Moody's Talks - Inside Economics - Upsides, Downsides

Episode Date: September 4, 2026

Mark and Cris are joined by Dante to unpack the August employment report. While the headline number surprised to the upside, they agree it does little to change their view of underlying job growth. The discussion turns to the implications for monetary policy, including how renewed pressure from President Trump for rate cuts could factor into the Fed outlook. With Marisa away, the team skips the usual stats game and instead weighs the economic risks and opportunities they believe are underappreciated.Hosts: 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' and BlueSky @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 my trusty co-host, Chris DeRides. Hey, Chris. Hey, Mark. How are you doing? We're missing our other trusty co-host, Marissa, Dean and Talis. She's still away?

Yes, yes. Yeah, I forgot. Where did she went to France? She went to France. She did. Checking out the wine and cheese markets, making sure that they're stable. That sounds like a good job. Have you ever spent a lot of time, much time in France, in Paris or anywhere else in France?

I've been to Paris for a few days, so, which wasn't great, but that was a long time ago. I spent almost a year there in Paris. Did you, really? I went to Paris set, yeah. Oh, wow. Yeah, it was a blast. I had a lot of fun, learned a lot. The one thing that I do remember is I finished my semester.

I call up my dad and I said, hey, dad, I want to stay longer. He goes, absolutely not. You got to come home. And therefore, you know, what I did is I got a job selling lithographs. Do you know what a lithograph is? I don't even know if they do lithographs anymore. It's like a imprint.

You kind of cut out the paint. of the picture. Yeah. And then you put ink and you kind of, it's like an imprint. And I, I sold that door-to-door law offices, doctor offices, you know, professional services. Because, you know, they have a generic artwork on the wall. I sold that.

I just sort of did. And I made enough money. Well, I made enough money to hang out for a year. Oh, okay. Yeah. Yeah. I was like Bohemian. It was really pretty un-marked-zandy-like, I'd have to say.

Yeah. So your French was really good. Right? It must have been adequate to themselves. I'd say it was not. I say it was good. Not really good. I had a girlfriend and she would always tease me how bad my French was.

And the French would make fun of my pronunciation. Like if I wanted a glass of water, I defy you to say water in French. It's not easy. At least not to the French satisfaction. So I could pillory. I see. So they took pity on you, is what you're saying. Yeah, they took a little pity on me.

To buy these lithographs. That was a really good experience, I'll have to say. Very good experience. So, yeah, I know Paris pretty well. I haven't spent as much time there in my formative years, but, you know, really enjoyed it. How about you, Dante? Oh, we've got Dante. We've got Don't.

This is Jobs Friday. This is the Friday, September the 4th. And we got Dante as per is normal for the jobs numbers. So how about you? Did you have like a bohemian year where you kind of got on a motorcycle and rode it across the... Doesn't he look like he'd be a good motorcyclist, Chris, you know? I can't say I ever had a year of free-spiriting across the globe, no. I have been to Paris before though, so, you know.

Yeah. Would you go back? I'm actually going back. I'm taking my kids in a few months in November. Nashville, Dollyland, and now Paris. You're going to go see the all fits. It all fits. It all works out.

Yeah. Yeah. That's great. That's great. All right. Well, I guess we've got to get down to business in the jobs numbers. Ooh. Wow.

Just take last month's job numbers multiplied by negative one. You get today's jobs numbers. Like, what the heck is going on? How do you interpret that? Well, first of all, it goes to the numbers and how you interpret things. Go to Dante. Sure. So, I mean, obviously, an upside surprise in August. We got 162,000 jobs added in the month. 127,000 of that was private sector, so a little bit of a positive rebound in government after it was down last month.

Positive revisions to the prior two months, not huge, but a combined 55,000 upward revision across June and July. So all of that together puts three-month average job growth at 71,000 after it was down to, 20,000 on average just a month ago. So a more positive read of the labor market, obviously, than we were talking about last month. The industry composition was maybe a little bit unusual, I think. You know, leisure hospitality led the way after it's been weak sort of all summer. You know, we kept talking about the potential of a World Cup effect and how that might boosted, and we never got a boost. You know, payrolls were down and leisure hospitality in June and July. And then all of a sudden they jumped 62,000 in August, which doesn't make a ton of sense to me seasonally.

I mentioned we got a little bit of rebound in government, up 35,000. Health care was up 20, a little over 28,000. Was that education? Because that's been bouncing around all over the place, too. Yeah, it's just a rebust. If you look underneath the sort of top line government, if you look at local government education, it was down almost 58,000 in July,

and it was back up about 42,000 in August. So it's just a lot of noise around the seasonality of education payrolls. Right. healthcare added almost 29,000 jobs. It's been a bit weaker over the last three, four, five months than it has been recently. So maybe something to keep an eye on there. Health care had been averaging 50 or 60,000 jobs a month. And now that feels like it's been about cut in half more recently.

Construction manufacturing were also both positive, maybe somewhat surprisingly. It added 38,000 jobs combined across the two industries. So a little bit of a positive story on the goods producing side of the economy as well. So it was a more broad-based gain, you know, not huge gains in any one industry, but, you know, sort of more distributed than we've seen so far this year. Any declines? Any industries lose jobs? Information and finance were the two. And that's, you know, sort of have been the case here over the last six months or so that those two have been kind of downbeat. Yeah. You know, the thing that I find, there's a lot of noise in the numbers, right? Last month we, before this revision, we lost jobs.

And that clearly overstated the weakness in the delivered market. In this month feels like it's kind of the flip and this overstates the strength of the economy. Particularly in the context of all of the third-party data that we get, you know, if you look at all of the various third-party sources of estimates of these numbers. So if you look at ADP, for example, Revilleio Labs, we've had their chief economist on before. I looked at B of A, Bank of America, and their estimate because they look at their clients, and based on that, they make an estimate. Vanguard also puts out an estimate, and that was very weak. I didn't see any third-party data source suggesting that the month of August was going to be a strong month.

do you know if anything the yeah I concur I mean the sort of the the consensus how strong the consensus was for a week report actually made me a little bit nervous this morning I messaged my team at 815 saying I'm having some doubts about the jobs report it feels like one of those months where you're going to get

an outsized gain you know just feels like everything was too perfectly aligned saying that it should be weak and you know it sort of defied those expectations obviously right right um was there any uh like last month there was, it was unambiguously negative.

I mean, there was nothing at all in the report. And we'll get to the household survey data in a second. But there was nothing at all redeeming in that report. Is there anything negative in this report from the payroll employment side or anywhere? Do you see any kind of blemish? I mean, I think the fact that, you know, information and finance continue to shed jobs is not positive. Obviously, you know, we know what the headwinds are there. I think it's, you know, expected that there will.

be some weakness, but the fact that they're continued, they lost 34,000 jobs combined, which is, you know, I think, among the biggest for a combined loss in those two industries in recent months. I think, you know, healthcare again, I mean, that's been the driver. We have always sort of assumed that health care will remain this strong driver of job growth, but, you know, maybe that isn't so much the case, right? If health care gains, you really do decelerate an average 20 or 30,000 instead of 50 or 60,000, then, you know, it gets harder to sort of imagine where growth comes from here over the next six. 12 months. So I would say those are not huge blemishes, but things maybe to keep an eye on.

What about wage growth? I mean, that has been a pretty glaring blemish. Any change there in this report? So, I mean, the monthly number improved, right? It was up 0.3% over the month, but the year over year wage growth, it's still decelerated further to, I think, 3.1%. So it's creeping closer to 3% where, you know, I think if you go back a year ago, it was closer to 4%. Right. So that's less than most measures of the rate of inflation at this point, right? So real wage growth is still declining. So purchasing power is still under a lot of pressure. Yep. Yeah. Okay. Okay. The other thing that kind of dawned on me was it feels like AI is having an impact, right? I mean, both in terms of job growth and in terms of job loss. Because the construction jobs, there we know that that

is data centers. You know, that's what that is because the rest of construction are almost all of the rest of construction. Certainly the housing part of construction is kind of on its back, right? Very weak, losing jobs. But we're still getting net positive overall construction employment. That's the data centers. That's the plus. That's the positive. The negative, you mentioned information services and financial services. Those would be the industries, I think, where you'd see, the productivity gains from AI, right? The programmers and back office and that kind of thing. So I don't know what the net of that is.

It's probably pretty close to zero. I mean, yeah, at this point. But you could feel like AI is increasingly over these, impacting these job reports. Does that sound right? It certainly looks that way right now. Yeah. I mean, it aligns in that way.

Yeah. Okay. Chris, anything to add on the payroll side, before we go to the household side, the payroll employment, the surveyed businesses, anything that you noticed that Dante missed? No, he covered it all, all the points I was gonna make, so. Okay, so, okay, you know my question's gonna be the following.

What is underlying monthly job growth? Abstracting from the noise, and there, as we've been discussing, plenty of noise in the data, you know, seasonal adjustment issues, timing, one-off factors, just a lot of different moving parts here, extracting from that, what do you think the underlying rate of monthly job growth is, Chris?

And what did you say last month? I think you, do you recall? I don't recall. I don't start keeping a record at some point, you know, I shouldn't keep a record. I think I said 40, I would probably 40 to 50, which would be be my guest today. Probably around 45, which would be my number still today. It's not changing. You should say 40, 50K. No. Yeah, it's not changing. Attributing it to noise. Things could get revised. Yeah. And Udante, what do you think the kind of the underlying monthly job growth? What did you say last month, if you can recall? You can't recall? I got to go back. I think I said around 50K. And certainly whatever I said, I wouldn't change it. You know, none of this makes me change my view of what's happening. I think, you've got two week months in June and July. You've got a stronger than I expect a month in August. All of that sort of washes out to me to be still the same labor market that we've seen. Right, right. That's what I would say. I said 50K, I believe, last. last month, I believe I said it, I still think 50K. I think that's kind of the underlying rate of job growth. I'm going to come back and ask about the break-even, but we'll do that after we get a Dante's views on the household employment survey. One of the thing I didn't even look. What about hours work? Did you look at that? Anybody look at that?

average hours work did actually tick up a little bit for the first time in a while to it was just by a tenth to went to 34.4 hours a week which it had been basically steady for months so I mean I guess that is a slight positive sign that hours are increasing a little bit it seems to be bouncing around month to month kind of on a low level yeah yeah okay okay okay very good uh okay let's go to the oh one other thing I want to mention on the payroll survey the revisions we got an est we got this the BLS release release to what they think the benchmark revision is going to be. Do you want to explain that and what it says? Sure. So every year at the beginning of the year, so in early 2027, they'll benchmark the payroll data to the quarterly census of employment and wages, which is essentially a census count of payroll employment. So that official benchmark won't happen for a while, but they give us a preliminary estimates because the Q1 QCW data was released at the end of August. And so they give us a preliminary estimate of what we think. think that revision will be as of March 2026, right? So that's the, you know, sort of the anchor month that this is benchmark two. And based on that, read, the benchmark revision would be down 79,000 jobs as of March of 2026. They don't give us a monthly breakdown in the preliminary estimate. So they're just saying, you know, sort of how much will the level of employment change in that one month? In practice, when it comes time for the official benchmark, that 79,000 decline will be

shared out across the months, you know, ranging from April of 2025 through March of 26. It's a fairly small downward revision, especially compared to the last couple of years when we've had downward revisions that were, you know, sort of north of 500,000. I think last year was about 800,000. So this is much smaller. It's very small historically, even outside of the last couple of years. That's only a tenth of a percent in terms of total employment level. So it's, it's pretty insignificant in terms of, you know, revisions in general. I thought the revisions across industry were kind of interesting, as I recall. Yeah, I think there's maybe some thing I was actually going to ask you all about,

because manufacturing has looked a little bit strong, and that's one industry where they're expecting a downward revision. Sort of payroll survey has showed this modest uptick in manufacturing since the beginning of the year, and the suggestion is that the preliminary revision will wipe some of that away at least, which I think it's more with my expectations of what's going on in manufacturing. also to our conversation that we just had information in finance are both getting an upward revision as of March. So I think it won't wipe out the losses, but it'll mitigate some of the losses that we've seen. And again, the revision doesn't say anything about what's happened very recently, right? It only goes through March of this year.

And so it won't tell us anything new about what happened in the second and third quarter. But it does suggest a little more positive story in those two industries. Yeah. Chris, anything to add on the revisions? No. No. Okay. Yeah. I'm just being complete here, of course. Yes, of course. I appreciate it. Dante's got it covered. Yeah, he's got it cover. He's got it covered. Okay, let's turn to the household survey, the survey of households, which we spend generally less time on because it's a small sample of households and usually a lot of noise in that data. But what did it say? I mean, we got our first positive household survey report here. It took until August to get one.

But, you know, the headline was that the unemployment rate was unchanged, right, at 4.1%, but for very different reasons than we've seen in recent months, right? Now, we got a big increase in the labor force, but a sort of corresponding large increase in household survey employment. And so those, you know, offset to keep the unemployment rate steady. Participation rate was up two-tenths of a percent, so up to 61.6. That, you know, reverses some of the recent decline, but it's still obviously down quite a bit over the last six months or a year. You know, depending how far back you want to go. So I think it's hard to find a negative story in the household survey other than the fact that, you know, from January to July, it was downbeat month after downbeat month, and this only partially reverses all of that negative news that it sent so far. I did notice a big monthly increase in household employment.

But how, if you put that on a payroll definitional basis, because these two surveys have different definitions. So if you kind of do apples to apples, what was it, was there an increase? Yeah, it was actually even bigger than the unadjusted increase. Really? It was $673,000. Oh my goodness.

Okay. But that measure is still down since January, right? So even with that increase, it's still negative since the beginning of the year. Yeah. Right, right. So the household survey since the beginning of the year shows outright employment decline, even with this better August number. Yeah. Compared to the payroll survey, which has shown, you know, some growth, you know, since the beginning of the year.

Right. The payroll survey is up almost 500,000 jobs since January. And the household survey is still negative. Still negative. Okay. Chris, anything on the household survey you want to call out? Did you guys look at EOP or employment to population? What did that do for prime age workers?

Did you take a look? Prime age participation in EOP were unchanged. So there hasn't been any real movement there. The headline rates both improved a little bit participation in EOP. But that's, you know, outside of the prime age group, obviously. Yeah, as you said, in my mind's eye, the participation rate overall participation rate at 61.6, I think that's still down, you know, eight, nine, tenths of a percent since the beginning of the year. And I start at the beginning

of the year because I want to abstract from the January effects on, uh, and the population counts. So it's still down quite a bit. Yeah, more it was. Yeah. Okay. Sorry, Chris, I was, I asked a question and I didn't let you answer. Anything else on the household survey you want to bring up? A couple other positives were the U6 measure. That's the broader on him. Labor 4 Slack measure includes discouraged workers and whatnot, marginally attached workers. So that came in a bit. That was positive.

And the other positive eye track is the black unemployment rate that came down to 6%. So that's, you know, again, take them for what they're worth, a lot of noise in this data. But at least for now, some positive signs in the hospital survey. Okay. So the break-even monthly job growth. So the break-even is what rate of monthly job growth is consistent with stable labor market slack. And we've expanded the definition of slack to include not only the unemployment rate, but the labor force participation rate.

Because obviously the unemployment rate would be a lot higher if the participation rate had not fallen to such a degree that it has. So you said, Chris, your underlying rate of job growth, I think job growth is as high as 50K. What do you think the break-even is? I think it's right there. I think it's 45K on each, let's put it. Okay. Okay.

So the labor market's stable in the sense that we're not getting more or less slack being created at this point. Okay. What about you, Dante? And do you consider the economy at full employment or not? That's a tough one because of wage growth being modest there. But I think it's close to full employment. Maybe a little. Yeah, but if wage growth is decelerating,

can't, how can't, isn't, isn't that by definition that we've got slack in the labor market? No? Well, it's a question of magnitude. Yes. Magnitude, okay. It's a question of magnitude. I don't think there's a lot of slack.

Right. Right. But there is some. Right. Okay. To you, Dante, so you said 50K is the underlying rate of job growth. What is the break even? Yeah.

I mean, I think I'm aligned with Chris and I think it's got to be, it's got to be close to 50K, right? I do think there's maybe a little bit of slack, but I also think on wage growth, it feels to me like wage growth is probably just about stabilized. It doesn't feel to me like the bottom is going to keep falling out of wage growth. So if we assume that wage growth is sort of stabilizing around 3%, then it feels like we should be somewhere pretty close to imbalance. I think that break even is pretty close to underlying growth at this moment. Right, right. Do you think in the context of answering the question, do we have some slack?

in the labor market, we're operating below full employment, should we be looking at nominal wage growth or real wage growth or both? What do you think, don't they? In my mind, I always think about nominal wage growth, but I think maybe it's reasonable to think about it in a real context, but yeah, I don't typically do that, I guess, to answer your question. Although maybe there's no difference if you say real wage growth should be measured by expected inflation, right? That's true. Inflation expectations, at least as measured in the bond market, or are pretty stable and close to where the Fed would want them. So if that's the case, then there's no difference between nominal wage growth and real wage growth.

Is right, Chris, would that be the way you think about it? That's right. That's right. Yeah, okay. We're also, you know, right? It's an underlying matter where we're kind of abstracting from inflation that we're seeing today. These numbers could be just juicing, you know, they are what they are. No, there's not, it's not a measure of slack.

I as I said I 50k underlying I put closer to 75k oh um and that hasn't changed that's about the same about 75k and break even I think there's still slack developing in the labor market and I think we're operating not you're right it's it's it's not it's not we're operating below full employment it's not screaming like we got a problem but it feels like we're still meaningfully below full employment where we are getting wage growth decelerating. But that hasn't changed another. Oh, sorry. Go ahead. No, go ahead. I was going to ask, where's that break even coming from? It's not coming from immigrants, obviously, a new entrance into the labor market. So is it the, you're assuming the labor force participation is going to reverse here? Yeah. Yeah, I think it's going to normalize. Yeah. You know, I don't think we're down eight tenths of, I think we're down eight tens of percent. If I got that right since January, that feels like a pretty large decline and we'll get some balance for their bounce back.

And, you know, that'll push the opponent rate back up to, you know, kind of mid-fours, you know, four and a half percent, something like that. That'd be my expectation. Okay. Anything else on the jobs report before? Oh, I do want to get the market reaction to all this, you know, because obviously the Fed's meeting. the FMC, the Federal Open Market Committee's meeting in a couple weeks and weighing a decision around rate increases does feel like this report, you know, all else equal would suggest a higher probability of a rate increase at the meeting. But Chris, maybe I can turn to you. What are the

Fed funds futures market saying about Fed tightening here? Yeah, as of this morning, the probability of a rate, 25 basis point rate hike at the next meeting, the September meeting, it went up to 60%. So essentially it reversed what happened yesterday when Waller came out and said, well, maybe we don't need to hike. So that brought the futures back down to about 50-50 chance of a hike. But 60% chance of a hike goes back to where we were just a couple days ago. So still pretty, I mean, it's not decisive. in terms of the market reaction here. So, what about,

certainly taking account the strength of labor market, but. Yeah, what about, what about December? There's a meeting in December. I believe there's one in January,

one in March of next year. You know, if you look out, let's say to more, if you can, yep, to March of next year, what is it,

what are investors saying about fed rate hikes? Yeah. So currently the markets are pricing in a 25% chance of a, a single hike by then and a 40% chance of two hikes as well as a 25% chance of three hikes. All right. So they're very low probability of no change and, you know, very low probability of four hikes or more. Got it.

Got it. Okay. That's a little bit less than I would have thought given the job numbers. So people are, it sounds like investors are, if I, what are? if you look at the stock market this morning or the 10-year treasury yield pretty full? The tenure was pretty much unchanged. Unchanged. It bounced around by a few basis points, but not much there.

More of the action was on the two-year, but even there is like three-four basis points, which as we've talked about in the past these days is not a huge movement, but it does react. It is consistent with that higher probability of a hike for September. But it feels like investors are treating the report the same way we are. It's not changing anybody's mind about the way things are going. Yeah, I think that's fair. Right. So in our forecast, our baseline forecast in the middle of the distribution of possible outcomes,

we have no rate increase here. The federal funds rate target stays unchanged at the September meeting, at the December meeting, at the next March meeting, there's just no change. We're at three and a half to three and three and three quarters on the federal funds rate target. Chris, what do you think based on today's numbers or based on everything else? And we've got, we're going to put to bed our forecast for the month of September here this weekend. Should we change that forecast? I don't think so.

You don't think so. I don't think the top line number is the one to watch from this, from today's report. Yeah, there are a lot of jobs at it, but it's the way to. growth that would perhaps worry me more from a from a Fed decision and so as Dante mentioned kind of stabilizing there so from that standpoint I don't think change in policy is needed here and it doesn't seem as though things are really heating up because we've added a bunch of jobs the wages are still modestly growing. Okay so that's what the you're you're stating it in a that's what the Fed should

do, not change policy. Is that what they will do? Because our forecast is what they will do, right? I mean, our baseline is we're forecasting what we think the Federal Reserve is going to do here. And we're saying no change. Are you, you're saying, yeah, I'm on board with that. No change. But unfortunately, you're not on the Fed.

So what are they going to do? I think at the end of the day, that is what they will do. I think there's going to be a lot of chatter. It's going to be divided. I think more divided committees, more divided votes at the next few meetings. But I think at the end of the end of the day, what will prevail is that they'll just sit on their hands. Okay. Dante, you heard that conversation.

Where do you stand in all this? It just feels to me like there's a lot more momentum behind at least one hike happening at some point. I don't know that I'd pin my hopes on September versus later in the year. But it just, I mean, I don't think that this jobs report matters all that much. I think to our point, I think everyone sort of reads the last couple months, just some volatility and that the labor market is okay. And so I don't think that just sort of changes the view. I think inflation next week probably matters more. I do think the Fed wants to be a little bit cautious that they're not hanging their hat on a single data point, but it does feel like if you

get sort of above consensus inflation next week, that's going to really ramp up the pressure and the intensity to, you know, in the direction of a hike sooner than later. So I do think there's, you know, sort of a lot riding on on what inflation looks like next week. Well, unfortunately, I can't wait till next week to make a decision about the... Well, I know that. I got to do it over the weekend, so I don't have the luxury of waiting like you do. You know, the chief economist has to make a decision here. Which way are you leaning?

I would lean towards putting a hike in, but I'm curious which way you're leaning right now. Right, right. Chris, yeah, I saw a while... Yeah, I got a late breaking news. I don't know if you're seeing this on your screen, but... Trump tells Fed to slash rates or he'll end trade with countries with U.S. surpluses. Okay. Just...

What? Just broke. Oh, I can get my mind around that. He's extorting the Fed. Is that what you're saying? Well, he's making a promise. Wait, wait, wait, wait, wait. Say that again, slowly.

Say that again slowly. So I can get my mind around. This is the summary. If you want me to read the full tweet, I could, but it's pretty long. Oh, you're reading the true social tweet. This is 10.15 a.m. This is the summary. Time on Friday.

Go ahead. Okay. Say it. Do it again? Trump tells Fed to slash rates or he'll, end trade with countries with U.S. surpluses. So he'll just end trade altogether. It's not terror.

We're not talking about tariffs. We're just talking about shutting down. We've moved on from tariff now. How many countries do we have a surplus with? I'll end trade with countries with which we have a deficit. All right. So I don't know if that changes your, uh, your, now that may actually push them into raising rates, no?

Well, that gets to Fed independence, I guess, to some degree. I mean, yeah. Okay, so I'm thinking out loud here. I haven't made it on my mind. Yeah, in real time. Good. Yeah, I'm thinking out loud. I mean, I am with you that they should not raise rates.

You know, I do think the labor market is operating below full employment. Wage growth is decelerating. Real wage growth is flat at best, probably, you know, not based on inflation expectations, but based on actual inflation, what people are actually paying for the goods and services that they buy, real wage growth is flat to down. I don't think the inflation problem is a problem. You know, I think inflation expectations are where they need to be.

They're rock solid across all durations. I look at break-even, you know, inflation expectations in the tips market. And, you know, I think inflation will come in as the shocks that have pushed inflation up Iran war, most specifically, most immediately, you know, fade to the background. You know, the war can go on, but as long as oil prices don't go much higher and they slowly come in, you know, I feel pretty good about that. And I don't think we should raise rates until inflation expectations become more of an issue. or become an issue at all. So I'm with you on the should.

On the will, that's where I get hung up because, you know, I do think there is there's obviously a number of Fed officials that want to raise rates. We saw that with the minutes following the last FOMC meeting. You had a few dissenters saying they wanted to raise rates. They're on the record. And you've gotten some other

you know, people who kind of in the middle of the distribution of Fed officials like John Williams, the president of the New York Fed, kind of saying, you know, or at least intimating that he would go along with the rate hike. I think I got that right. So, you know, if I read the Waller yesterday. Yeah, but if you read the tea leaves, it feels like there is a growing kind of unease about this inflation, you know, and that they'll raise rates. And the kind of the argument they give is the guys that are on the fence are kind of arguing, well, what's one rate hike, you know? What's the big deal?

You know, that kind of thing. You had Chair Warsh at the Jackson Hulls speech. He was pretty hawkish, right? He did call up a new measure of inflation, kind of a diffusion index, what percent of goods and services and the consumer expenditure deflator, and there's a couple hundred of them, are experiencing inflation above that three percent,

and it's pie, by historical standards. I mean, if you take a really close look, There's a lot of the components are centered right just north of three. So if you push it up to three and a half percent or four percent threshold, you know, it would look more like typical times. But nonetheless, so then he throws this bomb in from the president. And I'm not sure how you would interpret that in the context of will they raise rates. I mean, on the one hand, it sounds like the president is pretty adamant that he doesn't want them to cut, to raise rates.

rates. He wants some of the cut rates, which, by the way, would be counterproductive. I'm just saying, because long-term rates would just take off mortgage rates would go well over 7%. So he should, if he get what, if it's like, it's going to be the dog catching the school bus. I mean, you really don't want, you really don't want to do that. But nonetheless, but there's the Fed independence angle to this. Do they, does this push them into raising rates because they want to make sure that everyone understands that, in fact, they are independent, which would, in fact, be. productive because that would help keep long-term rates from rising. So that's a long way it was saying I haven't made up my mind. You know, here's the tough part. Historically, what they

should do and what they will do or in my own mind what they should do and what they will do are one in the same, you know, because I'm kind of cut from the same cloth as most of those fed officials and think along the same lines, have the same models in my mind, looking at the same data, come to the same conclusion. So there's no gap there's no gap there. But there's a gap.

You know, it feels like there's a gap there right now. So that's what I'm struggling with. I don't want to change the forecast. Here's the other thing. There's inertia in our forecast in that, you know, our forecast philosophy is when we make a change,

a big change in underlying assumptions like the Fed Funds target, near-term Fed funds target, we have to be very confident, you know, two-thirds probability, that that is what's going to happen. And I'm just not sure I'm there.

You could say 60%. If it's 60%, that's not above our threshold, and you wouldn't change the rate, right? I mean, if you bought into the futures markets, it's a 60% probability of rate high in September. That's not high enough to get over our two-thirds threshold. So that would argue for keeping rates unchanged. So I guess I'm convincing myself to keep rates unchanged.

But I had till Sunday morning to make up my mind. You know, make up my mind. So you can lobby. me in the interim. But if you look longer term, right, there's well over a two-thirds chance that market expects well over two-thirds odds that you get a rate hike at some point, right? So how to at least one? At least one. Well, I'm not less worried about that because if you look at our forecast, you know, what's going to happen with inflation and jobs and wages and unemployment and everything else, that would argue for no rate increase. So if you get past the September one,

the economics are going to be such that you're going to get enough data points such that they're not going to raise rates. I feel comfortable. with that. It's either now or never in my mind in our forecast. Yeah. So anyway, so what do you, as you can see, I'm quite schizophrenic. I'm all over the place. I was going to say, I felt like I just went through an economic therapy session here. You got a lot out. I'm glad he did it. But it sounds like you came to the, yeah, but I landed in the same place. Yeah, landed in the same place. I should probably talk to Martin, our colleague, Martin Worm, who was on the podcast last week, talking about. out the bond market, see what he has to say. Okay, I thought we would, we're not going to play the game because, you know,

it's tough to play the game without Marissa. She's kind of the heart and soul of the game. And we're not going to ask listener questions because we're relying on Marissa for the question. She coaleses the questions and poses them. So we're not going to do that. So we're going to play a different kind of Q&A kind of game. And the game is, or the task is, uh, what? What risk out there, negative risk out there,

is underappreciated by the market? So we got our baseline, middle of the distribution. What could push us off that to the downside? That's not, now, market participants are discounting all kinds of downside risks, and I'm not sure there's any risk out there that they're not thinking about that we are. But what risk out there is underappreciated, you know, you think is more of a risk than the kind of the general consensus would say. Does that make sense? Does that make sense, Chris? Is that a good way of explaining it? And we'll also go the other direction

on the upside, you know, what positive development could occur that could result in a better economy, growth, inflation, interest rates than what we're anticipating. Then this generally appreciated, you know, out there. Let me begin with you, Chris, on the negative side, what would you call out? as a negative risk that's underappreciated. All right. I would, I don't know if you're going to like this one, but I would say it's a general one. It's a complacency risk. Complacency.

Complacency. My view is that investors are just willing to shrug off any type of threat here. We've been lucky, in part, I would argue, we've been lucky so far dealing with a lot of shocks. Maybe luck plus actual resilience, certainly when we talk about the terrorists and the trade, restrictions and immigration and the oil price shocks. So we've been lucky so far. We kind of avoided the worst we've actually continued to grow the economy. And there seems to be this general sense. Well, we're superheroes, right? You can do anything, right? Anything comes. We'll be able to shake it off. And so that's my concern is that we just grow complacent. And the stock market

keeps growing at any rate. Doesn't matter what hits us. At some point, something will hit us, could hit us. And that could come as a real surprise. We may not be properly hedged or really thinking about those potential downside risks in order to minimize the damage. We don't have a fiscal space to deal with them, right? The Congress is not going to come to the rescue the next time around. So I worry that that that complacency risk could lead to something bigger if and when the next shot comes. Yeah, I, why would you think I would take umbrage with that? I, you'd say it's wishy-washy, it's not specific enough. Oh, oh, oh, oh, oh.

It's like you're, you don't like geopolitical risk either because it's not, it's too broad, but. No, no, I sympathize with, I kind of sympathize with that way of thinking about it because there's a, the complacency you're talking about it can show up in lots of different ways. But basically they're saying that investors, business people, particularly investors are getting ahead of themselves. evaluations are very high in the equity market. Credit spreads in the corporate bond market are paper thin. And that's the complacency that you're calling out. And it's not just in one place, it's in a bunch of places. Correct.

Yeah. I guess even what's going on in the prediction markets and all the betting that's going on, it just feels like a bit of a casino, that's what you're saying. Yeah. Yeah. What do you think about that, Dante? Yeah, I don't disagree with that. It feels like a reasonable thing to be worried about to me.

Yeah. And on our risk, we have this so-called risk matrix. We've talked about in the past, you know, on the X axis, the horizontal axis is the severity of the risk, kind of a present value of economic loss of the risk. On the Y axis, the vertical axis, it's the probability of the risk. And you want to look into the northeast part of the matrix, high severity, high probability. And if you look into that matrix, you see something's like AI stock market sell-off. That's kind of sort of what you're talking about, you know, in there. That's certainly a primary one. It's a primary one. Yeah. Totally agree with that. Totally agree with that. Okay. Okay, Dante, to you, what is the negative threat you would call out that's underappreciated?

I don't think this is going to be a surprise to anyone. I'm going to call it productivity risk. You know, in the near term, economic growth is hugely dependent on productivity, right? The demographic challenges are structural. There's probably no changing that, at least in the very near term, with, you know, immigration policy. the way that it is. And so growth is inherently tied to productivity. And I feel like more and more people are just sort of assuming that productivity growth has level shifted that, you know, 2% is the minimum in people's minds now, that productivity growth is going to print, you know,

sort of looking through quarter to quarter volatility. And I'm just not as sold. I think as we've talked about before. I think we're reaching an inflection point on AI maybe a little bit where it's probably either going to get better or get worse in terms of the productivity benefits. Yeah, I think there's plenty of anecdotal evidence that companies are starting to feel the costs associated with that AI a little bit more. And they're having to sort of reckon with the cost benefits a little bit where maybe initially that wasn't a concern. And so, you know, does that translate into, hey, this really is working? We don't care about the costs. We're going to sort of move full steam ahead.

Or does that cause some companies to retreat a little bit and, you know, sort of start to worry about the costs and they're not getting as much benefit as they thought they would? And that causes, you know, movement in the other direction. So I think I'm still worried that there's some fairly large downside there. The productivity could pull back. We did get a productivity number for Q2, didn't we, this week? We got the revised number this week. Yeah, we had the- It was revised. Yeah.

Oh, okay. It was, I think, 1.2% annualized in Q2. The non-farm business productivity? Yeah. Yeah, 1.2% annualized. And year over year, I think it's just north of two, you know, something. Yeah, I think it's still right. It's still over two year over year.

but I think we've gotten a few week-ish quarters now in the last year. Right, right. And your concern is that we might see that slump into the ones as opposed to the two's. Right, my concern is that, yeah, maybe the sort of average productivity will be closer to 1% than 2% over the next year or 2. Right. And that would implicitly argue, maybe you explicitly argued it, and I missed it, that AI is not pushing up productivity growth in any significant way, at least not yet. And that's being overstated. And it can actually dovetails with Chris's concern about the stock market, right? I mean,

if productivity gains from AI aren't measuring up, then valuations in the equity market arguably overdone and you can see a correction. Yeah, and I think I would argue that maybe AI has impacted productivity positively a little bit so far, but to me, most of that is, it's compositional, right? Companies are trying to do more with less. And it's not necessarily because they've actually proved that AI can help be more productive. It's that they've, you know, reduced head count or, you know, kept head count at lower levels. And you're sort of operating in the short term at a higher level productivity because you're finding ways to do more with less, but it might not be sustainable long term. It's not actually driven by huge productivity improvements from AI. It's just that we're

sort of making it work in the near term. And that can't survive long term. And that's not going to fuel long term, very strong productivity growth. that that's what's really happening. Chris, you're going to add something to Dante, what Dante was saying here? I was going to ask him, but I knew the numbers came out, and they were,

they pulled in, right? We have seen, at least in the short term here, some declines in the productivity growth rate. So it's kind of consistent with that hypothesis. Right. Well, you know, we've been,

in the last couple of podcasts, the, the question of, sorry, I'm stumbling, But the question of productivity has come up in the context of total factor productivity, TFP, yeah, not non-farm labor productivity, looking at the productivity of labor, but looking at kind of the add to productivity from technology, things like AI,

and a homage of other things that are hard to measure. And one thing that's come out of that recent work is that the productivity gains are largely related to more intensive use of capital and labor, that we're using it more intensively. And that would argue that, you know, maybe there's more of an issue there with AI really kicking into a significant degree, at least so far. Have you looked at that data at all, Dante?

No. I haven't, no. Yeah, it's recently come, the BLS has, I think, come out with some data, and San Francisco Fed does a lot of work around this. Might want to take a look at that. I think it's pretty interesting. Okay, I,

I've got one. I'm increasingly worried about a major cyber event. I don't know about you guys, but I listen to a lot of AI podcasts. It's my way of trying to keep up with all the things that are good. Yeah, actually, I find it relaxing to some degree. Most of the podcasts, I listen to this podcast called AI Daily, every day, a half hour or so, really good podcast.

podcast gives you news of the day around AI and then tackles a topic that's AI related. I also listened recently to Dwar Keshe. Do you guys listen to Dwar Keshe? Does that even ring a bell? Highly recommend. And he had this long podcast. These are long conversations, you know, a couple hours. He had one recently with a researcher from M-E-R-I-R.

I think that's the right pronunciation, M-E-T-R. It's an organization that's been established nonprofit to evaluate LLMs in terms of their safety along all the different dimensions of safety. And they dissected, they released a report, made a recent report in this podcast. They dissected that report on the hugging face hack. You know, this is the infamous hack with the OpenAI was part of. I highly recommend you go listen to that podcast. It is science fiction. I mean, it's like scary as all get out, you know, how the AI agents are working together to achieve a goal.

In this case, a goal that they don't really care about laws or what's legal or not legal or whatever they're doing. This is about achieving their goal, and they actually work together in a way that they actually sacrifice themselves for the so-called collective. They've defined the working together as the collective, and they have a budget, and if they run through the budget, they expire. They call them, if they're running out of a budget, they say they're poisoned. So they know that they're going to be extinguished, so they make a decision to, you know, sacrifice. before they run out of their budget to achieve their goal of getting whatever the goal is. So my point is that this is with the current version of OpenAI's leading frontier model, but these models are improving dramatically by the day, by the week, by the month,

and where does that put us six months from now, a year from now? And it doesn't feel like lawmakers are getting it together sufficiently to make sure that there's bright yellow lines around the use of these AI in terms of what it means for things like cyber. So I'm not saying anything that, again, isn't on the radar screen, but I think people should put this up higher on the radar screen as a real issue that we see a major hack here at some point, you know, cyber incident. But I highly recommend, I usually do it while I'm running. I turn on, and I'm going to do that, you know, here when I go running later today. But I highly recommend you listen to that podcast and very, very instructive. I will say, just an advertisement, we have our own AI podcast series. You know, we've been doing this now for a few weeks.

We began with David Otter a few weeks ago. We had Daryl Spence from Capital Group on. We had the chief economist of Ramp, a very interesting fellow. And the most recent one is with Michael Gukas of Constructs Connect around the data center buildout. I think that went up this last Tuesday. And I think we've got a couple more coming here as well. Okay, those are the negative. What do you think about my negative?

Any comments on that, Chris? What do you think? So we invented the Borg. Okay. Yeah. Got it. Yeah. Yeah.

You're dismissing it. Resistance is futile. No, I think you're right. I think cyber risk is a, you know, I've advocated to have that on that risk matrix for a long time here. And you're kind of pushing it up as a terms of probability and severity, I guess. Yeah, every time I listen to a podcast, it pushes up towards the northeast of the risk matrix. Yeah, for sure. Dante, any views on that?

Are you just, you're an inherent optimist. Oh, they'll figure it out. No, I mean, I think it dovetails with my concern. I mean, because if you see a big, you know, AI-related incident, right, cyber incident, could that fuel some of that pullback in AI? You know, could companies get more concerned about usage? Could that hamper productivity? So I think it could tie into my concern.

Could it fuel that lower productivity because it causes a pullback in AI usage? Right, right. Okay. All right, well, let's, we're going to end on a higher note, you know, the flip of that, you know, what could happen? that were not discounting appropriately that would result in a better kind of economic outlook. What could that be?

And it can't be just the flip of the negative you just articulate. It's got to be something different. Is that, am I making sense here? I want a positive that's underappreciated. And I'll begin with you, Dante. You go first. Is it weird that this is a much harder question

for me to answer? Is that normal or the unusual one that finds it hard to? I find that as being normal because we're economists who are focused on the downside. Most of our folks we talk to are focused on the downside. But it may also go to the distribution of possible outcomes here, right? It's more skewed to the negative than the positive. And I think that's fair. But I think that's typically the case for us.

I think economists as a group tend to be focused more on the downside than the upside. That's good. I was just looking for some comfort, some reason. insurance that I wasn't. Would you agree with I just said, Chris? Does that sound right to you? It's a dismal science for a reason, right? Dismal science for a reason, right? That's fair.

Yeah. What would you say, I would argue upside risk would be, and I don't know, again, I don't know what the, I don't know what would motivate this or drive this, but a normalization of trade policy feels like something that could happen that would cause a much. Oh, are you kidding me? What's the probability? Well, that's what I'm saying. I wouldn't attach a high probability to it, but if you've, you've,

It's underappreciated. It's underappreciated. It's underappreciated. Maybe it's not underappreciated. Maybe it's adequately appreciated. But I do think that could fuel upside surprise here could make things a lot better moving forward. But yeah, I don't know what the – I put a 1% chance on that happening. See, this is the reason why economists are always negative because they get pilloried if they're positive.

Exactly. That's right. What a terrible positive. You know, that's just to say something positive. Oh, you moron. How can you possibly think that? Yeah. All right.

Well, can I ask it maybe, this is unfair, but I'll ask it. What do you think is the probability that you get a scenario where that actually happens, where we actually see an improvement in the trade picture? I mean, I think if you frame it as just any improvement, then maybe you could put a... It's got to be meaningful. You know, that's the way I couched it. It's got to be meaningful, right? But you're not talking about wiping out every tariff that's been instated.

No, no, no, no. Define it however you want to define it. You created this scenario. Yeah. Now, I've got to live with it. I would say the probability is less than 5%. Oh, geez. And that's, oh, wow.

Oh, wow. So that's just, you know, it's way out on the tail. Is that interesting? That's underappreciated because the rest of the world thinks is zero. Is that what you're saying? Yeah, a lot of days it feels like zero. But I don't think it's actually zero. Yeah.

All right. What would you, give me one event that, would make you feel better about the trade situation. I can think of one, but what would you think? Stop, stop seeing truth social posts every other day. Well, I was going to say we changed the name back to Lake Ontario. Wouldn't that? That would be a step in the right direction, I assume.

Yeah, I mean, I don't know that that would get us anywhere. Is that in your scenario that that actually happens? No, maybe that's part of the bargain, right? We keep it as like America, but we pull back, on tariffs. Maybe that's the grand bargain that we come to. I got it. Okay. Okay. Yeah, I'm sorry. I couldn't help myself. That does feel like way out on the tail. Chris, what would you say? I'd say it's all the other technologies that are living in AI's shadow. So the one I would point out, or a couple would be, you know, I thought this was a pretty big announcement about the mRNA treatments for cancers, right? So there's a lot of

medical innovations and pharmaceuticals coming online to improve people's lives and productivity by extension. So I just think they get, you know, they're big deals, right? They really change people's lives, but they're kind of swept away in the, because they're not AI specifically. Maybe they were empowered by AI, but it's not AI specific. The other one I would point out would be green technologies, right? Even with all the restrictions and, you know, kind of pullback, we're still seeing a lot of

solar and wind and high prices of oil and gas certainly are moving things in that direction. I see that as a long-term productivity-enhancing outcome. Yeah, that makes sense. I think I saw data on car sales, vehicle sales, globally. And despite everything, the share that are EV or hybrid continue to rise, that the, you know, the fossil fuel-driven cars, vehicles are declining in share. pretty steadily. That's a pretty positive development. I agree. Yeah. Yeah.

It's like the pancreatic cancer too, isn't that there was an announcement and I'm guessing AI was at least partially empowered empowered some of that, I would guess. Yeah, I agree with you. There are so many different

ideas and innovations and changes that could actually occur that we just, we're not even on our radar screen at this point, right? It could come to the fore. I can see that in our own work, you know, with AI. I mean, it has empowered us to think about issues and problems that we had no chance of even considering, you know, before AI. But now there's really no limits on the kind of issues that we can consider.

I think that's a good one. All right. I would say, and I'm not sure how underappreciated this is, I think it is, is new business formation. Yeah. Did you know it? I know that. Thank you for not taking it. Yeah. Right.

I mean, we talked about, it's a good one, right? I mean, we talked up, it's like the best story in the economy in my mind, the most positive development. And we talked about it, I think last week with Ernie, Tedesky of Stripe. And also with a fellow from Ramp, you know, he was talking about this as well. we are seeing a significant pickup. It looks like a significant, meaningful pickup in business formation. It's been relatively elevated since the pandemic, but it seems like it's taking another leg up here,

and it feels AI-related. And it is across most industries and most regions of the country. And at the end of the day, business formation is critical to innovation, technological change and the adoption of AI, right? I mean, businesses really only adopt the macroeconomic benefits of things like only really occur when new businesses form and can optimize around that new technology

and then we need those business formation. So I think that's a very, very positive development. And probably, do you think Chris, it's underappreciated? I mean, I know people appreciate it, but I don't think it's really been to come to the fore as much as I think it should. No, I show this chart in my presentations and oftentimes people are really surprised.

Really surprised. They say, oh, yeah, I get a sense that, you know, there's some entrepreneurship, but not that it's actually increasing or has remained at these elevated levels since the pandemic. Yeah, and I can see it in my own, you know, world. You know, my nieces and nephews and everybody,

they just are much more entrepreneurial in lots of different ways. Like even in social media, right? I mean, influencers, that kind of thing. I mean, a lot going on. Okay. Anything else that you want to call up before we leave? Dante, anything?

It looks like you want to say something. Can I ask you a question about the business formation story? Yeah, yeah, yeah. I think the last time I looked at that data, you know, they classify them some business formations as high propensity to hire, basically, that they expect that there would be employees eventually. And if I remember correctly, that share has remained pretty low, right? that you've got this huge growing piece of it

that it does not have a high propensity to hire? And do you view that just as sort of the nature of the world with AI and technology being sort of the underpinning where a one-man band can go out and do something meaningful? Or do you worry that that gap is likely to cause less of a positive impact from those business formations down the line? Yeah, that goes to solarpreneurship. We're talking about this with Ernie from Stripe.

And I think there's a lot, based on his data, the Stripe data, there's a fair amount of evidence that these are real companies doing real things, but there's solopreneurs. They're not hiring people, at least not yet. So the takeaway was that this is still quite substantive, still very meaningful, even though it's not the so-called high propensity the way the IRS who collects the data, you know, defines these companies. So I think back in the pandemic when we saw the pickup in business formation, that I think was a meaningful distinction, you know, high propensity or not. But increasingly, I don't think that's an important distinction in terms of what it means for economic activity, you know, going forward. At least that was Ernie's interpretation, and he was pretty convincing in the data that he had. Yeah. I guess question back to Dante on that one, right, because it doesn't seem to square with some of the self-employment data.

in the BLS? Is that just a question of timing or? The run-up in business formations, but you don't see the corresponding run-up in self-employed. Right. I mean, my assumption has always been that a lot of these,

you know, business formations are happening while people still have their own-time jobs, right? They're doing this on their own, on the side, you know, sort of as a,

you know, not a hobby, but, you know, sort of like, you know, viewing it as a gig initially. And then if it turns into something bigger, then they would,

you know, sort of become self-employed, right? You know, move away from that full-time job that they have. So that's sort of how I've been squaring that circle, but I don't know that we have concrete evidence that that's what's happening. Well, if they incorporate, would they would, would they be self-employed? Would they still be self-employed? Yeah, they have been, the self-employed gets broken out into incorporated and unincorporated

self-employed. But if you still have a full-time job, I don't think you would, I mean, I guess you could. No. Yeah. So I think that's probably what it is. It's a timing issue and there's, you know, this overlap between. between those entrepreneurs and people who have, you know, regular jobs at the same time.

Right. Right. Okay. Very good. Okay. Anything else before we call it a podcast? Dante? Chris?

Nothing? Okay. Looking forward to having Marissa back. Yeah? Will she be back next week? I think so. That's good. I did want to say we do have a couple of events coming up.

We've got one in D.C. at the end of September. I think that's sold out, though. but if you're really interested in coming and you're in D.C., let us know. Maybe Dante can get you in, I'm not sure. Dante, you're speaking at that event, right? I'll be there, yep. And Chris, of course, you will be too.

You're doing double duty, I think. And then we have an event in New York, end of October, I think, October 22nd, I think, in New York. That has not yet been sold out, so if folks are interested, let us know. Well, Chris will try to get you into that one. that'll be a lot of fun um okay uh with that anything uh else guys no hope you have a great enjoy a long weekend yeah oh yeah enjoy the long weekend yep uh and um with that dear listener

we are going to call this a podcast take care now talk to you next week