Moody's Talks - Inside Economics - November Jobs: Back on Track

Episode Date: December 6, 2024

With Marisa out on assignment, Dante joins Mark and Cris to discuss the latest U.S. employment report. After several volatile months due to hurricanes and labor strikes, the job market found its footing in November, with payroll growth reported across most industries. The team considers the report's implications for monetary policy and the long-run interest rate outlook. With all of the policy unknowns, they conclude that the only certainty is uncertainty.Guest: Dante DeAntonio, Senior Director of Economic Research, Moody's AnalyticsHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by one of my trusty co-host, Chris DeReedies. Hi, Chris. Old faithful. I'm here. Have you ever missed a podcast? I think I missed one on vacation.

I usually dial in on vacation, but I think I did miss one or two. One or two. Okay. I've not missed any podcast. I'm just saying. Yeah, yeah. We rearranged the schedule. Dirty little secret.

There you go. Yeah, but we've been doing this podcast now for, is it coming up on five years? Could that possibly be right? I mean, in the spring, it'll be five years, I think. I don't think we started. Didn't we start in 21? It was during the pandemic era, but. Right.

I don't think it was. Well, we don't have Sarah to ask. Oh, yeah. It's either four or five. Well, what number is this? Maybe Franco knows. Yeah, me, Franco. knows. Anyway, well, let's put it this way. It's a long time. A long time. It's a long time. I used to

have more hair. Yeah, but it's good to have you. And we've got Dante, Dr. De Antonio. Hi, Mark. I know it's Kristen comment on the less hair. I did you notice that. He kind of, I heard those. Just let it hang. I heard a little stifled laugh. That's what I know. No, no. Just muted himself quick so you can hear it. I've got more gray hair. Well, I'd say you look distinguished. You see how that's done, Chris? Nice.

Nice. Exactly. Thank you. How are you, Dante? I'm doing well, thanks. Yeah? Your family been able to navigate through all the colds and all the things going on. Knock on what it's been, it's been an okay start to the late fall here so far, so we'll see.

I've been pretty lucky. My wife got pretty sick with a flu-like symptoms. and I somehow navigated through it without catching it. So hopefully. Now, let me knock on wood. Yeah. I'm sure I'm going to get nailed here pretty soon. But good to have you on.

It's Jobs Friday. We got the report for the BLS, Bureau of Labor Statistics report for the month of November. And before we dive into that, any other chit-chat you guys want to bring up? Where's Marissa, by the way? But, you know, that's our other co-host. It seems like she has a lot of vacation. Is there something going on that I don't know about? No?

Well, you should know about. I should. As her manager. I guess I should know that. Yeah. Maybe I'm just to prove. I approve whatever comes across my transom here. Maybe I, no, no, she's a hard worker.

Absolutely. That's well deserved. I'm sure she's doing some crack economic research on her travels. Wherever she is on the globe in the globe. Well, she needs vacation after dealing with me on a regular basis, that's for sure. I wear people out. But anyway. No, you don't.

No, you don't. Okay. He's learning. He learns. You see, Dante, he learned. He said something. Took him a little while. It was a little bit slow to forget that.

It was a little slow. Practice that. All right. Please. Of course not. Of course. Okay. Well, let's dive right into it.

Dante, you want to give us the rundown on the November. jobs numbers? Sure. The headline for November is a return to normal, I think, after the sort of mess that we had in October with strikes and hurricanes. So we got headline job growth at 227,000 in November, your private sector growth just below 200,000 positive revisions to the prior months as well, brought the three-month average up pretty drastically. It had fallen to, you know, just north of 100,000 last month, and now it's back up to 173, which I think is sort of roughly in line with trend job growth. I think the underlying trends somewhere in the 150,000, 175,000 neighborhood. So we're sort of more consistent with that again. On an industry basis,

we got more broad-based growth again after the sort of mess in October. The same industries are leading the way has been the case over the last year or two, healthcare, leisure and hospitality, the public sector, you know, to a lesser degree construction, had a little bit of a weak month here in November. Manufacturing bounced back, although not very strongly. You know, if you sort of subtract the returning striking workers, manufacturing would have been negative again. It was only up 22,000. And we got more than 30,000 workers coming back from strike. So not a great month for manufacturing.

Still some weakness at the industry level. Retail was down big. information was flat you know temp help is is basically flat still which is weighing on professional business services so I would say the industry story hasn't really changed a whole lot

over the last couple of months the same industries that have been leading the way are leading the way again on the earnings fronts another strong month for average let me mention it but I missed it government what happened with government it was up again another 33,000

which it's been sort of consistently 30, 40,000 jobs a month in the public sector. Right. And it's been in the news recently, but federal government employment, that's not where the job growth is coming from. It's state and local. Yeah, I mean, most of, yeah, I mean, by side, you know, by sort of the base of employment, state and local government is obviously much larger, and that's where most of

the monthly job gains come from as well as state and local government. Well, and also federal government employment hasn't changed in 50, 60 years, right? It's like 3 billion people working for it. But I mean, there's, I guess, outsourcing potentially that might be affecting the numbers, but the actual number of federal government employees, that hasn't changed in decades. Right. I mean, state and local government is much more closely tied to populations. Right.

You know, education and public services and everything being run by state and local government. So they've been trending higher over the long term. Okay. So the only real weakness was across industry, broad industry, was retail? That's where we saw it. Yeah, retail was down 28,000. kind of surprising big decline. Yeah.

Yeah. It is surprising, right? And some of that is likely, I didn't look at the seasonals, but, you know, it's obviously retail is usually ramping up this time of year. So it's likely just that the ramp up in November was a little bit smaller. I'm assuming on an unadjusted basis, payrolls were still up in retail. There's just a little weird kind of the number of days in Christmas, Christmas blank season are shorter, right? So I think that messed with the seasonals and therefore I'm not sure I'd read too much into it.

Yeah, agreed. Yeah. Okay. Okay. Oh, you were going to average hourly earnings, the wage measure in the report. Yeah, it's another strong month up 0.4%, which was the same as October. So on a monthly basis, a little bit stronger than it had been in recent months. The year-over-year measure is still at 4%, which is where it was last month. It's up a little bit from its low. If you go back prior to October, it was at 3.8% for a couple of months. So, I mean, it's up a little bit, but I don't think it's anything to be concerned about at this point.

weekly hours again sort of recovering a little bit from the weirdness in October you had a slight tick up an average weekly hours and the aggregate measure of overall hours also ticked up a little bit sort of reversing the declines from October I think the the harder part to reconcile here is what happened in the household survey so the household survey was weak again you know week in October for for obvious reasons but week again in November declines in household survey employment declines in the labor force, you know, other uptick in the number of unemployed workers, push the unemployment rate a little bit higher to 4.2 percent, you know, participation rates down again in November. So just a little bit hard to square the sort of continued weakness in

the household survey in November, given the rebound in the payroll survey. I haven't had a chance to look at the report. So the unemployment rate knotsed a little higher, 4.1 to 4.2, at the same time that the participation rate notched a little lower, Yep. 62.7 to 62.5. Do I have that right? So it's 62.7. Two months ago, it dipped one, a 10th last month. I might say another 10th this month. It's down to 625, yeah. So does that mean usually when participation is declining that helps bring down unemployment,

use that for your people in the labor force? Does that mean that household employment declined? There's a big, big decline in household employment, a little over 350,000 decline. Oh, okay. And is on a payroll. basis, obviously, they're different measuring different things. If you take the household survey and put it on the same basis as the payroll survey, was it down, do you know with that number was? It was a more positive story. It was actually plus a little over $100,000. I probably took your stat. It was in the running. But yeah, so it wipes out the decline in November if you adjust to the payroll. Okay. So you don't read that mitigates any message in the negative message in the

number. I think so, yeah. I mean, I'm not really reading into any of the the weakness of the household survey. Just one, because it's volatile all the time, two, because you've got this difference in the adjusted measure as well. So, right, right. Was there any issue with the survey response rate? I didn't get a chance to look. So I didn't look at the household survey responding. The payroll survey response rates bounced back. They were actually quite high for the first print in November. It's back above 67%, which is actually on the high side recently for sort of the first print. response rates.

And actually for October, I think we had talked about last month, the response rate for the first rate was very, very low, obviously, given all the issues with hurricanes. And that fully rebounded, you know, for the second print, for the first revision, the response rate is back to what it normally looks like. So they got much more data in at this point. Great. Good. And I guess the other macro data point I look at and report is weekly hours, average

weekly hours. Any change there? So it had ticked down by a 10th in October and it ticked back up by a 10th. So it's back at 34.3. I mean, so it's basically stable. Okay. All right. So take a step back, look at the entire picture of the labor market, how did you characterize it?

I mean, I think it's good. I think there's just reconfirms that the labor market hasn't really changed. October obviously left us sort of wondering if something had changed or if it was just those one-off effects. And I think this sort of reconfirms that it was just those one-off effects and nothing has really changed in terms of the health of the labor market. Right. Okay.

Chris, any different perspective or same perspective? No, I'd agree with that overall. I think analysts are calling out the 4% job wage growth, average hourly earnings. Is that, you know, is at the start of a inflationary spiral or not or any concerns there? Who's doing that? Who's calling that out? I heard it on a business news show this morning. You're listening to it.

credible person on this business use so or just to know that's right given that inflation isn't all the way back down to 2% yeah yeah so you know because you're kind of referring to the to the fact that if you most economists two three years ago if you ask them what's the ideal rate of wage growth they'd say three and a half because that would be 2% inflation plus 1.5% productivity growth. So if you get three and a half percent, that's non-inflationary. There's no pressure on corporate profit margins and therefore no pressure on businesses to raise prices more quickly. Now we're sitting at four, so is that a problem? That's what you're right. That's the, that's the conjecture. Yeah. Given that overall inflation has not fully recovered, is this,

you know, a risk that we re-accelerate in terms of inflation, yet another factor that could lead to inflation taken off again. Yeah. Well, what do you? How would you respond to that? I don't think so because I'm a productivity bowl. Yeah, right. Oh, you were setting up Dante. That's it you're doing. Oh, I see.

That was a question for Dante. That was over my head. Yeah, I get it. Okay. Lining it up. Yeah. Because you think underlying productivity growth now is probably, what, closer to two than one and a half.

Therefore, 2% inflation plus 2% productivity growth is 4%. That would be consistent with what we're getting. That's non-inflationary. Yeah. Dante, what do you think? Yeah, I mean, I can't argue sort of backward looking, right? I mean, over the last four or five years, productivity growth has averaged close closer to 2% than one and a half percent. So I don't think wage growth today is a problem.

Right. I'm a little more skeptical that, you know, can we sustain that 4% wage growth moving forward? If productivity growth does slow a little bit, then it becomes more problematic. But as of today, I'm not worried about wage growth because productivity growth has come in a bit stronger. Okay. So you're good with the 4% at the moment. No big deal. Okay. Okay. Okay. So broadly, you feel pretty good about this, Chris. Any blemishes in the report that you can see that are consequence?

You know, there was black unemployment that jumped up. 0.7 percent. 0.7? Yeah, it's a big, but, you know, it's from the more volatile portion of the survey, right? Right. Household survey tends to be, and it's a smaller demographic, right? So I don't know the same. That's also why I asked kind of about the survey response rate. So, you know, certainly something to watch, but I don't know, we, I don't know that we should get overly excited at this moment. Well, I guess the other problem with the household survey, in addition to such a small survey, I think, what, 60,000 households each month? So, and there are, what, 100, I want to say, 125 million households across the country.

So that's a pretty small sample. And response rates are low. You've got the other issue that the number, the household survey numbers, like a number of employed or labor force or benchmark to census estimate population estimates that don't incorporate, at least in a meaningful way, the surge in immigration and now the more recent deceleration and immigration that we're observing. So it gets increasingly hard to interpret certainly the levels in the household employment survey. I mean, the ratios maybe the like the unemployment rate, which is a ratio, one to another,

maybe no big deal. It should be okay. It could be okay. But the sampling's an issue, right? What's that? But sampling definitely is an issue. Definitely an issue. Yeah, definitely an issue.

Okay. Well, I'd say picture perfect, right? I mean, I probably've used that description now more than once over the last few years. But, you know, right down the strike zone. I mean, oh, did you guys mention the job revisions to previous months? Did you mention that, Dante? Yeah, I didn't give a specific number, but they were positive. I mean, which is I sort of expect.

October to get at least bumped a little bit up, and September also got revised higher again. Right. So we added some jobs in the revisions. Yeah, I thought it's underlying job growth, meaning abstracting from the vagaries of the data. And as we've been talking about, there's a lot of vagaries, Boeing strike and storms and response rates and seasonals and all that stuff. It feels like it's around 150K to me per month, 150,000 per month, you know, in that ballpark. And that's, you know, enough jobs to keep consumers in the game spending, keeping unemployment low at 4 percent or close to, which is full employment, keep wage growth strong, sturdy at, you know, 4 percent, which means real wage growth of, you know, almost 2 percent, which

means the economy continues to move forward. But it's not so many jobs that it causes unemployment decline, cause wage pressures to develop, causes inflationary pressures to, you know, take off again. So it feels like it's like exactly where you would want it to be. And we've been there for a while. I mean, the unemployment rate, the 4%-ish unemployment rate, I was just looking at a quick chart, you know, it's been there for three years, three years. I mean, I say soak it in, right?

So soak this in. You guys, you don't realize how, how unusual this is, you know, because you're too young to, You don't know. Dante definitely doesn't know, right, Chris? He has no idea. Yeah, yeah. He thinks this is like common. This happens all the time.

No, no. This is very unusual. Atypical, increasingly unprecedented, I would say. Is it unprecedented? Now that I say that, we're getting an unprecedented territory, I think. You have to go back into the 60s, maybe. Like a 50s or something.

Yeah. Well, I think the 50s are a pretty volatile decade. You know, a lot of recessions in the 50s. Green war, strike. That's when a steel strike meant something, right, back in the 50s. I think someone, we should look. I thought the unemployment rate was, it might have jumped a bit, but I thought it was still pretty low, but that's pretty low.

Oh, you may be right. You may be right. Because everyone was off at war, you know, in Korea, you know, distracting from that, you know. Dante will know. He's our, no, Dante's, why I meant his story. He's hiding over there now because he doesn't really doesn't know the answer. He should know the answer to this. No, I remember we talked about what the unemployment rate was at or below 4% for,

for I think about 24 months. Obviously, it's gone a little above that lately. And I think that was the longest stretch that it had been at or below 4% since I think the 60s, if I remember correctly. So we had been on a pretty good run. Yeah, I guess we should broaden it out and say, how long has it been, had the economy been at full employment? You know, reasonably, that's a squishy concept, but, you know, reasonably estimated. I would bet this period is about, it's pretty damn close to being the longest, if not, if not the longest. We should check.

That's a good tweet or blue sky. You know, I'm on blue, did I tell you guys I'm on blue sky? He did. Oh, how's the going? You know, slower going than Twitter. But, you know, I think it has legs. You've got some really interesting folks. Like Paul Krugman is, I think, moved over entirely to Blue Sky.

I don't think he's doing Twitter anymore. I could be mistaken, but I think that's the case. I'm already taxed out with this whole blue sky Twitter thing, X thing. Because right now I'm putting different tweets or posts, I should say, on each. So I'm doing double duty at the moment. But I can't keep that up forever. So we'll have to see how that goes. Anyway, back to the labor market.

I think it's come on already. Are you the script? Yeah. Okay, we've got all the. Let me just say, just to put a pin in it, or is that the right phrase, put a pin in it? Yeah. You know what I'm saying. Yeah, put a pin in it.

President Trump, the incoming President Trump is inheriting a fabulous economy. There's like no ambiguity here. This isn't a bad economy. This isn't even just a good economy. This is a fabulous economy. So let's just put a pin in it. You know, anyone disagree with that statement? In aggregate, I mean, I'm sure clearly there are differences across groups within the economy,

no doubt about it. High income households are doing a lot better than low income. Some industries are doing a lot better than other industries. Some regions of the country are doing better than other regions of the country. No, you know, it's not, you know, great across the board. But in its totality in aggregate, I'm hard, I'm hard pressed to say there's been a better economy. This is a fabulous economy. Any disagreement with that statement, Dante?

No, I think it's hard to argue. I mean, top line growth is obviously stronger than what I've expected. And like you said, we've been at full employment now for the better part of three years. And that's a pretty impressive run. Right. Chris, any push back on that? No, well, I guess you'd still have the folks who are comparing prices, right, back to 2020 and whatnot, you know. Yeah, okay.

But, you know, objectively speaking. But if it's a snapshot of you. Yeah, yeah, exactly. snapshot today of how things are performing. Right. Very strong. Very strong. Okay.

All right. Anything else about the, oh, you know, of course a lot of other labor market data came out. We got the job opening labor turnover survey data a few days ago. We got unemployment insurance claims. We got Challenger layoff announcements. I'm probably missing something. Dante, anything in those other releases, economic releases data reports on the

labor market that would suggest anything different than what we saw today? No, I don't think so. I mean, you know, Challenger, jobless claims, joltz, on the layoff side of things, all sort of consistently low. The jolt state, I think, is a little bit murky because it's for the full month of October, which we know, obviously, there were issues there with hurricanes. So, you know, you had a down tick in the hiring rate again, but the biggest movement in the hiring rate was in the south region and was in leisure and hospitality. So I believe that most of that movement was probably, you know, hurricane related. So aside from some of those movements that I think will likely reverse next month, I don't think there was really anything there to suggest a different story than what we've seen in the Employment Report today. Yeah, up and openings, right? Yeah, uptick and openings, down, tick, and hiring. The quits rate picked back up again, too, which I think some people would read, obviously, as a positive that maybe workers are feeling a little bit better about outside prospects lately.

We had been on a pretty long downward trajectory for the quits rate. So if that holds up over the next couple months, I think that could be. a positive for some increase in activity in the labor market. Yeah, talk about response rates, though, right? I mean, in the job opening and return in their survey, response rates have been even worse and have fallen even more than for the payroll survey or the household, I think. I say that, but I think that's the case.

Yeah, they've always been quite low. And I didn't look for this month, but I would assume for October, they were probably even lower than normal, given everything that was going on. So, yeah. So, yeah, just go about the point being that it's important not to get caught up in the monthly ups and downs and wiggles in the data. I mean, I think it's still very useful if you take a step back and look at the broader trends here. And the broader trends are that the number of openings continues to moderate, quit rate, quits remain very low, hiring that has softened. It's okay.

It's consistent with pre-pandemic labor market. trends, but, you know, they've softened. I think the one constant, and we can, this is across everything, there are no layoffs. Layoffs remain very, very low. Okay. Okay. Oh, good. So I have been Zoom in the whole morning.

I have not looked at markets. What's going on in the equity market, the bond market, what investors are thinking about the Fed meeting here coming up. Is the Fed meeting next week? I think is it next week, but it must be. It's two weeks. It's the 18th. Oh, 18th.

Yeah, in two weeks, what the probability the Fed's going to cut rates because there's been widespread expectation that they would cut rates again. So, Chris, have you been following the markets? What are they, what's going on there? Yeah, so expectations are that the Fed will cut 25 basis points when they meet. The probability this morning is around 90%. 90. 90.

Oh, okay. So it's been a majority for a while, but it's even ticked up higher over the last week or so. So I'm pretty confident. At least markets are pretty confident that the Fed is going to make that move. Stock market, bond market, pretty tame in terms of a reaction. Yeah. I think stock market up a little bit. bond or 10-year treasury yields, you know, I think upper debt plus or minus one to basis points.

So not a huge reaction to this report. Okay. Okay. So the markets, investors fully anticipate almost fully anticipate a quarter point cut in the federal funds rate target. And when the Fed meets on December 18th, taking the funds rate from four and three quarters to four and a half. And of course, it peaked at five and a half percent earlier this year. And any expectations about what happens early next year? Do you have any sense of that?

I think a little more spread out, a little bit more uncertain, but I think March seems to be in another rate cut. Markets are coalescing around a quote next rate cut in March. Yeah, the one thing about the Fed that is increasingly, an open question in my mind is, you know, what's going on in markets, asset markets. You know, financial markets meaning stock, stock market, the corporate bond market, what's going on in the crypto market, gold, and then you go into real estate, commercial real estate values are down, but housing values continue to power higher.

And they're up a lot. I think 50, 60% from the pandemic. Stock prices have doubled, I think, since the pandemic. Of course, Bitcoin's at 100K plus. Gold is close to, I think it's at a record high. It lasts to look, $27, $2,800 an ounce. So if you're sitting at the Federal Reserve and you're watching what's going on with asset markets, that would argue for maybe pausing here, right?

Right. Even though rates are seemingly still high, you've got a lot going on with regard to asset prices. Yeah, that's right. Financial conditions pretty loose, right? Well, I guess that's the question, right? Because financial conditions also include the value of the dollar. The value of dollars up. That is, that works in the opposite direction, right, than higher stock prices. Mortgage rates are pretty close to 7%. That's pretty high. Bank lending standards, which also go to financial conditions. They're relatively tight, right? I mean, got really tightened up after the last year's banking crisis,

and I don't think banks have eased up since then, if anything, they continue to, you know, at least if you look at the senior loan office survey from the Fed, feels like they continue to tighten. So if you take the net of all these different financial measures and ask, you know, how financial conditions changed, I guess it's still, you would still argue they've eased. I guess you know, I look at the bond spread. The bond spread. Yeah.

The corporate bond spread. The corporate bond spread, right? It's pretty tough. Right. So. Right. Evaluations that you mentioned, right? Those certainly.

Right. Would be of concern. So you're saying financial conditions have eased to a degree where maybe, I don't want to put words in your mouth, but maybe this is a time, the Fed cuts in December, and maybe they kind of stop and just kind of wait and take a look around. I would think so. I would think so. I would even say December is not as, I mean, as clear cut as what the market might suggest.

You could certainly make a case that you could pause here. Right. Labor market's still pretty robust. The inflation again still not quite where you want in, but right direction. So, and with the financial markets, I think that would be a rising concern. So I don't think they will. I think they will take the cut, but I think they will pause and, you know, certainly take a closer look. of things next year. Right, right. What do you think, Dante? Yeah, I mean, I was surprised. I mean, I don't try not to read too much into the one-day swing in expectations, but I was surprised that expectations for a cut swung as dramatically as they did today after

the employment report. If anything, to me, it solidified that the wheels aren't falling off the labor market, right? If there was any sort of concern after October, this should have mitigated any of those concerns. If anything, job growth is back to where it was, if anything, wage growth may be. is creeping in as a concern even if we're not concerned about it. So to me, if anything, that would have made it less likely that the Fed cuts in December are not more likely.

I still think they do cut in December, but I am a little bit confused by the market reaction to the employment report this morning. And maybe that all reverses by the end of the day or by next week. And yes, it could all just be a temporary shift. Yeah, right. Right. Yeah, I'll have to say I'm not sure. I mean, I do think we're at 4.75% on the funds rate target.

I mean, it still feels like it's above the equilibrium rate. And that means that monetary policy, the Fed, is still restraining growth. You know, policy is restrictive. Not a lot restrictive, but a little restrictive. If you told me the equilibrium rate was 4%, I say that sounds about, it feels about right to me. But I don't say that with confidence because we're seeing the job market's really strong. And then financial conditions have eased. I don't know if they're easy given what I just said about the dollar and the mortgage rate and bank lending standards.

But they're easy. They're definitely easier than they were, you know, not too long ago, given the run-up in equity prices and the tightening in corporate credit spreads and the crypto prices and everything else. So I think you can probably, you can, you certainly should be starting to think about maybe I should pause, take a little steam out of these markets. Because right now the markets are anticipating further rate cuts, right? So if you, if the vet came out, said, okay, at the December meeting, let's say they cut rates and they signal that that may be that they're going to go on pause here for a little bit. I suspect we would see these markets sell off to some degree. I don't know if it would be a big correction, but it would be, there would be some correction, right? because markets are anticipating some further easing in policy in the not too distant future in 2025.

If they don't get that, then presumably we would see stock prices down, credit spreads gap out a bit here. But, yeah, it's not clear in my mind at this point what's the most appropriate policy response. But I guess the most appropriate policy response is when you're confused, you kind of do nothing. You just, you know, you, they got to, I think they got to follow through on the December rate cut. And then they see how things play out here a little bit, you know, before they start cutting rates some further. Of course, the other complicating factor in all of this is economic policy, right, under President Trump, which creates a both, regardless of what you think about the policy, you know, before the policy actually occurs, you know, we're talking about tariffs, we're talking about deportations, you know, we're talking about tax cuts that could be unfunded, tax. cuts and add to deficits in debt. In regards to how you think about those things, what I think we can say with certainty

is it's very uncertain, right? We don't know what these policies are going to be and exactly the timing of those policies. So if that's the case, that seems to argue, doesn't it, that the Fed would more likely to sit on its hands for a while, just pause and take a look around and see how this all plays out? What do you think, Chris? Does that sound right? They're clearly not going to be disinflationary, right? That's clearly, yeah, there's no way that all that stuff is disinflationary, right?

So it's a question of how inflationary they are, or maybe they're not inflationary at all. But yeah, so I agree with you. That would suggest you should wait and see what actually transpires before making any moves here. Yeah. So we've actually changed our baseline forecast, right? So we had, if you go back a month ago, we had the Fed cutting rates in December, a quarter point, and then a quarter point each quarter going forward until the funds rate got down to 3%, which is our estimate of the neutral rate, the equilibrium rate, the R-star, in the long run,

sometime in early kind of spring 2026, something like that. We're now, we've got a December rate cut. We also have a March rate cut, although I say that was much less confidence. and then nothing, no change in monetary policy until September, and then we're assuming that there's enough evidence that things are moving in the right direction. There will be changes in economic policy, but they won't be earth-shattering changes, and that'll allow the Fed to start normalizing rates, and we get back to that 3% equilibrium by the end of 2026.

So instead of spring, 2026, or year-end, 2026, something like that. Does that sound like a reasonably good forecast? Chris, in the context of everything we just discussed? It does. What do you think? Do you still think 3% is the... De equilibrium rate, long run? Yeah.

I... We have to be humble here. I mean, I got to be humble here. Absolutely. I'm not sure. It feels right to me. You know, thus our forecast. But I have to admit, I don't feel like I have a strong anchor to explain why.

that feels right to me. I mean, before the pandemic hit, I think the general consensus, and we were consistent with that, was a 2% fund rate target. And now we're saying three. And it feels like directionally that's right. You know, one reason that I have talked about in the past and, you know, I think it's very important is that U.S. households and businesses were able to and did a very good job of locking in the record low interest rate.

that prevailed when the economy shut down during the pandemic. Remember, mortgage rates got down to sub-3 percent, fixed mortgage rates, and you got households refinancing their mortgages and got mortgages in three. That's creating other problems now with interest rate lock and home sales and everything else. But it does insulate households from the run-up in interest rates, right? So if you go look at people's interest expense, in aggregate, in aggregate, differences across income groups, whether you have credit card debt or not, so forth and so on. But in aggregate debt payments as a share of income are rock solid, stable, and they're low by, you know, we've got data back to 1980 from the, now it's a Fed in our data back to 1980, and it's, it's low

by that historical, the standards of that long period of history. And corporations the same way, you know, surprisingly, you know, the Bureau of Economic Analysis publishes data showing the share of corporate non-financial corporate cash flow that's going to interest expense, that is really, very low. I think it's at a record low, and we've got data back to World War II. I don't think I'm making that up. I think that's in my mind's eye, and it has not risen at all. So it's not only that households have locked in, but businesses have locked in. And so that's one makes the economy less rate sensitive, right? So this rampant rates has not had the same impact that it would typically have. And one reason why the yield curve hasn't worked, you know, as a predictor of

recession. And, you know, therefore, ergo, that would argue for, you know, a higher equilibrium rate, you know, at least for a while until liabilities adjust in a significant way. But that's going to take a while because households have refined into 30-year mortgages, as we can see, they're not moving. They're just not moving. And businesses, you know, they're, they locked in too. I mean, a lot of businesses took on, you know, very long-term. I remember back in the day, I think some of the tech companies were issuing 50, 100-year debt, right? Because it was like free money. I could borrow it 50 basis, point. So they locked in forever, you know, the lower interest rates. The only people who didn't,

the only entity that did not lock in, the U.S. government, the U.S. government, you know, because of the debt limit battle, they, you know, they had to issue all these bonds all at once back at 2023. The bond market choked. And so they had to start issuing short-term debt. And so the maturity of the debt got shorter. And now they're getting, now we're getting reamed as taxpayers because of the interest expenses rising on the, federal government's debt. It's now ballooning over a trillion dollars, I think, at this point. I don't know. That was a soliloquy. What do you think, Chris, does that resonate with you? Absolutely. I always make that point during the debt ceiling battles that it's not, you know,

it's not costless. And there's a big cost that we're paying now, right? But my point about the, the logic behind why the equilibrium rate is higher. Yeah. Yep. Now, whether it's two and half or three or three and a half. You know, I don't say that with confidence, but directionally, I feel pretty good about it, about a higher equilibrium rate. Yeah, I'd agree with you. You agree. Okay. And higher productivity, you know. A higher productivity, yes. What do you think, Dante? Do you think the risks are balanced around that 3% or do you think the risk is in more one direction than the other? I mean, the dot plot from the Fed seems to suggest that they think the risk is to the upside, right, that the equilibrium rate might be above 3%.

It seems like that's the direction they're trending. I'm curious if you think the same thing. Well, it depends on how you frame it. So if you say in the long run, you know, cutting through the business cycle, what is the equilibrium rate? And how do you are you? I'd say 3% and the distribution of risks are equal, higher or lower. If you're saying the equilibrium rate at the end of 2026, which is our forecast, 3%, what's

the balance of risks? I say higher rather than lower because we're well above three percent. So, you know, I think that's just, you know, where we are, you know, but in the long run through the business cycle, I think I could easily argue three and a half or two and a half at this point in the long run. I know you got a book, you got to book it. You're going to leave, right? Dante, where are you going?

Do I have a client presentation? Oh, those clients. We got clients, right? It never stops, right? It's always working. It's always working. Yeah, well, I think we're going to keep this a short podcast because, you know, without Dante, it just doesn't work on Jobs Friday. Right, Chris?

That's right. And without Marissa to boot, it doesn't work. Any other, so we're running out of time because you have an 11 AM ET webinar with a good client. Okay, any parting words, Dante? No, I think it was a good month for the labor market. Good to see sort of things return to normal after some uneasy. in October, so I'm happy moving into the end of the year here. Well, happy holiday.

What's your forecast for next month? Yeah. It's a little early for that, don't you think? You know, 1-150 is an early forecast, you know, just throughout a trend job growth assumption. All right. So, good month. Yeah. Well, happy holidays.

I hope, because we won't talk to you until the other side of the holidays. I hope you have a great holidays and may everyone stay well in your household. And Chris, any parting words? see you next week. See you next week because we'll make our official holiday words at that point in time, but nothing else to say here. You're good? I think we're good.

Okay. All right, dear listener, this is a short one, hopefully a sweet one, and we'll talk to you next week. Take care now.