Odd Lots - Lots More on the Growing Risks to the US Labor Market

Episode Date: February 28, 2025

A week from today we will get the February jobs report and there are growing concerns that the US labor market is slowing. Already, the number of sectors adding jobs in this economy is on the decline. Meanwhile, the housing market continues to struggle. Add in the Department of Government Efficiency and worsening fiscal conditions in the state and local sector, and the government may prove to be a drag on employment. To talk about this and other macro developments, including possible tariffs, we brought back Jon Turek, founder and CEO of JST Advisors, to break it all down on this episode. Read more: US Initial Jobless Claims Hit Highest of 2025 Odd Lots is coming to Washington, DC! Get your tickets here.See omnystudio.com/listener for privacy information.

Bloomberg Audio Studios, Podcasts, Radio, News. Tracy, did you read our newsletter contribs this week from Neil Dutta and Scanda? It would be terrible if I didn't. Not only did I read them, I lightly edited them. That's right. You did. You did. You did. I think I uploaded the text of them and then you edited them. I did a dead list. I'm both the most popular trader and most successful trader at Citadel.

Fed is going viral. Uh, barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Black gold! These are the important questions. Is it robots taking over the world? No, I think that, like, in a couple of years, the AI will do a really good job of making the Odd Lots podcast.

One day, that person will have the mandate of heaven. How do I get more popular and successful? We do have... The Perfect guest. Welcome to Lots of More, where we catch up. with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have the perfect guest.

I have to say, though, they were both great. And I'm not just plugging our newsletter. Those were outstanding contributions. And they sort of build on something that Scanda pointed out earlier in the newsletter about how embedded or how important AI is becoming to the U.S. economy. Yeah. And like this idea, like, there are signs of slowing. Oh, yeah. I feel like we're in a moment where actually there just aren't really many people talk about the economy because we're either so transfixed by the goings on in Washington or certain big tech stories like AI that we're in a period where there's this lull of like just the meat and potatoes of like what's happening with initial claims.

What's happening with housing starts? What's happening with the jobs report? And there's actually signs of a slowdown. Yeah. And there's also signs. Well, there's also signs of inflation picking back up. And so that kind of raises the question about what's the Fed's reaction function here? We thought it was sort of skewed towards preventing a recession a little while ago. But now, like, maybe they start caring about inflation again. I don't know. But, you know, the other thing that's happened over the last week is that we have had this pretty substantial drop in 10-year yields. As of the time we were recording this, which is March 27th, we touched 4. 25 yesterday. We had been at 4.65 on February 12th. So it's like the curve inverted again as well. The curve and it's a weird time. John Turrick, what do you think? Why what happened that we were at 4.65% on the 10 year February 12th and right now we're at 4.2886? Yeah, I think it's it's an interesting one.

I mean, as you guys kind of noted, I mean, I think we came into this year with a lot of excitement in terms of, you know, what the policy and would mean for the economy. It seemed that the animal spirits were going to lead to a more meaningful real growth impulse. I mean, I think the famous Dan Druckenmiller said in a note or on a TV interview that he hadn't seen the business community that's excited in like his 40 years in the business. And, you know, I think that we've had a little bit of a transition in like what that policy impulse means and the fact that it seemingly is two-sided. as we're seeing today, tariffs are also a big part of that policy impulse. And as we've seen over the last few weeks, it has a very unevenness into either both the implementation and the scope. So I think, you know,

the market kind of has had to adjust to, you know, a policy impulse that seemed to be unambiguously positive to one that's more mixed. And I think the tenure is just, you know, kind of a reflection of that. I would also note, as Tracy pointed out, about sort of inflation pricing, you know, a lot of the moves, especially since the middle of January, has been in real yields lower. As in 10-year break events, it actually stayed pretty firm. So, you know, I think that the economy is having to, the market is sort of having to deal with, you know, an economy that's a little more confusing. And, you know, the policy impulse is, is more muddled this time around where you have, you know, the potential for tax custody regulation on one side. and just a lot of tariff uncertainty that is potential in scope much more drastic than we saw in Trump 1.0. Yeah.

So, you know, I think that that is, you know, sort of at the nexus of what's going on here. And, you know, just to add one more thing, you know, you guys kind of made it up like the meat and potatoes of the economy. I think that, you know, for the last two years, we've been in a very stable, nominal GDP regime. It's kind of oscillated between high fours and high fives. and, you know, the economy seems to be running on a few less cylinders than it has been in the last couple years. You know, consumption is much more uneven and very biased towards the high end. Outside of the AI CAPEX cycle, there really isn't that much CAPEX. And we've seen that housing has, you know, been in a law now for a while. And, you know, hiring isn't that high.

So it's just a much more, you know, a lot more cross currents than I think the market probably had anticipated six weeks ago. So we are recording this on February 27th. In about a week, we are going to get U.S. payrolls for February. We just had initial claims, as Joe mentioned, showing that they jump to the highest level so far this year, I think increasing by 22,000. A lot of that is the cuts in D.C. What are you seeing on the labor side of things? Yeah, I think that, you know, from the labor market perspective, I still think the economy is in a decent equilibrium in terms of that we have a pretty stable unemployment rate. We're still churning out pretty respectable levels of payroll growth per month. And that's, you know, sort of been noted by the Fed now that, you know, they're much less worried about the labor market side of their mandate than they were, say, in Q3. You know, but I think what's a little bit worrying is that the labor market is kind of coming into this, you know, or whatever the DC impulses, you know, I would say a little bit more vulnerable to shocks

than it's been maybe over the last few years. And I would namely say that because the hiring rate is still quite low, which means it doesn't take much in terms of, you know, negative payroll impulses to sort of lead to more drastic jumps in the unemployment rate. So, you know, I don't necessarily look at it right now and say, you know, there's an obvious threat to three months the labor market being materially weaker than it is now. I still kind of get the sense that it's pretty stable. But I would say that we kind of, we feel a bit more vulnerable, given that we don't have the cushion of a decent hiring rate. So probably a bit more vulnerable. You know, if this, you know, DC impulse is more of a shock, that could, you know, it could spiral

a little quicker now than, you know, say a year or two ago. I saw someone make this point on Twitter. I wish I could remember who so I could give them credit. He said one encouraging thing that we've seen lately in the markets, is that at long last, there are hints of the inverse correlation between stocks and treasuries reemerging. That was the famous condition of the 2010s, that if stocks went down that day, your treasuries probably did well, and you got that beautiful hedging effect from that. And then it famously blew up in the immediate wake of COVID, where you'd have these big down days in stocks and also big down days in treasuries as inflation took center stage is the main source of economic worry, et cetera. In recent days, are we potentially looking at signs that we might go back

to something resembling more pre-COVID patterns? And is that a sign that the price on the so-called Fed put is not so, not as far out of the money as it had been in recent years? Yeah, it's a good question. I'm not sure. You know, I think that, you know, the simple empirics that have kind of come come out is that when CorePC is, printing below three. You'll get a decent buffer from treasuries in the way of a growth shock that will, you know, cushion the risk asset side of your portfolio. And when, you know, Corp.C. is above three. You don't have that and you can see their worlds as we saw in 2022. You lose on both. I think that it's a little early on in terms of kind of getting a sense for like

what the tariff impact on spot inflation is going to be because, you know, I think that that what's different to me about this time versus, you know, Trump 1.0 is the psychology of price setting is totally different. Yeah. And as we see every Q1, you know, even in an economy that's, you know, much more balanced in terms of inflation where, you know, we've noted that, you know, companies don't feel the same ability to pass through price, but we see every Q1, the price resets has still been pretty strong, especially as it's places now like Canada who are, you know, being inflicted in all this. It seems that you kind of have to keep an open mind that spot inflation could move a decent amount if the price setters feel that in the post-COVID world,

it's much easier to pass through any pain on their input side to the output side. So I think from like a base case, I think it's fair to say that we're not durably going to a core PC plus three world so that Treasury should sort of, you know, the underlying fundamentals of 6040 should be okay. But I wouldn't say it's all, you know, it's kind of all clear for return to the pre-COVID world. We just don't really know yet how price centers are going to internalize this past third. Yeah, Joe, I remember Tom Barkin over at the Richmond Fed making exactly this point, this idea that one of the things companies learned from the post-COVID world was just how fast and perhaps just how far they could push on price. And so that's still,

lingering in their minds, even if they're not doing it as much as they were back then. So it seems like they could raise them very quickly if they saw a chance. Yeah. No, I'm fascinated by that. The reminder that price increases can be part of the corporate playbook is not going to be forgotten. By the way, I should mention John Turrick is the founder and CEO of JST advisors. Been a few years since we had them on. It's nice having them back. Let's talk about the DC impulse. So I'd right now, these cuts that we've seen towards federal employment, you know, very few people would say they're going to meaningfully change the dial on, you know, deficits, etc. at this point. But they're real and there happen and there's a lot of anxiety and there are a lot of

people who are out of a job that never expected to be. And there are a lot of stories. We saw in a recent, there was, I think it was the conference board survey, respondents saying that expectations of fewer jobs existing six months from now, that spiked in the survey highest level now, I think, since like 2013. Talk to us like a little bit about like how you are thinking about the sort of macro impulse from the labor market cutting that's happening in DC. Yeah. I mean, I think that, you know, as a as a baseline, you know, it's hard to see that it being an outsized factor in terms of like kind of the status quo in the labor market. But I think, you know, kind of as I said, I think you have to kind of take it in the context

of the hiring rate in the economy is lower now. So I think the labor market as a whole is more vulnerable to things that, you know, kind of net net shouldn't be as big of a deal. And I think that's kind of, you know, gotten the market's attention as we, you know, we've kind of like, you know, over the last few weeks entertained more left-tail risks. is that, you know, the starting conditions really matter when you're dealing with exogenous variables. And, you know, the starting conditions for the labor market are, you know, it's steady, but it's not bulletproof. And it has been bulletproof, you know, probably for the last

three years, maybe it's really since COVID. So, yeah, I think, you know, it's hard to say, you know, it's hard to map out the sort of the spillover in terms of, like, you know, what number claims will be in four weeks. But I think you really have to keep an open mind to the left-tailed side, getting that the starting point isn't great. By the way, Tracy, for people listening who want to understand this sort of why some of the engines that are not, that we're growing are not there anymore, I thought, you know, so Neal's four points, real incomes aren't rising anymore. The housing market is no longer showing the signs of life. Local government spending is clearly, there is a fiscal retrenchment, clearly.

It's not just what's happening at Doge. It's also state locals, which are no longer flush with money. So like they're like this is when when John here is talking about, you know, not as many engines are firing, there's some pretty big forces that sort of give people caution or why the hiring rate is not great right now. Yeah, absolutely. And John, you brought up earlier the tariffs. And I think some of those are slated to start as soon as next week. How long would you expect it would take for the effects of those to feed into the U.S. economy, either in terms of corporate earnings or the inflation rate? You know, I think the interesting thing about tariffs as opposed to a lot of other policy

measures is the impact is, like, fairly mechanical. So, you know, it immediately has its FX impact. It immediately has its, you know, direct trade impact. And I think, you know, kind of the deeper questions will be like, what are like the broader externalities? Because I, you know, something that like really fascinated me was Governor Ackleman gave us, the Bank of Bank of Canada they gave a speech last week. And he was talking about sort of like what these numbers would mean for the Canadian economy. And he was saying, well, you know, they're huge because, you know, trade is 25% of national income in Canada.

Trade with the U.S., excuse me. Will that impact be because it'll eventually sort of, you know, feedback into the U.S.? So, you know, I think that, you know, in terms of the scope, I think that the two things now that are sort of critical are, you know, in terms of who eats sort of the cost, will, you corporations really, you know, take a bigger share of it, or what they try to pass it on. And then I think, you know, sort of the, you know, the next big domino will be the question of like,

what is the bigger impact, the mechanical effect on price or the more psychological effect on growth, where it just becomes very hard to operate in an environment where, you know, we're, you know, a tweet away from, or sorry, whatever platform uses now, from like, you know, it's very hard to plan in that sort of world. You know, we had two weeks ago, we thought we were delayed until April, and then today it comes out that they start next week.

You know, I think those are kind of the two, like, very immediate questions that we'll get a real feel for, I think, pretty quickly. And then, you know, kind of zooming out, the bigger questions is like, how does the global economy absorb this? Because some of these numbers, this time around, and I think it's a big point to emphasize where, like, a lot of the tariffs last time were really focused on China. And substitution effects, like, kicked in pretty quickly. and also that companies had time to sort of digest that this was coming, where this time around both in terms of scope and who it's applicable to seems much more best. So I think that it will be really crucial to watch. Tracy, something I've been thinking about a lot is that if you want to find like this sort of, first of all, admire the fact that Trump still post primarily to truth

social, even though Twitter is sort of now that's what it's called true. The spiritual home of Trump is is on Twitter. So the fact that he's sticking to truth social, I sort of admire it. Do you think Elon talks to him about that? I just like wondering. Like, what does Elon think about this? That he's still holding out on truth social. Anyway, you know, I always think like, you know, there's sort of like a core pillar of the sort of Trump coalition in the United States is like small business owners and small business optimism. You know, it's been through the roof since the election, but they don't like tariffs by and large. And if you look at any regional business survey, etc. You'll find a lot of clearly politically inclined respondents who are excited about the Trump

administration and then say, but we're worried about trade. And I'm actually for the first time, especially assuming these tariffs go into effect, extremely excited about the headline numbers of the NFIB survey in the coming months. You have this core Republican constituency, which is totally on board generally with everything except tariffs. I think that's going to be something interesting. No, it's going to be really interesting to see whether, I guess, political allegiance trumps some of the feelings around business effects. Ooh, I said Trump's. There's a pun for you. It's crazy. His name is Trump. Sorry, I always think, like, what an amazing apt to him. Anyway, I mean, he owned a casino and his name is Trump. I know this has been

observed hundreds of times, but it still always blows my mind. Thank you, Joe, for reminding us. It's his real name. That blows my mind all the time. Lots more is produced by Carmen Rodriguez and Dashel Bennett with help from Moses Ondom and Kale Brooks. Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts. Please rate, review, and subscribe to oddlots and lots more on your favorite podcast platforms. And remember that Bloomberg subscribers can listen to all of our podcasts ad-free by connecting through Apple Podcasts. Thanks for listening.