue you're at full employment. Right. Pulling in that kind of labor force, right? Yeah. I think you could argue that you, we could see

wage growth moderate faster if unemployment crept up closer to four, but I don't think we necessarily need to see that happen in order to get back to a steady state here. We're, you know, long run path. What other measures are you looking at to gauge how tight the labor market is, whether we're at or beyond full employment? I mean, the unemployment raise the kind of the top line headline kind of statistic, but what others do you look at? Is that to me? Yeah. Oh, sorry, Dante, yeah. I mean.

I'm looking at you, Dante. You didn't know that? I didn't know. You know, I mean, if you look at any of layoffs, it's surprising how well things have fit to I mean, we saw this uptick in layoffs, but they've come in, but they've come in with job growth still slowing, which seems like an unlikely outcome, right? But it's because hiring has also slowed. Everything sort of seems to be just gradually pulling back. You know, if we were in this overheated labor market, you'd imagine there was a bigger fight for workers and, you know, bidding up of wages. And it just doesn't seem like in any of the measures that that's happening.

It seems like we're drawing in enough workers to sort of satisfy needs and, you know, things are sort of coming back into normal. I think it just took a little bit longer after the pandemic for all of that to happen than we maybe initially thought. But it feels like everything is sort of coming back into a long run sustainable path. If you look at quits returning to normal, you know, hiring, slowing at the same time that layoffs are easing, you know, it just feels like everything is fitting into a nice, you know, sort of stable pattern. Yeah. Okay. Well, I think near perfect is a good description. It's not perfect, right, because wage growth is still elevated, you know, even by my effort to get the target of or still above, you know, any target that you might have consistent with a 2% inflation number that the Fed's focused on. So I don't think it's perfect, but it is near perfect.

job growth is strong, but it is steadily moderating, moving in the right direction. It's now consistent with, it's growing less than the growth in the labor force. Labor force is growing more strongly. It feels like the labor market is slowly but surely easing up, despite the 3.5% on unemployment rate. And I think you can see that in a number of statistics, some of which were in this report, some in the Joltz survey, the job opening labor turnover survey report we got earlier in the week. Now, that's lagged one month.

The data we got today for employment was July, the jolts is for June. But it provides a lot of insight into the underlying dynamics. You mentioned hiring. Hiring, I think that's the way businesses are responding to kind of the weakening and demand for their goods and services. They're saying, I'm not going to lay off workers. I don't want to do that because it's going to be hard for me to find new workers and retain the workers I have. So I don't want to lay off.

But I can pull back on my hiring and be less aggressive than my hiring. So the hiring rate, the number of hires as a percent of the labor force is I think it's back pretty close to even lower than what it was kind of in the pre-pandemic period in the tight labor market before then. The other thing that it appears to be going on, and this is kind of interesting. is they're cutting back on hours. That's the one thing you didn't mention, I don't think. Hours worked per week declined in the month. And they're now kind of sort of below where they were pre-pandemic as well. And it feels like that's the other way businesses are responding to the weakening and demand.

Again, not laying off workers, but allowing the hours work per worker to start to come in. The other good indicator of an easing in the labor market is quits. The number of people quitting, this goes to the jolts, the job opening labor return of survey, quits have come back down. And I think the quit rate, again, quits as a percent of the labor force, that's back consistent with where it was, you know, pre-pandemic. Still maybe a little bit elevated, but only a little bit. And that's really key to wage growth, right? because it's when people switch jobs that they tend to get these bigger pay increases. So if you, and it also, you know, that also adds to weaker productivity growth because as

people quit and move around, you know, ultimately I think it raises productivity, but at least initially, because people are transitioning to new jobs and trying to figuring out and getting up the learning curve, that that's going to reduce productivity growth and, you know, keep up our pressure on inflation. but the lower quit rate is, you know, I think very positive, you know, another indicator that things are kind of easing up. So it feels like businesses are, you know, responding to the weakening in demand for their goods and services, but they're doing it in a way that doesn't entail layoffs. And if you don't get layoffs, I think I've said this a few times before in

these podcasts, hard to see a recession, right? Because I think you need those layoffs. to really spook people, consumers, have them pull back on their spending, and ultimately that's what you need for an economic downturn. If consumers keep on spending doing their part, you're not going to have a recession because there's such a big piece of the pie. Does that all make sense? Chris, did I say anything that you would disagree with there or push back on? No, it looks, again, the trends look favorable.

One other statistics, I can throw out, the temp help hiring was down this month as well. you might view that again as another. I think Dante mentioned that. Yeah. Right. Another indicator. Right. Dante, any pushback on what I just said there?

No, I think all of that makes sense. I mean, the hours point is a good one. If you look at the index of aggregate weekly hours, it was down again this month. And it's been down a few times in the last four or five months. So even though we've been adding jobs at a steady pace, you know, some of that is being offset by those reductions in hours. Now, I've got a question that, again, pretty deep into the weeds, and you may not know the answer to or have, you know, a sense of it,

but I'm going to ask anyway. And then I'm going to turn it back to you and see if you've got any questions that you want to pose to the group that you're saying, this just bothers me. Can someone help me figure it out if you've got any of those questions? My question goes to the labor force and the strength of the labor force in the context of a stable labor force participation rate. So if I look at the participation rate, the percent of the labor force that's, you know, out there in the, looking for work or working, it's flat as a pancake, 62.6%. That's, you know, it's down from its pre-pendemic, 63.3. But that, I think, is what you would have expected to happen with or without a pandemic, just given the aging

out of the baby boom generation. You'd see a decline in participation rate. And it's, you know, roughly where we thought the participation rate would be, if you go back and look at our forecast for this time prior to the pandemic. I think it was exactly 62.6%. So it's sticking the script. But yet we've seen this big pickup in labor force, which means, doesn't it, that the growth in working age population is strong? I think that's the simple arithmetic.

Correct me if I'm wrong. And if I'm right, what's going on there? Why are we seeing, what could be explaining that? Why are we seeing more working age population growth? Dante, I'll turn it to you because you look at these. First of all, is that a reasonable question to ask? I mean, is that perplexing? I know you probably didn't notice that, but now that I pointed out, do you find that

a perplexing development? Yeah, I mean, I think there's two possible explanations, I think, off the top of my own. I mean, the one you made, I think, is fair that you've got stronger than expected growth in the actual working age population. I think you still have some offsetting effect of weaker participation for, you know, non-prime age, so 55 and over workers, but you've still got modest increases in participation for prime age workers. You're there at, you know, 20, 25-year highs in most cases. So I think some of that, you've got the top-line participation that's been holding steady for, whatever, six months or so.

And some of that's been an offsetting there where participation among older workers has stayed weak, but you've gotten this uptick in participation amongst prime age workers. So I don't know that it's the increase in population that's driving it or just an increase in participation amongst those younger workers. I think the prime participation rate, it actually was down a little bit this month, but it's a couple tens of plus pre-pandemic. If you look at the prime employment to population ratio, that's the highest that it's been since the early 2000s.

I think some of it's an offsetting effect where you've gotten this really strong. participation amongst prime age workers that you don't know, we're necessarily expecting to see that hitting new highs here at this point. Yeah, the other interesting thing I noticed in looking at the growth in working age population, you can look at it in terms of native-born versus foreign-born. You go back a few months ago, I'd say six months, nine, 12 months ago, you saw a really substantive increase in foreign-born workers in the labor force. That has leveled off.

And more recently, in the last few months, it's native-born, which is kind of sort of interesting. Yeah. Any comment there? It's just an observation. Yeah. I would agree. I don't know that I have a good explanation for why it's happening. Yeah.

Yeah. Okay. Go ahead, Chris. I'd throw out just to be a little cautious with the date itself again. Yeah. Yeah. Measurement errors, I think. measurement differences, let's call them.

Right. I think even in the census, we suddenly discovered there were more younger folks than we actually estimated prior. So, you know, just be cautious, of course, when you're looking at this. Generally, that's what happens. When I have a question I can't answer, the answer is it's not really happening. It's data. It's a data problem.

And the data ultimately gets revised and you go, okay, now it makes sense. And even in the employment, I don't know if Dante mentioned it, but there were some revisions in the past two months of employment, right? Downward. Yeah. Right. Consistent with some of the observations we've made in the previous podcast that the labor market just looked too strong. I think we're buying back some of that now. So it's still strong, but maybe not quite as strong in terms of employment growth as we thought a couple months ago or we saw a couple months ago.

Right. And just to reiterate something we've said in previous podcasts around the jobs numbers, we've got these big benchmark revisions coming. At once a year, the these data, the payroll data that we're referring to, the survey of businesses, gets a so-called benchmark to actual employment accounts based on unemployment insurance records. They do this once a year just because it's such a computing, requires a lot of computing resources. And they, they, and they don't do it every, every month. So it feels like that, when we get those benchmark revisions, we might get some further downward revision

to the employment growth we've been observing. So employment growth is slowing, but it may have even slowed more than we think it has once we get all those revisions in. Yeah. And we're going to get a read on that. Aren't we Dante here pretty soon? The preliminary estimate of the benchmark comes out later this month.

So by the time we get a Wimmer report next month. We'll have that data in hand to be able to. Okay. I'm really curious to see what that says. Yeah. Hopefully it doesn't change the picture. Oh, we're in recession. That would be bad.

No, no. Now it's not going to do that. But anyway. Okay. I did want to talk about the other, we were focused, obviously, on the job market, labor market this week because it got a lot of labor market data. The other data point that came out was around productivity growth. And I want to talk about that.

I'll come back, but I want to come back to it. Let's play the statistics game and then we'll come back and talk about productivity. So the statistics game is we each come up with a number, a statistic. The rest of the group tries to figure it out through question, deductive reasoning, clues. The best statistic is one that is not so easy. We get it immediately not so hard that we never get it. And it's apropos, hopefully to the topic at hand. It doesn't have to be.

It could be a recent statistic as well. But obviously the job numbers are top of mind. So with that, let me turn to you, Dante, first. What's your statistic? Let's go with 4.1%. Hmm. In the jobs numbers today? It is not in the jobs numbers.

In the Joltz report. Not in the Joltz, no. Oh. Hmm. Okay. Now he's digging deep. In the productivity numbers? It's not in the productivity numbers, no. Is it a labor market statistic? No, it's not directly labor market related, no. Oh, okay. Head fake. Yeah, threw us off the track here.

Yeah. I think Dante, I think labor markets. Yeah, absolutely. I'm mixing it up. Nice, nicely done. Okay. Thank you. Thank you, Dante. Is it an inflation statistic? It's not inflation, no. Oh, geez, Louise. Is it a government statistic? We've got to go back to basics here.

It's not a government statistic. Oh, my gosh. It's a Moody's Analytics statistic. Oh. I want to say CMBS to only quince erase, but that sounds like can't be that, right? Is it from the survey of business? No. It's a number we just rolled out this week.

Oh, I know what it is. I know what it is. I know what it is. You've used it again before. It's the tracking estimate for GDP in the third quarter. That's right. We just rolled out the initial estimate for third quarter GDP is 4.1% annualized. And that's actually in line with you. I think the Atlanta Fed's GDP tracker was at 3.9% in their initial estimate.

So either roughly in alignment. It's early. Obviously, it's not based on a ton of data. But explain what this tracker is. You know, what is it? So, right, we take incoming hard data that would eventually flow into the estimate of third quarter GDP, and we use that to do a real-time estimate or projection of what we think third-quarter GDP would be. So as we move through the third quarter, we get more and more data. We update that tracking estimate.

So, you know, the initial estimates don't tend to be super accurate because we're not basing it on a lot of information. They tend to get more accurate over time as more of that source information comes in. But, again, it's a real-time tracking estimate of what we expect output to be in the current quarter. Yeah, I think it's – I thought it was interesting. Obviously, we had a couple of high-profile pullbacks on recession calls, and it feels like if you're getting anywhere close to 4 percent annualized growth, I think the talk of recession any time this year or probably even early next year is unwarranted at this point, it feels like. So I think we'll probably see more people going back on those recession calls here in the near future.

Although if we get 4.1 percent, then, you know, can't sustain out. But if you get 4.1 percent with inflation still coming in and the job market still slowing, yeah. It does that cause the same reaction, I guess, is my thought. Although productivity then is taking off. Right. That could mean the productivity is providing a bigger lift than it has recently. But the reality is this is early days.

We don't have many hard data, as you say. So this is based on very little. Yeah, I certainly, I'm not expecting 4% growth in the third quarter. But I think it certainly is a positive sign that growth is going to maybe pick up a little bit from where it was in the first half year. Yeah, in the third quarter. Can I ask right now? So vehicle sales, we got vehicle sales for July. we got the ISM surveys for July

and the supply management numbers. What else is it? I guess it also depends on the kind of the jumping off point from Q2, you know, for a lot of this data. Is that basically the data that you have now for that tracking estimate? Right. The initial estimate comes after we get vehicle sales. That's the first big data point that we get in.

And then, right, the jumping off from the previous quarter obviously matters and the trend estimates are for the other factors. Vehicle sales is the key to when that starts for the next quarter. But your point is a good one. I mean, you had a lot of forecasters, not us. I'd just point out, not us, but other forecasters really saying, you know, about this point in time, we'd see some real weakening in the economy, maybe not a recession in Q3, maybe not negative numbers,

but certainly not strong numbers. We'd be starting to see some real weakening here, and we're not seeing it at all. Just, if anything, just still early days, but if anything, just the opposite. Strengthening. Yeah. Okay.

There was one forecasting outfit out there that said 100%. Probably remember that? I do. I don't want to embarrass them out. Yeah. Just to say. Yeah. Of course.

Now, the script, you know, I always hesitate to. No, please don't go. That was, I told you so. I didn't know. That was you who said, I told you. you so. No, I was not saying I told you so, but I hate doing that because that was a pretty bold. 100%. Well, yeah, they're trying to make a, they're obviously make a statement. Yeah. But, but anyway, I did notice Bank of America, you know, I respect a lot. They had a recession call for a long

time and they decided to roll that back. Anyway, okay, that was a good one. That was a really good one. A little little difficult because, you know, our minds were somewhere else, but nonetheless. Chris, what's your statistic? 23,697. Is it? Too easy. It's too easy?

Yeah, it's a job cut announcements from the Challenge report. Yes. Oh, my God. There aren't that many data there, and that's just sitting. The individual number. Boy, that's embarrassing, actually. Chris, are you embarrassed? By how embarrassed that was so easy?

Yeah. No, it's a, I knew it was easy, but relevant, right? Actually, I wouldn't have gotten it. I was, my mind immediately went to construction employment or something, which was, I think it was up 19,000 or something, right? Yeah. What was manufacturing? Was manufacturing up or down? Down 2000, which is pretty amazing that given all this, it's only down 2000. But okay, so, okay, Chris, you pick. Very low, very low level of layoffs. It's actually. down 8.2% from a year ago. That's the first year-over-year decline this year. So just, again, points to the fact that job cut announcements are very low. Businesses seem to be focusing more on maybe pulling back some of their job openings rather than actual layoffs at this point.

Yeah. I mean, it's just incredible. I mean, just how low those layoffs. We saw pickup earlier in the year because of the tech, I think we mentioned that. But since, really, the last couple, three months, it's really come off again. That's right. It got up as, I think it was over 100,000 back in January or February of this year. So, you know, when there was some of the metals here there.

Yeah. Right. Which justified some of those recession calls perhaps. Right. You've heard my explanation for the low layoffs, kind of the labor hoarding argument. Businesses just don't want to lay off because they know they're number one problem through, you know, looking through whatever it is that we're experiencing now is going to be Yeah.

Finding and retaining workers. Do you buy into that? I think you asked this last week. Did I? Okay. As well, but yeah. I kind of buy into it. Oh, I think I did.

It was a couple weeks ago. I asked you when it was mono-a-mano. Yeah. I buy somewhat into it, but I can't be the only factory. There must be demand for goods and services. So they're willing to accept lower productivity, perhaps, but they can't have a big part of their labor force just doing nothing, right? back. It's just... Yeah. Right. So they'll hoard to some extent, but there are some limits there.

But that... I see the hiring is still being organic. They're seeing the demand for goods and services. They're still fulfilling. Okay. Okay. Okay. And at your earlier point, I think you've seen some of the adjustment on the hours front, right? I mean, you're still hiring, but you've seen average hours come down. You know, Chris's point about part-time for non-economics, you know, you've seen maybe some adjustment there, you know, where firms are saying, okay, we're not going to lay workers off, but hours are being cut back a little bit. People are being forced part-time maybe a little bit more than they were. So, you know, I think to your point about labor hoarding, they're trying to find ways to keep workers on the payroll by, you know, putting them to work a little bit less, maybe.

Yeah. Okay. Good one. Okay. So my statistic is 1.5%. 1.5% in today's jobs report? Nope. It's labor market related.

From the Jolts? Nope. Came out this week. Yep. Government statistic? Government statistic. BLS. Bureau of Labor Statistics?

I just saying. Is it? Is it productivity related? Yes, it is? Productivity related. Is that the decrease in hours worked in the productivity? Hmm. I don't know that.

I don't know that number. That was the number I had in mind, but it sounds like a big decline. Is that the average output per hour over the last 12 months? You've got the spirit of it. Yeah. It's the average annual growth, non-farm business productivity, since the just before the pandemic hit. So that's, you know, now.

Well, that's what I meant. I know that's what you. Yeah. Yeah, as I was just said, you've got the spirit of it. You got the spirit of it. And that's almost exactly equal to the productivity growth in the prior three plus years. So if I, you know, look at the since the pandemic hit in 2020 Q1 until now and calculate productivity growth. And then compare that to the same kind of three year plus period prior to that, that was also 1.5% productivity.

growth. So despite, despite it all, despite all the ups, downs, the economy is still generating productivity gains that are 1.5%, which is, you know, back consistent to what we were saying earlier about underlying productivity growth and the kind of wage growth you need to be consistent with the 2% target. You have to assume a 1.5% productivity growth numbers. I found that quite interesting, very, very encouraging, you know, particularly in the context of, yeah, in the context of all those quits. Remember I mentioned all those quits? I think at least initially, that's going to depress productivity growth.

It feels like we might be getting to the other side of the learning curve and people are going to start kicking in the gear. And because of all those quitting, people shuffling around getting jobs that were more they're more happy with, the more consistent with their skills and their preferences, it could be. We could see some pretty significant productivity gains here because we got more happy workers, you know, than we have had historically because of those quits. That's interesting. But there was a Wall Street Journal article that came out this week making

the rounds and indicating that, you know, newly hired workers, new labor market entrance were showing lower productivity, right? The businesses were really struggling to train folks. They attributed it to remote work, certainly, as well as just the pandemic itself and decline in education during the pandemic. So maybe it's industry specific, right? We're thinking, I think this article focused more on restaurants, retail, you know, just how do you register, how do you manage your schedule and whatnot? Well, typically when you have a tight labor market, productivity growth does start to decline, right?

Because you knew start hiring workers that are of lesser skilled, less experienced, have other issues and productivity does sort to suffer, but it doesn't feel like that's the case here. I mean, it feels like we're holding our own. At least if you buy into the data, we saw a big increase in the first quarter because it's jumping up and down on all around quarter to quarter. But if you abstract from that, it feels like, you know, we're still hanging tough, which I find encouraging. So you're still bullish, still optimistic for the future.

productivity gains you're going to yeah you know in our baseline forecast the most likely forecast in the middle of distribution with which no recession and we've never just to repeat no recession we've never had a recession we're assuming 1.5% productivity growth going forward which is

kind of pedestrian in the grand scheme of things meaning if you look at productivity growth between the World War II and the financial crisis it was almost 2% on the nose between the financial crisis and the pandemic that whole entire period, it was 1%.

In a few years right before the pandemic, it got back up to 1.5 and that's where we've been since the pandemic. So it feels like we were at 2. We went to 1. We're now 1.5. And that's what I'm assuming, because I just don't know, really, there's so many cross currents. Those things we were just talking about are cross currents. And that's not even bringing in things like artificial intelligence and AI and, you know,

the strong investment spending that's going on right now. among businesses, you know, how's that all going to play out? But we're kind of punting on that, at least so far, which I think it's, you know, hard to do otherwise, right? I mean, I think at this point, right? Yeah. Yeah. Still negative?

Yeah, I would say I'm still bearish. I don't think productivity growth is going back to 1%, but I, you know, I'm not sure that we get to 1.5% you know, over the next couple of years. I think maybe it's a little bit weaker than that. I'm still a little bit pessimistic, I guess. And Chris, I forgot you, this is kind of the ying and the yang of the productivity to be. Dante's the yang, meaning negative and Chris is the yang, the positive. Is that right?

That's right. Right. And so if you were, I mean, if you, if you, if you, we have the 1.5%. I'm kind of splitting the differences between the ying and the yang. What would you say, Chris, would be more likely? something closer to two, back up to two, over the next few years? Maybe one in three quarter. One in three quarters.

And Dante, you'd say one and a quarter? Yeah, I think that's roughly where I'm going to say one and a half. And it's one and a half. That's how we do the forecast. So that's one and a half, one or five percent. Reasonable. Reasonable. Right.

Reasonable. Have you seen, though, there, you know, the Goldman Sachs came out with a study on AI and they were arguing that it's a game changer, that, you know, it's like electricity or the internet in terms of what it means for productivity. So one point, it's going to add 1.5% per annum to grow. So we're now 1.5. We're going to get another 1.5. We're going to therefore be at three over the next, you know, 5, 10 years, something like that.

Was that the study that's $7 trillion to GDP or something? Global GDP. Yeah. Right. So hard to put that in. Information to make that case, though? I don't know. I don't know.

I don't think so. But, yeah, we'll see. AI specifically. So not. Yeah, when we're talking productivity, Garleth, it could come from anywhere. A lot of different sources, right. They're saying AI.

Genderative AI, yeah. Yeah, exactly. Yeah, interesting. Yeah. Okay. I think this is going to be a shorter podcast, which isn't hard to do because our recent ones have been very long. But let's end like we have been because I just want to get Chris's probability of recession over the next 12 months.

I'm just waiting. I'm waiting, you know, Dante, because he's stuck at 50% probability over the next 12 months. Chris, any change there? I'm not a hedgehog. What are you then? Gee, it feels like a hedgehog. Fox. New data?

No, that's no Fox. I'm revising it down to 45. Oh, look at that. Oh, my gosh. That is a watershed moment. Yeah. Right. And I might even go lower, but last week's podcast with the government shutdown discussion

and it spooked me. It made me a little nervous too. So a 45% probability, a National Bureau of Economic Research defined recession will start between now and this time next year, 45%. 12 months, yeah. Wow. Okay. Because you were 50 last week.

and your peak was 65? Yeah. 65%. Right. Okay. Anything, well, the employer report must have moved in that direction.

Was that the thing that pushed you over the line? Yeah, this and the layoffs and, you know, Nancy and the. Yeah. Okay. Okay, very,

very good. That's a watershed moment. Dante, where are you? I think last month I was at 40%, which was down a bit from a few, from a few months ago. I think I probably spent too much time with you recently. I would lower that probably to one-third now.

Oh, okay. I'm going to split the difference and call it one-third to make it easy. I have influence. You have, yeah. Ooh. Yeah, because Dante and I were traveling together out west visiting clients, and he heard my talk a number of times. Ah, okay.

Yeah, all right. Well, okay, one-third probably. of recession over the next one. I'm with you. I'd say one third probability of recession over the next 12 months. Still elevated. I mean, we're not, you know, until inflation is back to target, hard to get, you know, overly excited.

And economy is going to be vulnerable here. It is going to be soft. And anything that goes off the rails, even a little bit, going to be a problem. And that looming government, potential for a looming government shutdown does make me nervous. So, what was the, what was the, What was the price of gas at Wawa this morning? You know, I didn't go into. Oh, you didn't go.

Yeah, I actually was thinking about driving the car to get some Wawa coffee. But I couldn't, oh, because the employment report was coming out and I was, you know, busy getting, and I had a lot of other stuff going on writing a piece for CNN and that kind of stuff. But I didn't look. Do you know, Dante? Oh, you're at sure. Yeah, I think it was like, I don't even know what it was down here, 360. You bring that up for good reason because oil prices are going back up. Yesterday I saw $396.

Ooh, really? Westchester. In Westchester. Wow. Okay. Yeah. That does worry me as well, right? That's another good reason to be a little nervous here.

Do you think if we stay below $4 a gallon, we're okay, if we go over four, then I get a little nervous. If we get $4.50 plus, I think. Yeah. Plus food prices, I think. Yeah, that's the other thing. So electricity prices are coming in. So that should help offset some of the other. But still, yeah, I agree with you.

Yeah. Yeah, but that sentiment is really tied to gas prices for sure. Yeah, absolutely. Okay. Anything else, guys, you want to bring up before we call this a podcast? Now, are we going to get Marissa back next week? Of course, she's been AWOL quite a bit here. Next week, she should be back.

Okay, she should be back. Okay. All right, Dante, thanks so much. And with that, dear listener, we're going to call this a podcast. Take care now. Bye-bye.