Moody's Talks - Inside Economics - Resilient Job Market and Remote Work Part 1

Episode Date: November 22, 2022

Nick Bunker, Economic Research Director for North America at the Indeed Hiring Lab and Adam Ozimek, Chief Economist at EIG, join the podcast to provide a labor market outlook.Full episode transcriptFollow 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 we've got an action-packed podcast for you. We're going to be talking about the job market, and we'll bring in a discussion around remote work, and we've got my two co-hosts. We've got Chris. Chris looks like you got a haircut. A little less swirl there. I was wearing a hat. That's all. Oh, is that? Is that how it is? Okay. It looks good, though. You always look good, though. And Marissa, Marissa, Deena Talley, you look better. You look marvelous. Yeah, a little blurry from my perspective, but that just, that might be my glasses, I'm not sure. My background is blurred, but I look blurry. Yeah, look a little blurry. Just the background. Is it just the background? Yeah, okay. And we've got two guests here, repeat guests back by popular demand.

We've got Adam Ozimack. Adam was our first guest back on this podcast. Adam, can you believe it was almost a year and a half go. Was I the very first guest? I think you were. Chris, wasn't Adam the first guest? I believe it was. Yeah, number one.

I don't remember. Yeah, I'm pretty positive. Just like I'm positive about the odds of recession. Oh, there we're going to. Zing. A little testy. Yeah, we're going to get into it. And, Adam, you switched jobs, though, since the last time you were on the podcast.

What are you up to now? Yeah, I'm the chief economist at the Economic Innovation Group, so moved into a think tank world. It's a public policy think tank focused on increasing economic dynamism, reducing spatial inequality, stuff like that. Cool. And I ran across EIG back around opportunity zones. You were doing a lot of work. Well, the think tank was doing a lot of work around opportunity zones. Is that still on the radar screen?

Yeah. ENG created opportunity zones and they were part of the tax cuts and jobs act. So they do exist and seem to be working pretty well so far. Are they, I've lost track. Are they working pretty well? It's really early, you know, like all the data is basically only able to show so far, like where is an investment going versus like what are these sort of downstream impacts and stuff. And, you know, I don't think it took a while, you know, it was past its tax cut and jobs act,

but then they had to put the rules out and put everything in place. There really hasn't been that long, but so far it does look like it's increasing investment in places that weren't getting a lot of investment for the basic day. Okay. Very cool. And, you know, your original claim to fame was you worked at Moody's Analytics. We worked together many years ago at this point. But it's good to have you back on. And you just recently published a paper on remote work and its impact on rents and connecting the dots back to CPI and inflation.

And definitely want to talk about that. I haven't had it really, you just published it recently in last few days, I think, right? Yes, just yesterday, yeah. Oh, was it yesterday? Okay. And I haven't had a chance to read it. I read the executive summary. It's a little counterintuitive to me.

So I, you know, a bit counterintuitive. So we can dive into that. And we also have Nick, Nick Bunker. Nick, good to have you on. And you were, great to be back. Yeah, you were on a, I don't know, a couple, three months ago. And it's good to have you back. And Nick, you're the head of economic research indeed.

Yes, just for North America. I don't want to steal any of the credit for my colleague over in Europe. Okay. Yeah, no, it's all good. Yeah, very good. I'd love for people to think I'm associated with that fantastic work, but I don't want to steal any credit. If he brings up Australia, he's in big trouble, huge trouble.

Not North America. Got to stay in North America. Oh, I see. I see. Yeah. Yeah. Yeah. Well, North America is a big place, though.

A lot of room there to strut your intellectual stuff. So, yeah, good. And so, and of course, indeed is, are you the largest job site in the world? Would that be fair to say, indeed? Yeah, is the largest. Indeed it is. Indeed, it is. Okay, very good.

So the right person to be talking about the job market. So let's talk about the job market. And, you know, maybe this, I'm really curious to get kind of a broad sense of where your mind is, you know, thinking about the labor market and ultimately bringing that back to the broader economy and this whole debate about how tough the economic conditions are going to be next year. Are we going into recession or not? So maybe before we kind of dig down deeper into, you know, the kinds of things you guys are looking at to assess the job market. And then, as I said, we'll come back to remote work. Maybe you can give me a broad sense of how you're based on the things you're looking at, how you're thinking about the labor market and the economy more broadly. And maybe I'll begin with you, Nick, if that's okay.

Yeah, sure, happy to do that. So I think. And by the way, just so you know, I know, I interrupt all the time. I'm going to interrupt immediately. You probably don't know this, but Chris and I have been just going at it. Chris is a bear. And I wouldn't call myself a bull, but I'm certainly more bullish than he is. And Marissa, I haven't quite figured her out yet.

She's been coming over to the light. So just so you know, to couch your comments in that context, I'm just to say it. So go ahead, Nick. Go ahead. Gotcha. Yeah, we'll throw that needle for sure. So I think my view of the labor market right now is it's just incredibly resilient that you see a lot of concerns elsewhere in the U.S. economy about the strength currently

or even the outlook for next year. I think the labor market continues to be a source of strength. That payroll growth has been slowing down this year, but it's still at the pace or the rate of growth that if you told me that number in 2019, I would have been really happy about it, that it's well in excess of population growth or sort of what you'd need to pull folks into the labor force. I think there's an interesting conversation right now about, you know, that's what the payroll survey is telling you, and the household surveys indicating much weaker growth.

But, I mean, that's maybe something we can dive into more. But then, you know, the outlook, demand for workers continues to be, you know, incredibly strong. I know there's like mixed feelings on the Jolt's job. openings numbers, but that's still very elevated, even if it's come down a bit this year. At Indeed, we track job postings on our platform. Very similar story there where it's drifted down this year. And there's been some sectors of the labor market where things have cooled down more. But it's still, you know, postings are still very elevated from where they were back in 2019.

And the thing I track, you know, it's a top tier statistic for me is, you know, the quits rate. That is, again, a similar story. It's not as elevated as openings or postings, but there's still lots of jobs switching in the labor market and wage rolls through really strong. So I think things right now in the labor market, it's still a tight, still a hot labor market, even if there's some sectors like the tech sector and housing to a certain extent that are cooling off, that overall things are pretty robust. So there's kind of two ways of thinking about what you just said about the resilience

of the labor market. And, you know, I think that's a pretty clear, a good description of the labor market. It's, it's throttling back, but it's still moving forward at a pretty good clip here. You know, monthly job growth, beginning of the year was 600K, felt like on average per month. Feels like maybe 250K, something like that right now. But 250K is still a lot of jobs, you know, being created every month. I mean, given the underlying growth in the labor force. One perspective on that would be, okay, well, that's a problem because inflation is high, wage growth is strong. Federal Reserve is on DefCon 1, raising interest rates trying to cool things off and they're having a hard time cooling them off. Therefore, they're going to have to raise rates even more.

And the more they raise rates, the longer they keep them high, the more likely you break something in the financial system and the economy, recession risks rise in that perspective. kind of perspective. The other perspective is, okay, well, you know, it's slowing. It will likely continue to slow. All the trend lines suggest that it's going to slow here, given what the Fed's doing. And this resilience is a reason to be optimistic that the labor market, the economy broadly, is going to bend. Things will cool up, but it won't break. You know, we're not going to see mass layoff. And mass layoff is what you need for recession. I mean, you need people, businesses laying off people in a significant way, unemployment rising in a significant way for that to occur.

So of those two perspectives, which are you most sympathetic to? So I think, I feel like the last time I was in this podcast, I was more in that, I was leaning more towards that first camp and I've been slowly drifting towards that second camp, I think because there is the potential for wage growth, which I think is like sort of how the Federal Reserve is thinking about inflation moving forward, for that to slow down without layoffs and unemployment rate spiking too much. So I think there are some signs that, you know, the quits rates cooling off a little bit and wage growth might be turning down. So I think there's some

signs there. I think my view, my view is that this is pretty, very dependent on the Federal Reserve's like reaction to what's happening in the labor market. And that if we start to see inflation slow down and some of its wage growth measures tick down, maybe that makes them a little bit more patient or the slowdown in rate hikes is even slower. And we get closer to a pause. And that would make me more optimistic about that outlook. So I think it is this, you know, for me, it's looking at the actual labor market data, really trying to keep an eye on what's happening to wage growth and sort of quits and sort of measures

of job switching as like an antecedent to that. And then also, honestly, it's like the inflation numbers. Just if those continue to cool, then maybe the Fed gets a little bit less antsy. And that makes me more optimistic about the resilience and strength of the labor market can carry through next year. Okay. So I just say I got it right. You're saying when you were last on, you were more worried that the economy would, let's say, overheat, that the labor market would remain too resilient, Fed would have to step on the brakes even harder

and by so doing make it more difficult to navigate through without recession. Now you're feeling a little bit more optimistic. It sounds like a little bit more optimistic that maybe we can get through this period with the labor market kind of bending here, things cooling off sufficiently to convince the Fed to stop raising rates as aggressively and we can navigate through. Did I get that right? I think that's fair. I think it's less that I'm more optimistic about the labor market, not overheating.

I'm more optimistic that signs from the labor market are going to show a cool down and the Federal Reserve will become less concerned about the labor market overheating. So I think there was a little bit more potential on the labor market on the supply side than maybe other people do. Maybe Adam, I think, is similarly sympathetic to this view so that if they're all, You guys have been talking to each other? You guys have been talking to each other, huh? I didn't realize that. Nick, Nick and.

We got from time to time. Oh. Collusion. Oh, collusion. It feels like collusion. Lucky we're not playing the statistics games. They said they wanted to come on at the same time because they were going to play the statistics game and sweep us. Did you get, getting that?

That's what I'm hearing here. Yeah. They've uncovered that's logical conclusion. We have to burn all the transcripts now. We have to burn all the secret recordings of our. Don't tell the FTC. Don't tell the FTC. Thanks.

Oh, good. Okay, very good. You did mention one thing, one technical point. Maybe we can close a loop on that before I go to Adam and get his broader perspective on this. The household employment survey versus the payroll employment survey. Do you want to just dive into that a little bit and give us a sense of that? Yeah. So broad strokes, it's that if there's in the jobs report, there's the two surveys and the household survey,

which is the survey that gives us the unemployment rate, employment to population ratios, has been showing much, much weaker gains in employment in the terms of the levels and even rates as well, to the point where the last report was, it's essentially flat or negative if you adjust it to make it similar to the establishment survey, which has been much stronger showing that 250,000 a month average the last few months. So there's sort of a disagreement in those surveys as to the actual underlying pace of employment growth. And I think most people tend to lean towards the establishment survey for a better barometer of the actual pace of underlying job gains. But I think it's worth keeping an eye on the household survey, just that there is some signs of more significant slowdown. But part of the reason why people prefer the establishment survey over the household surveys, the establishment survey has a much larger sample size.

so it tends to be more reliable and less variable. Yeah, I think from my mind's eye, I think the household employment, if you look at employment, overall employment by the household survey, it basically has gone nowhere for the last, I don't know, six months or so. It's basically flat, you know, no job growth. Is that right? Marissa, do I have that right? If you take like a six-month moving average, it's, I think it's around 100,000 a month.

Oh, is it? Okay. Yeah. But, yeah, I mean, it was, there was a negative print, right, last month. So that is very disconnected from what we saw on the payroll survey. The six-month average is around 250. One other sort of technical question, maybe to Marissa and to Nick, if I look at labor force growth, which is labor supply, year over a year, it's pretty strong. It's like 2%. So if you do the arithmetic, that translates into, you know, 250, 300,000 people being added to the labor force every month, which would be consistent with the current growth in payroll employment, the 250K and payroll employment, monthly payroll employment. And also consistent with other labor market measures like the unemployment rate, which has stopped falling and has actually risen, well, you got to maybe, you know, it's maybe data. I'm not sure, but it is up a little bit from where it was,

37 versus 35. And also the employment to population ratio, another for prime age workers, 25 to 54, that's another really pretty, we think, a pretty good met. And actually, Adam, this was something you uncovered back in the day when you were at movies and analytics, a relationship between EOP for prime age workers was probably a better measure of labor market slack, at least in terms of what it meant for wage growth, than the unemployment rate. And that also has come in a little bit.

You know, 80% is the threshold. We were a little bit above that back in the spring. We're now a little bit below that. Does that resonate with you, Marissa, that labor force growth has picked up? Does that, does that, does that, is, am I, do I have that right? It's, it's stronger than it was, you know, going into the pandemic, certainly. But it has, I think labor force growth has slowed a bit from where it was earlier in the year. So yeah, you're right.

It's right under 2% now. It was a bit over 2% coming into 2022. And you see that, if you look at prime age work, Right? You see women, prime age women's labor force participation rate is back to where it was prior to the pandemic. Men is still a little slightly less than where it was prior to the pandemic. And so if you take everybody in the prime age bucket, it's still a little under where it was prior to the pandemic, suggesting there could be some, maybe there's some supply still out there, but not much. Yeah. Nick, did you want to add anything to that? I see you're shaking your head. Yeah, I know. I agree. I agree with that. I agree with that. Yeah. Yeah, the one thing I have noticed in terms of the labor force growth, it feels like a large share of that is foreign-born workers.

A BLS, the Bureau of Labor Statistics now publishes and has been for a bit employment by foreign-born versus native-born. And a lot of it feels like immigration is coming back. It's not the labor supply growth isn't related. It's not labor force participation because that's flat to down. It's really the working age population that feels like immigration is starting to come back and that's what's driving it. But if that's the case, that, you know, that makes me feel a little more comfortable that, you know, maybe we don't need job growth at zero to cause the labor market ease up enough to get wage growth down. You know, maybe something less than that if we continue to get this kind of labor force growth.

So that sound right? Yeah. Okay. So, okay. All right. Well, that was, hey, Chris, I, I don't know. I took some solace in what Nick said there. I mean, you know, he felt like he's moving in my direction. What do you think? A little confirmation bias there. See what you want to see. I am definitely guilty of that all the time, confirmation bias. I know. It's a terrible thing that confirmation bias. Anything to add to the conversation so far, Chris? No, I think that's, I think it's accurate. You know, 30% chance that we make it through is still high, in my opinion. But, you know.

Oh, just to articulate for the listener, Chris is that you're at 70% probability between now and the end of 2023. So that means 30% we can make our way through. And you're saying that, that feels high. That's pretty good. Okay, pretty good. All right, Adam. Adam, Adam, let me turn to you.

Okay, so I'll just, same question. And what's your kind of broad 30,000 foot, maybe take it down to the 10,000 foot level, maybe 5,000 foot level, you know, perspective on the labor market and what it means were the economy broadly and for recession prospects next year. Yes. I mean, I agree with basically most of what Nick said. So to add on to that a little bit, focus on whether the Fed will get it right, I think is a big question. And I think that's the, the Fed has put themselves in a very tough spot. They put themselves in the economies, put them in a very tough spot. It's a genuinely difficult labor market to read.

And I think the Fed could have a soft landing much more easily if they could simply optimize based on the incoming data and the reading economy. But they sort of tied their hands quite a bit by their, accumulated mistakes. They've just drastically underestimated inflation over and over and over again, you know, along with the market and professional forecasters in their defense. But now they're at a place where their loss function can't be as symmetric as it would be anymore.

And they so whatever, if you take like all the data and you project like an optimal inflation path or rate hike path to like get you that soft landing, they can't. be on that. They can't be on that because they can't afford to be wrong. They can't afford to be wrong like they could have if they had been warning about, you know, even if they had done basically the same forecast, had they been constantly warning the risk to inflation are high, the risk to inflation are high. They've been doing something like that to preserve their credibility, but when the data starts to suggest, okay, it's time to let off, they can't quite let off, right? because they need the data to really clearly, surely say it's time to let off, let off.

So what I take from that is the Fed is basically forced to raise rates too much. They're just going to have to. They're going to have to go higher than they want to. They're going to go higher than they otherwise would have. And so I think that's, you know, that's bad news, right? The good news is I don't believe that the Fed having to go too high is necessarily going to induce a recession. I think we tend to have this very zero one view of recessions based on the SOM rule correlation that inflation, if unemployment goes up a little bit, it tends to go up a lot, right?

That's certainly true. But I don't think it's necessarily the case that labor demand being reduced necessarily triggers unemployment to go up a substantial amount. So that's the real question. It's not can we increase unemployment without increasing it a lot? It's can we reduce labor demand without triggering unemployment increase. And I think we can. And I think we have two recent historical episodes that should give us some solace.

One is 2018 through 2019. The Fed raised rates too fast. And you can like it's, you know, time series econometrics is tricky. But like you see it so clearly the data. The Fed was going too fast. Job growth slowed. Inflation slowed. And then the Fed pivoted and said, oh, actually we were making a mistake.

We were raising rates too fast. there's more slack in the labor market than we thought. We need to just be way more dovish and they cut rates. So when they cut rates, that's like sort of like the end of the debate, right? The Fed raised rates too fast. They admitted it did. They cut rates.

And we didn't see job losses, right? What we saw was job growth slow. What we saw as inflation slow. The other historical episode I would point to is 2012, to extend the time horizon, 2012 through 2018. Like in 2018, the mistake became beyond debate because the Fed essentially acknowledged it and cut rates. But I think even longer than that, the Fed was raising rates too fast. And before they raised rates in 2015, they were signaling they were going to raise rates too fast.

And they were signaling that they thought the economy's productive capacity was far lower than it was. And as a result, we had low inflation. We had inflation below target for, you know, almost a decade. We had a Fed that was too hawkish for almost a decade, but we didn't see unemployment go up, right? We didn't send the economy in the wrong direction. We just held the economy down. We just held demand down. And so I really think we need to get off the sort of zero one view of reduced demand equals recession.

And I think what we're going to have is just the kind of mistake that they made in the past where they raise rates too fast. Demand slows down more than it needs to. and, you know, that things cool down and they go a little too far and then they, they, they, like, I think they're going to be cutting rates, you know, next year, 2024. Oh, fascinating. Fascinating. And I'm sympathetic to what you're saying, but, and I got a couple of questions, but Chris, I'm going to put you on notice because this is not what you think. So I want to listen to your perspective on this. But going back to a number of things that you said to unpack it a little bit.

One thing he said was the Fed is likely to inappropriately raise rates. It's going to do too much here. And that's because of the loss of credibility when they didn't raise rates fast enough earlier in the year when it was getting pretty clear that they should. And inflation expectations took off and, you know, things got to a place where we are today. one other interpretation of, you know, the tough talk, and I'm assuming that one reason why you think this is because they're talking talking very tough here. I mean, very, very hawkish. One interpretation of the other interpretation of that would be that they're just trying to keep inflation expectations in and financial conditions sufficiently tight. That the tougher

they talk now, the more likely they keep. inflation expectations anchored. And right now, if you look at expectations, bond market expectations is pretty close to, you know, where you'd want it, you know, kind of two in a quarter, to 250 somewhere in there. And and by so, and also keeping the stock market from rallying back, keep keep the credit spreads from, you know, coming in. They're already, they're not that wide already, but coming in, keep mortgage rates up to keep pressure on the housing market, which they need to slow the economy because that's the most rate-sensitive sector. And so by doing, by being as hawkish as they are in their language that, in fact,

they won't have to raise rates as much going forward, that this is actually a strategy, not, you know, it's not a signal that they're going to make an error. This is actually a strategy. Does that, does that resonate at all? So I think that like what you're saying is correct in the sense that those are all the way that the Fed holds back the economy, right? But you can imagine a world where the Fed was much more ahead of the curve on inflation and they weren't really concerned about inflation expectations. Like inflation expectations didn't move up. Like short term inflation moved up more, right?

And expectations didn't move up nearly as much because everyone thought, oh, the Fed saw this coming. the fed's not worried about this they're you know they would have been doing a much better job convincing people this is you know supply side they won't have to do as much so i think that what you're describing the fact that they feel that they have to hammer on expectations is kind of just like that is what i'm describing playing out in reality um so i don't i don't think that's that's different from from from describing and i think that you're going to see the the real evidence of it is going to be when they when they go past where you think they should be and i think they've gone up very quickly. And I think they've gone up in a way that is, they're not playing wait and see

anymore. You know what I mean? Like when you look back at like the average inflation targeting mindset is very weight and see kind of thing. And they're like beyond wait and see. They're raising rates acting like inflation has been disappointing when the reality is like you wouldn't have expected that much of an impact on the CPI and most of the real economy from rate hikes yet. Like outside of housing, like you expect these things to take six, nine months. We only started hiking, what, in March or something like that? So like, those first rate hikes should just be starting to impact. Like the Fed does not, they do not seem patient, right? And so yes, I think that is, that is the strategy of ensuring that the rate hikes are working and pulling down, pulling things

down. But I think they just could have been more relaxed about everything if they weren't worried about expectations. Yeah. Well, let me, let me tell you our path, our baseline path of fund rate and let me get your reaction to it. I'm not sure if you do explicit forecast, but maybe you can... Yeah, I live in the luxury of just being able to talk about general trends. I'm out of the forecast. I don't have to put it, but let me give you ours. And let me, let me, I'd like to hear your reaction to that in the context of what you just said. So we have we have Fed raising the federal, the federal fund rate today is three and three quarters to four. That's the range. We have the Fed raising rates a half a point in December.

when they meet, a quarter point in January, and we're going to put a quarter point in in March. So that would bring the funds rate to four and three quarters and five. Yeah. We have to discuss this, but I think- Breaking news. Yeah, it's breaking news. We're going to add one more in March and go to four and three-quarters to five. And I think that's what broadly markets expect, more or less. Yep. That's what's embedded in stock prices and credit spreads and mortgage rates, the value of dollar, all those kinds of things. Then they pause. They stop. They took a look around. They see what's going on with inflation. It sounds like all of you and myself and maybe Nick, I'm not sure about Chris and

Marissa, but I think at that point they'll have, you know, there's more evidence, job market slowing, wage growth is rolling over, inflation is starting to come in. And they, and that's the terminal rate. That's the end of the story. They don't need to raise rates any further. They keep rates at 5% through next year into 2024 by some spring, summer of 24, inflation is back to the Federal Reserve's target within spitting distance are close enough, and that's when they start easing up and allowing the funds rate to come back in,

and they go back to the so-called equilibrium rate, R-star kind of neither contractionary or stimulatory to the economy of two and a half percent by mid-decade. That's the path. How does that resonate with you, that path? I don't think it's going to take them that long to start cutting. Ah, okay. And because I think, like, it's hard for me, Mark, to square that, with like your view that there's a lot of this is still supply side, right? Because that supply

side stuff is going to be deflationary too. Yeah. And, um, you know, if you look at labor force growth and so one note about labor force growth also is like you can't really, if we're not taking the household survey seriously on employment growth, you shouldn't take it seriously on labor force growth either in that same period, right? Because it's the same problems, basically. Good point. So I back into labor force growth based on what we see in job growth, which is super strong, right? I think that the household survey is much better for utilization. Can I just a proclamation? Just to make a quick finer point on that, what you're saying is we're getting all this job growth and unemployment's not moving, and EPOP's not moving,

therefore we've got to get, you're saying, ergo, we're getting a lot of labor force growth, consistent with this job growth. Yeah, I think the real EPOP probably is improving and we'll probably see like some step up from that. And you know, we see this from time to time in the data. The CPS is, it's just volatile. So I think non-farm payrolls are much closer to describing reality. I think labor force growth has been strong. And I think that should be deflationary. Like we are, and you are seeing evidence that in wage growth.

So like, it's obviously labor market utilization has gone up compared to December of last year, right? Like over last year, labor market utilization has gone up. And yet wage growth has gone down. Now, why would that happen except for, except for an increase in labor supply. And so I think labor supply is having the effect that we would expect to have a little bit slower than I expected it to have. But I think that that's also going to be a positive for prices as well because labor supply is holding back output. And weak productivity growth is holding back output.

And I think we're going to see those things start to become deflationary. I don't see how the Fed can be two and a half percentage points above the terminal rate, the long run rate, and labor supply and aggregate supply is coming back online quickly. And it still takes, what, two years for them to start needing to cut rates? I just don't see that. Okay. Okay. Interesting. And I think your view is more consistent with the market expectations, right, Chris, that we go to up to about 5% terminal rate and then the Fed starts cutting.

more towards the end of next year. Is that right? Do you recall? Or is it more consistent with what I just articulated? I thought it was higher for longer. Oh, okay. I think it's come in a little bit, but maybe you can take a look.

But don't do that. Don't do that. Don't worry about that. How do you react? I'm just saying. And I didn't know where Nick and Adam's minds were before they came on the podcast. Sure.

But I love the way they think. Nick is coming more towards my perspective. And Adam is like beyond me, it feels like. He's even more optimistic, it sounds like, about the labor market adjustment, inflation coming in and the Fed not needing to raise rates as much or keep rates as high for as long. And it feels like that gives us an even greater chance of kind of navigating through. And I don't mean to put words in your mouth, but it feels like the, if you had to put odds on a recession in 2020, it sounds like it's a lot lower than Chris. Would that, would that be fair? Yeah. Yeah. Yeah. And again, he's a big guy and he's not going to put a number on it, but, you know, I'm 50. What are you?

I'm 50%, but I, you know, because and you say, oh, that's a cop out. And it is a bit of a cop out. But the baseline forecast, the forecast that we publish in the modal forecast, the, you know, the forecast with the highest probability is no recession. We have no recession. A weak economy, no doubt, you know, a job. growth kind of stalls out at some point and we get unemployment north of four and wage growth rose over but no recession so that i'm at 50 and marissa you're at 60 i believe last last i heard

yeah okay oh i thought it was 65 yeah i've kind of wavered between 60 and two-thirds oh so where are you today on the depending on the day and the data and today you are at i'm still there i'm still i'm still in that range. I mean, I'm not going to distinguish between 60 and 66. Okay. No worries. So, so do you want to put a number on it, Adam? Yeah. Well, I mean, my professional forecasting services are thousands of dollars an hour, so I can't give you the exact number. Oh, great. We've got to pay you money for that. Yes. I can tell you, I would say I'm willing to go and say it's the odds of recession are 30% or lower. That's right. 30% or lower. You can come on anytime you want, Adam, anytime. You know, I need, I need him in the macro meeting.

That's what I need. Okay. Interesting. Interesting. Okay. Nick, I want to come back to you on this resilience question. And the labor market feels resilient, meaning job growth is slowing, but hasn't slowed as quickly as some might anticipate. Two theories I'm going to throw out and get your reaction to, and you can add any other theory you want as to what's going on.

First is, to Adam's point, we're just impatient. I mean, it takes time. I mean, these large corporations, and we are. in a big large corporation, you are too. Six months ago, we were hiring hand over fist and to tell the HR guys, oh, stop hiring, but now, you know, reducing payrolls. I mean, that's like, that is moving a container ship around. It's going to take some time, right?

And it feels like it's coming. It feels like we are going to get more laughs. And when I say more layoffs, just simply a normalization of layoffs. So it's a matter of time. The second is, explanation is businesses know that their number one problem, you know, going forward for the foreseeable future is finding workers, good workers, and holding onto them. That was the problem before the pandemic. That's the problems, you know, except for the immediate shutdown of the economy, been the problem in demographics aging out of the boomer generation, me and immigration constraints are going to keep, you know, labor supply constrained, therefore I'm not going to lay off workers. I may, I may cut my hiring.

I'm going to get rid of those unfilled positions, but I'm not, and I might normalize layoffs, but I am not, I'm not going to lay off workers on mass, and therefore, you know, a resilient labor market and no recession. So those are my two explanations for your point about resilience. Do they resonate with you, and are there any other explanations for what's going on here? So they do resonate with me. I think the matter of time or just, that the hikes need to move their way through the economy. I think that's true and that like there will be a softening in a labor market. I just think that part of this too is that, you know, if you look at job openings data

in some of the sectors that are still pretty constrained, they're still holding up quite a bit, like we're in hospitality. There's still lots of demand. But we are, and so Adam referenced earlier historical like historical, like historical. examples are sort of like what the Fed could do, but I think there's within some of the sectors in the U.S. labor market right now, you are seeing already some signs of like soft landing-esque-esque, like labor market dynamics. So like retail trade, hiring has slowed down. They're considerably payroll growth has like come down when payroll level of employment is close to flattish over

the last several months. But layoffs really haven't spiked if you look at. But the hiring in the Jolt's data has come down quite a bit, and so it was the quits rate data. And you can see a very similar story to a lesser extent in leisure and hospitality. So those are two sectors that, you know, there are some signs that it's already cooling and also those aren't very interest rate sensitive. So maybe that that still powers through. But then the labor hoarding story, I think that's, I think I'm very sympathetic to that there's just, there's structural issues. And not only is it that employers can see down the line that like the population's aging, that's like a stubborn fact of reality, but also for some of them there just might be, you know,

they're looking back and thinking about what they did in 2020 and thinking, okay, maybe that was the lesson learned that they, maybe there was some hit to their ability to hire because people thought, people remembered what happened in 2020 or now. a little bit gun-shy of taking some opportunities. And I think one thing that is also, I think, related to your earlier point, so this is maybe a sub-theory there. And I mentioned this a bit. It's just like the interest rate sensitivity of some sectors that a lot of the excess demand is in, you know, sectors that aren't as interest-rate-sensitive as construction

or manufacturing. It might take a lot. It might take more time to get through there. But there's so much for momentum there. that once we get to that spot where those sectors are really starting to cool down in terms of the lay market and there are some layoffs, then maybe there's enough strength and momentum there that it, like, as I said, like it's non-binary distinction between recession or like a strong period, it just cools down a little bit. And then maybe things have, you know, the rate hikes have made their way through and have picked back up. Oh, that's an interesting point.

You can feel that in the construction trades, right? So that's very rate, I guess is another twist on what you said. It's interest rate sensitive, but what's happening is the single family construction is coming way down because we've had such shortages on the multifamily side and they've been constrained by supply chain issues. People are, you know, maybe losing their job building a single flaming home. All they do is walk across the street and go work in a multifamily unit to build up a multifamily unit. So you're not seeing. Okay. You know, one place where you'd expect to see some job laws, you're not seeing it in the construction trades.

Yeah. At least not so far. Yeah. And I think that's also part of it is that like you have, say like demand for hiring new workers come down some and layoffs normalize. That would be, you know, layoffs getting back to like 2018, 2019 levels, but demand coming down, even if it drops, comes down quite a bit, that's still relatively elevated demand and layoffs that were consistent, you know, back in 2018, 2019, which is a pretty tight labor market. So, yeah, there might be some normalization, but it's not like a massive swing and there's a huge rise. So, you know, it could, you know, layoffs could rise over 30% on like a monthly basis. And their average monthly rate would be similar to what we've seen back in 2017 through 2019.

So there's a lot of margin there. Like, you know, those could rise a lot and it would back to quote, quote, normal. Yeah. You know, economists shouldn't rely on anecdotes, but, you know, I can't help myself. So I was talking to a private equity guy yesterday, and it was the most optimistic thing I had heard in a long time. And he was saying they own a lot of companies, all kinds of consumer product companies. And they own restaurant chains and they own grocery stores and all this kind of stuff. And he says, we're not laying off anybody for the very reason that what you just said, Nick, I remember what happened back during the teeth of the pandemic.

I could not get these people back. And I'm not going to lay them off now because I know I'm not going to be able to get them back a year from now. And but he did say they are going back to the workers and saying, look, you know, we've got a business is weakening, you know, particularly in some of these lines. And, you know, our cost pressures are very high. So, you know, we're actually, and we gave you a big wage increase this past year. We're just not doing it this year. We're just not doing it. We'll see if that sticks, but it feels like it is because you can see wage growth coming in pretty fast and leisure and hospitality.

and retailing. And again, those are the kind of, so I go, oh, this is a, this is an anecdote. Sorry, Chris, confirmation by the confirms view of how things are working. But this guy's a big PE guy. I mean, he's got a lot of companies all over the, all over the place. And I thought that was fascinating. I think, go ahead. Go ahead.

Maybe another margin there beyond just the saying, hey, we gave your big raise last year. Let's please remember that. Also, there's other ways for firms to reduce their labor utilization without letting people go. So, like, keeping an eye on part-time for economic reasons, those measures. That might be a way to, like, semi-lay people off. But just like, hey, business is weak right now. We just need to, like, bring you down to, like, 25 hours a week or something like that. And we'll try to ride through this.

So it ends up, you know, it's a private sector response similar to, like, short-term work. Yeah, totally. the countries that might in some sectors you might see that we haven't seen that yet in the data not here i think we're seeing that actually in the uk in the uk that's what's you're starting to observe that happening but not in the in the u.s um i was going to say oh chris let me okay you've heard all this chris and you've been quite silent over there in your in your office just taking it all in in we're coming back to remote work in just a second and you can see adam can you see this guy he's the only guy who's in the office which is testimonial to what adam's going to be talking

about in just a minute and nick so but uh What do you think of all this? This must be eye-opening for you. I'm just... It's nice to be here. It's nice to, you know, feel a little, feel good for a little bit, you know. Put on the rose-colored glasses and see how things could work out. You're the one with the rose-colored glasses.

Come on. No, not. What are you talking about? 70% of recession odds. No, literally. There is a path. There is a path, right? It's possible.

But there are so many other factors that I see that are going to continue to weigh on the economy. We already talked about the rate hikes not actually having had a chance to be fully digested yet. That's certainly going to have an impact on restricting credit. We have all these regional Fed reports that Marissa loves showing weakness in manufacturing, industrial production coming down, right? There's a lot of momentum in the other direction here that I don't think we're fully accounting for. And we know that employment is the last shoot a drop, right? So great, that the labor market is hanging tough here. But when it turns, it can turn pretty fast.

So, yeah. Mark, can I offer something about, I think, that might bring the Chris and Mark. No, no bridge to join them. No bridges. No bridges on this podcast. It's like all out. No, go ahead. Go ahead, Adam.

Go on. The audience loves the, the, the, Bates. I think what we will see is what people are going to call a goods recession. That's my expectation because Chris is talking about these signs of industrial production and whatnot. And look, there is no denying that goods production, goods demand has been wild over the last two years.

It's going to manifest as weaker good spending and it's going to look like a goods recession. We'll have really weak prices there. We'll have weak good spending. And Chris will be able to say, see, there's a recession. And Mark, you'll be able to say, oh, actually, overall employment is still growing. So it's not a recession. And then, you know, that's kind of going to be the synthesis of the two. Oh, well, that's the nice synthesis, but I'm still declaring victory.

If that's what happens. Oh, you'll be right. You'll be right. It'll just give Chris the chance to feel like you got. Oh, I see. Oh, a little better. Ah, okay. One other thing I would add on just sort of employers' perspective, I think, is there's a,

cyclical aspect here, which is, Mark, you talk to a lot of employers, right? And think about the period from 2016 through 2018, how many employers thought that they were dealing with the new normal labor markets, right? Everyone thought, like, oh, this is full employment. This is it. This is as good as it gets. Hold aside to any sort of like slow down in population growth or aging in the population. I actually don't think those make the labor market tighter. So I don't think that that's really the issue. You look at Japan as a country that's, you know, aged rapidly, really weak labor force growth, didn't really manifest itself as fast wage growth, right? So like, I don't think aging necessarily gets you that tight labor market. I think it's people are starting to realize,

oh, actually the U.S. economy can generate what feels like a really tight labor market. It's really that simple. Like, what is full employment is not 2016 to 2018. That wasn't full employment. That was actually still a pretty weak labor market. Full employment is going to look more like it's not going to look like 2020, 2021, right? Like that was temporary tightness. But it'll look somewhere between there in 2019, which is like a lot harder to find the workers that you need.

And now people know that. So it's a structural change in thinking around the cyclical nature of the labor market, if that makes sense. Yeah, it does. And this is something I learned from you when you, when we were working together back in that period. You kept saying to me,

how can the labor market be tight if the economy's creating so many jobs? That's what you said. And it's a great question. And today, you say, well, and back then, of course, wage growth was pretty pedestrian. It was 3.5%. So you could also point to no wage growth.

I mean, wage growth. And inflation. Yeah, right. But today, you know, people will say, oh, we got the strong wage growth. Therefore, the labor market is tight. But my sense of that is that, well, that, wage growth is really strong because we had these supply shocks that infected inflation expectations

and workers demanded, particularly in certain sectors where the labor market was tight, I need a pay increase. I want to pay increase. And that the labor market actually underlying labor market is not as tight as it appears from looking at the wage growth because we are creating a boatload of jobs. I mean, if we were running out of workers, if labor supply was a real problem, we would not be able to generate 250,000 jobs per month. Does that sound right? I somewhat. I mean, I think that there is something,

you have the circle of causality between inflation and, you know, the labor market. I think it goes both directions. But I think that the labor market also causes weight, the tight labor market calls wage growth. But what's important is that, you know, almost throughout most of history, fluctuations in the labor market are driven by changes in labor demand, right? That's usually what happens.

But what happens to some extent, over the pandemic, not entirely, but to some extent, this changes in labor supply. So it's going to change a lot of the normal things that we expect to see. But the things you described me are consistent with labor supply went down, and then labor supply is coming back up. Those would generate the same sorts of things. That's not to say that that reduction labor supply didn't generate, I believe it generated labor market tightness, wage growth, which then fed into inflation.

And I think another important thing that gets missed here is like most of our understanding, about the way that tight labor markets pass through to inflation comes from the fluctuation of labor market demand. So we look for those kinds of outcomes, which is labor markets are tight, wage growth goes up and that flows through to output prices and inflation. But when you're dealing with temporary labor supply shocks, there's an entirely different mechanism through which tight labor markets can generate inflation, which is, you know, I'm an employer. My labor supply is down, but I don't believe that it's permanent, right,

which is rational, of course. And so I'm not going to increase wages to the market clearing level because wages are sticky. What I'm going to do is throttle output. And I'm going to deal with a lack of output, which means prices and margins go up, right? But like my total production goes down. My GDP is weak. That, to me, is what we've seen. We've seen a lot of employers. reduce output, reduce employment, and they're just waiting out the labor market. They're not passing wages, they're not raising wages to the clearing levels and then passing that through inflation. They're reducing output, which also generates inflation.

So I think we shouldn't, we shouldn't just be saying, well, if we don't see, you know, a direct sectoral wage growth and then, you know, inflation, like it can happen through output reduction as well. And I think that that's what you see. That is also a reason to be bullish going forward, right? Because labor supply goes up, output goes up, and that brings down price growth. Interesting. But it's a different mechanism than normal.

Well, I want to move on to the remote. That's a very good description of the interesting description of the dynamics here that are playing out here. And I think we're coming up to the moment of truth on this. You know, we've been debating it, debating it, debating it. It feels like over the next six months, this may be my last, maybe overstating the case, but it feels like over the next six months, we're going to get a clearer sense of how this is all going to play out. But, well, welfare listener, we're going to, this podcast ran on for a bit.

So, in all, great conversation with Nick Bunker and Adam, Ozemeck, and the team. But we're going to end it here, this discussion around the job market and then pick it up in part two, in the conversation around remote work. And that'll be released in a couple days after. Thanksgiving. So we'll catch you soon. Have a great Thanksgiving.