INSIDE ECONOMICS

Mark Zandi:

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. Today is Jobs Friday, July 7th, and we're going to run down the June employment report. To help do that, we've got a bunch of colleagues. My two co-hosts Chris deRitis, who's hailing from somewhere in Italy. Where are you in Italy, Chris?

Chris deRitis:

I'm in Abruzzo, which is-

Mark Zandi:

Abruzzo.[1]

Chris deRitis:

... the province opposite coast from Rome.

Mark Zandi:

The opposite-

Chris deRitis:

On the Adriatic.

Mark Zandi:

Oh, I see. Very cool. You were there last summer too, as I recall.

Chris deRitis:

Yeah, I'm at my mother-in-law's house. So, this is where I go.

Mark Zandi:

You look very relaxed. It's a good thing.

Chris deRitis:

Well, maybe it was the labor market report.

Mark Zandi:

I feel pretty good about that report, but a lot to talk about there, and we'll come back to it.

Hey, Marisa. Good to see you.

Marisa DiNatale:

Hi. Nice to see you.

Mark Zandi:

Our other cohost here on Inside Economics. Good to see you.

Marisa DiNatale:

How are you?

Mark Zandi:

You're early in the morning there on the West Coast, but you look marvelous. I mean, what-

Marisa DiNatale:

Thank you.

Mark Zandi:

Yeah. Looks really good. Now Dante, on the other hand. Oh my gosh, look at that guy.

Dante DeAntonio:

Same time zone, but can't get it together yet.

Mark Zandi:

It's like me. I can barely comb my hair. My three hairs. But we've got Dante, of course, here to run down the labor market data key to this jobs market analysis.

So, we're going to dive right into it, because I got a wedding to go to. Chris has wine to drink. God knows what Marisa and Dante have planned here. We got to get going, and we'll keep this short and sweet. But Dante, give us the rundown on the June 2023 employment report.

Dante DeAntonio:

Sure. I'm going to steal Chris's word. I think it was a relaxing report to read. There's not a lot in there to stress anyone out, I don't think. Top-line job growth came in at $209,000. Private payrolls only grew by $149,000. The three-month moving average of job growth is still a little over $240,000. But that's down pretty substantially from last month, given some [inaudible 00:02:19] revisions to prior months' data.

By industry, there was some weakness, certainly. Healthcare contributed almost half of all private sector payroll gains, adding just over 65,000 jobs. I think construction, probably a little bit of a surprise. Adding another 23,000 jobs after adding the same last month. Manufacturing turned positive after a couple of declines in recent months. Most of the real weakness in terms of declines have been concentrated in retail, and transportation, and warehousing. And not huge declines, and those industries have been sort of flat to down a bit in recent months. So, not really a new story there.

I think the one blemish potentially, or the one thing people will focus on is growth in average hourly earnings was up 0.4% in June. A little bit stronger than expectations. Leaves year-over-year wage growth at about 4.4%, which, again, is still higher than we would like to see. Certainly higher than the Fed would like to see moving forward, but it's basically where it's been stuck for most of this year. So, it hasn't re-accelerated. It's just sort of been stuck right around 4.5% here for a few months now. Average weekly hours ticked a little bit higher, which was the first time that has moved up since January. Again, not a huge movement. It's only a 10th of an hour. So not a big deal there, I don't think.

On the household survey side, again, I think things were sort of back to normal this month. The unemployment rate actually ticked a little bit lower, but that was coming off of the big jump last month, and it ticked lower for the right reasons. The labor force is still growing. Employment just outpaced labor-force growth by a little bit. So I don't think there's any worry there, on the unemployment rate side. We still expect it to soften a little bit throughout the rest of the year, and I think it's still on-track to do that.

Mark Zandi:

So let me ask you, what do you think what I'll call underlying average monthly job growth is? Abstracting from the vagaries of the data, the ups and downs and all-around seasonal adjustment, measurement, whatever, where do you think we are?

Dante DeAntonio:

225.

Mark Zandi:

225. Right. What do you think labor-force growth is right now?

Dante DeAntonio:

It's probably about the same.

Mark Zandi:

About the same.

Dante DeAntonio:

I think over the last 12 months, it's been actually a little closer to 250 than 225.

Mark Zandi:

Right, and that's the stable unemployment rate. Low and stable.

Dante DeAntonio:

Right.

Mark Zandi:

It hasn't really budged in over a year, I think. 3-5, 3-6. Somewhere in there.

Dante DeAntonio:

It's been in that tight range.

Mark Zandi:

So bottom line, it sounds like you feel pretty good. The report feels pretty good to you.

Dante DeAntonio:

It does. I mean, we want job growth to slow, which it seems like it's doing. I think the wage growth story is the only thing that's maybe of any concern to people, and even that's not a horrible story. It's just that it hasn't really budged going down yet.

Mark Zandi:

Could that be mixed too? Because you had a lot of construction and manufacturing, as you pointed out. They're high-paying, and that affects this average hourly earnings estimate?

Dante DeAntonio:

It certainly could be. I mean, growth in leisure hospitality is much weaker than it's been, which obviously is a lower-paying industry. You've had some declines in retail, which is also lower-paying. So you've got a stronger amount of job growth coming from at least mid-to-high-wage industries, which could certainly be propping it up a little bit.

Mark Zandi:

Okay. Hey, Marisa, what do you think? Any gaps there? Anything you want to push back on?

Marisa DiNatale:

No. I mean, I think it's what we want to see. Job market is clearly slowing, but not cratering. I think underlying job growth is somewhere in the range of 200,000. We're going to get benchmark revisions, the preliminary benchmark revision, a peek at that in the next couple of months. So actually next month, I think, when they released the July figures. So we saw those downward revisions for the past two months, which we've been talking about. Some expectation that might be the case that the data have been overstated a bit, and that seems to be the trajectory that this is moving. So, I think it's a good report.

Mark Zandi:

What about the average hourly earnings? The one blemish that Dante pointed on.

Marisa DiNatale:

Yeah, I do think that there could be a mix issue going on. So I don't put that much stock into this, but other measures of earnings have also been kind of hung up there too. I don't know when we get the ECI again-

Mark Zandi:

End of the month.

Marisa DiNatale:

... next. It's going to be next month. So, we'll see what happens there.

Mark Zandi:

No, no. I think end of this month.

Marisa DiNatale:

End of this month.

Dante DeAntonio:

Yeah, it's in a few weeks.

Mark Zandi:

In a few weeks. The Employment Cost Index, which is a broader, more rigorous measure of wage growth, because it controls for mix of occupation and industry. It's a quarterly series though, so we don't have to wait for it.

Marisa DiNatale:

Yeah, there's the Atlanta Fed's Wage Tracker that's been moving lower. Slowly, but lower as well.

Mark Zandi:

Okay. So, relaxed feels like the right word to describe this?

Marisa DiNatale:

Yeah, I think it's good.

Mark Zandi:

I think we're coming close to the title for this podcast. I think relaxed probably will be in the title. Just my thought. We'll see. We'll have to [inaudible 00:07:17].

Dante DeAntonio:

And it's apropos with Chris in Italy.

Mark Zandi:

Yeah, look at him. He's so relaxed, man. That white linen shirt. It's very Abruzzo. Are you actually in the wine cellar, Chris? Are you actually in the wine cellar?

Chris deRitis:

I'm not in the wine cellar. There is no wine cellar here.

Mark Zandi:

Oh. I thought you were, in the last... Wasn't he in the wine cellar last year somewhere?

Chris deRitis:

I think that was your imagination.

Mark Zandi:

Oh. [inaudible 00:07:46].

Chris deRitis:

You romanticized my trip. You would like me to be in the wine cellar.

Mark Zandi:

I'd like you to be in the wine cellar playing bocce ball. Do you play bocce ball? I forgot. Oh, yeah. You're really [inaudible 00:08:01].

Chris deRitis:

Tough competition here.

Mark Zandi:

Tough competition.

Chris deRitis:

[inaudible 00:08:06].

Mark Zandi:

So what do you think, Chris? I mean, and I'm going to ask you at some point, what's the probability of a recession? But, I mean, come on. I mean, when I saw that... I'll stop. I was going to give you my view, but what do you think of that report?

Chris deRitis:

All good. You really can't push back. All I would say is that the revisions, right, were pretty substantial for April and May. So this 209 number probably isn't going to stand. It's probably closer to 170, 180 if you take some type of average there, which I think is kind of in line with the type of job growth that the Fed would want to see. So I think we'll see the one hike in July, because that's already baked in, but September, I mean, it's a lot of script to be written still between now and September. But if this is the pace we're on, then this does comport with the slow session narrative.

Mark Zandi:

Right. Slow session being no recession, but an economy that's kind of going nowhere fast.

Chris deRitis:

Yeah, definitely feeling uncomfortable.

Mark Zandi:

Uncomfortable.

Chris deRitis:

And risk of tipping into recession, but narrowly avoiding it.

Mark Zandi:

Okay. Any blemishes, in your mind, in the report? Nothing you can point to?

Chris deRitis:

Again, the average hourly earnings maybe, but how much stock do you want to put in that? But even if you account for those mix issues still what, 4%? That's still too high. So the Fed is going to be on guard here until that number comes in more aggressively, but I don't think this changes their outlook at this point.

Mark Zandi:

Right. Okay. I think this report, do you care what I think, by the way?

Chris deRitis:

Of course.

Mark Zandi:

I'm going to tell you anyway,

Chris deRitis:

Of course.

Dante DeAntonio:

I already know what you think, but maybe you could tell us.

Mark Zandi:

I like the word relaxed, but I get pumped when I get reports like this. I mean, I'm so weird. I get nervous about nothing except for two data points that come out every month. One is the jobs number, and the other is the CPI number, which is going to happen next week. Which I actually think that could be a really great number in part because of reality inflation's monitoring, but also because of measurement issues, seasonal adjustment issues. So maybe we'll come back to that.

But regardless, when I got the number today, I said, "Okay, that's about as perfect as it could be. Not too hot, not too cold." In fact, if it was over 300K, I think the market might lose their minds thinking the economy's going to overheat, a lot more fed rate hikes, which would ultimately mean recession risks would be higher. But sub 300 closer to 200, that's right down, I'm going to use every metaphor I've got, right down the strike zone, down the fairway. If you wanted to pick a number, that would be the number that you would pick. So it felt pretty good there.

Chris deRitis:

Yeah, the ADP numbers spooked me this week. But speaking of that-

Mark Zandi:

Dante and I were going back and forth on that a little bit yesterday via email. We don't pay any attention. I mean, I don't pay any attention to that, do you, Dante?

Dante DeAntonio:

I haven't even looked at it until you mentioned it yesterday. I just don't even, it's not even in my mind.

Mark Zandi:

So just given what happened here. Explain ADP and what happened here with ADP in the markets. Chris, go ahead. Because you brought it up.

Chris deRitis:

I don't remember. It was a big number.

Mark Zandi:

Almost 500K private sector.

Chris deRitis:

Yeah. And the market. We may not react much to it, but the markets clearly did.

Mark Zandi:

They may not in the future though, given what happened here.

Chris deRitis:

Could be. Just little bit of a head fake. And that is a private number based on payroll data that ADP, the human resources company collects and tries to estimate. Well, are they still estimating the BLS number or is that?

Marisa DiNatale:

I'd say they're not.

Dante DeAntonio:

It's supposed to be just an independent estimate.

Mark Zandi:

I think it's just an independent estimate.

Chris deRitis:

Okay.

Dante DeAntonio:

And I mean, the industry mix is just bizarre too. The top line number is sort of bizarre enough, but the industry mix to get to that just doesn't make any sense. Expecting 100,000 construction jobs to be added, 70,000 jobs in mining. I mean, it just makes a lot of sense.

Chris deRitis:

Makes sense.

Mark Zandi:

So for me, it was a wonderful report. The peak in average hourly earnings growth was back in March of 2022, just about 6% year over year. We're now at four, four. And the bogey I think is 3.5% year-over-year growth because that's pretty consistent with where it was pre-pandemic. And that's also consistent with 2% inflation plus 1.5% underlying productivity growth. So that 3.5% wage growth would be non-inflationary because it's consistent with that productivity growth number. And that's kind of underlying productivity growth. That's where we've been since the pandemic hit and a few years before that. So we're not quite there yet. But it feels like if the job market is going to continue to moderate, and unemployment probably will notch a bit higher here. That's going to take some steam out and we'll get wage growth back in.

The other one blemish, and I hope I don't take anyone's statistic for the game. Oh, maybe I won't say it because I might need the statistic. I'm not going to say it. I'm going to keep that statistic.

So I felt very good about the number. I think this is consistent with the idea that the economy is reasonably, gracefully throttling back. Inflation's going to come in. Fed doesn't need to raise, they're going to rates because they're how hell-bent on doing it later this month. But if that's not the end of it, we're pretty darn close to the end of the rate hikes. And if that's the case, then I think we're in good shape. The economy's going to come in here without experiencing an economic outright economic downturn. So this all felt good in that context.

I did want to dig a little deeper here. We're going to get a little nerdy into something Marisa brought up around revisions. And I'm going to turn to you, Dante, because these revisions are going to become important. They already are. So describe why we have revisions to the data and when do the revisions occur, both in terms of the monthly revisions and the so-called benchmark revisions that Marisa talked about. And just give us a lay of the land there so people understand what's going on with the revisions.

Dante DeAntonio:

Sure. So the monthly revisions happen when we get a new number like we did for June, you get revisions to the prior two months. Those monthly revisions are just due to additional sample data coming in. So when they produce the June employment report, they have some data in for June, but they're still getting data in beyond today. And as that additional data comes in from survey respondents, that obviously changes the estimate of employment growth for June or for the prior months like we saw. So those monthly revisions are purely due to additional sample that's coming in.

The annual benchmark revisions that we get are due to a couple of different factors. One, they're benchmarking, they're tying the level of employment back to the quarterly census of employment and wages once a year. So they're taking the March level from the prior year from the QCW data and they're saying, "Okay, this is the new level." So that obviously affects some of the historical data as that tieback, that benchmark is done to the QCW data. And then from that new level that's set in March, they then re-estimate the changes for the year. So we'll get that benchmark level, which will affect some of the data, and then you'll get a re-estimation of the data coming off of that level.

And then in addition to that, you get revisions to the seasonal adjustment factors. You get revisions to the birth-death model, which estimates how many firms are being created and dying. So you do get other things that affect it as well in that annual revision. But the tying back of data to the QCW is the biggest factor.

Mark Zandi:

And Marisa mentioned that, is it next month, Marisa, that the Bureau of Labor Statistics will release a preview of what the benchmark revisions will show as of March 2023?

Marisa DiNatale:

Mm-hmm.

Mark Zandi:

Okay. So we'll get a better sense of whether this data's going to hold up. My sense is, and I'm curious in what you guys think. My sense is we will get some downward revisions with the benchmarks. That if you look at the QCEW data, as you mentioned, the quarterly census employment wages, the unemployment insurance record data, and if you look at household employment, that's employment as measured by the household survey. What we've been talking about here is the employment as measured by the payroll survey businesses. The household employment numbers have been much weaker. The employment gains have been much weaker than the payroll employment gains. That those two pieces of evidence suggest, hard to know how to what degree, but they would be suggestive of some meaningful downward revision in the employment growth that we've been getting over the past 12, 18 months. Would you concur with that, Marisa or not?

Marisa DiNatale:

Yeah, I think particularly if you look at job growth from the QCEW, particularly last starting last summer, it looks like it's significantly weaker than payroll employment growth. So I think we'll start to see revisions back mid to late 2022 that are probably going to be downward.

Also, let's not forget that jobless claims have been trending up now pretty much all year, and they're significantly above where they were at the start of the year. So that also suggests that job growth as measured by the payroll survey is likely weaker, I think, than it's been showing in the past few months.

Mark Zandi:

Hey, that reminds me, one more thing and then we'll go to the game, and then we'll come back and end the conversation. Again, we're going to keep this short and sweet. And this goes to the UI claims. Dante, you published this in the Economic View. You published this concept of break even UI claims. So it's the level of weekly initial claims for unemployment insurance as consistent with no job growth, I believe. And right now, weekly UI claims, it feels like we're somewhere around 240,000, 250,000 per week, kind of in that ballpark.

Dante DeAntonio:

That's right.

Mark Zandi:

And historically, I've thought of that as kind of a normalized level of claims that is consistent with a well-functioning labor market, one where you're getting job growth consistent with labor force growth. Everything is kind of hanging together reasonably well. Is that right? Are we at 240, 250 pretty consistent with the well-functioning economy? And what is your current estimate of breakeven UI claims?

Dante DeAntonio:

Yeah, I think the 240 to 250 is a reasonable sort of healthy level. You can still have decent job growth consistent with labor force growth if you have claims that are at the 240,000 range, breakeven level is somewhere between 265 and 270 right now. It fluctuates a little bit month to month. So there's obviously never a whole lot of space between what is good and stable and what is no job growth. I mean, if you're getting 20,000 or 30,000 more jobless claims every week, that adds up over the course of a month and that eats away that sort of employment growth buffer that would be that well-functioning labor market. So it doesn't take a lot of increase there to go from 150,000, 200,000 jobs being added a month to no jobs.

I think the thing that's important to realize is that breakeven level, that means sort of a steady state of jobless claims that are at that 265,000, 270,000 level. If it hits that for a single week, that doesn't mean we're going to get no job growth. I think you've got to see that pretty consistently over 4, 6, 8 weeks before you'd really believe that job growth is going to go somewhere close to zero.

Mark Zandi:

That just strikes me as low, 265, 270 is break, I mean, consistent with zero job growth. Here we are at 240, 250 with job growth at a couple... Although maybe we're not at 200K because with downward revision we may be at 100K or 150K. That's probably what you're saying, right?

Dante DeAntonio:

Right. I think it seems like the gap that we have now between jobless claims and that breakeven level would be more consistent with something like job growth of 125, 150, which maybe is where we are and we just don't know it yet.

Mark Zandi:

That's right. That's my intuition. And that reminds me, someone mentioned to me, and I haven't had the chance to look, maybe you guys have, on tax withholding data. Because of course tax withholding, I think we can get daily estimates from treasury on, I think. And of course that's a window into what's going on in the labor market wage growth, and that's been weak. Has that gotten on your radar screen at all, Dante or anybody? Chris? Marisa?

Marisa DiNatale:

Haven't.

Chris deRitis:

No.

Mark Zandi:

No?

Chris deRitis:

I haven't.

Dante DeAntonio:

I haven't seen it.

Mark Zandi:

Maybe someone can take a look at that and we could just... I was talking to a client and they brought that up as something to look at, but worth looking at.

Anything else on the job numbers before we move on to the statistics? And then we'll come back and kind of talk about it in the context of monetary policy and the outlook for the economy, recession risks. Anything? We miss anything? Okay. Very good.

Let's play the statistics game. We each pick a statistic. The rest of us try to figure that out through questions, and clues and deductive reasoning. The best statistic is one that's not so easy we get it immediately. One that's not so hard that we never get it. And if it's apropos to the topic at hand or the data that came out this week, all the better.

Okay. Tradition is we go with Marisa. Marisa, you're up. And Marisa is like lightening it up on this statistics game recently. It's very almost embarrassing for Chris.

Marisa DiNatale:

We'll see. I'm a little tired. Embarrassing.

Okay. My statistic is 6% in June.

Mark Zandi:

Okay. 6%. Labor market related?

Marisa DiNatale:

Yes.

Mark Zandi:

In today's employment report?

Marisa DiNatale:

Yes.

Mark Zandi:

In the household survey?

Marisa DiNatale:

Yes.

Mark Zandi:

Related-

Chris deRitis:

Unemployment rate.

Marisa DiNatale:

It is an unemployment rate

Mark Zandi:

For some demographic?

Marisa DiNatale:

Mm-hmm.

Mark Zandi:

Black unemployment rate?

Marisa DiNatale:

No.

Mark Zandi:

No.

Chris deRitis:

Less than high school?

Marisa DiNatale:

What, Chris?

Chris deRitis:

Less than high school.

Marisa DiNatale:

Yep, you got it.

Mark Zandi:

Ah, very good. The unemployment rate for people that are less than high school-

Marisa DiNatale:

Less than high school diploma-

Mark Zandi:

... education.

Marisa DiNatale:

So this was 6% in June. That was up three tenths of a percentage point from May. It's the only educational demographic where the unemployment rate increased over the month. And it's been on a pretty clear upward trend since the start of the year, unlike other demographic groups. So it's actually now a bit above where it was going into the pandemic. Of course it spiked very high in early 2020 when we went into the pandemic, but it's above where it was now in like 2018, 2019, slightly. Other demographic groups are faring much better in terms of the unemployment rate. And I should also mention the labor force participation rate for this group, just to give some context, it's about back to where it was prior to the pandemic, but it's actually slightly below. Again, unlike other demographic groups that have done a bit better.

Mark Zandi:

What do you think's going on? What's behind that?

Marisa DiNatale:

I mean, there could be industry mix issues, right? There's been weakness in manufacturing lately. There's been weakness in retail trade, some other service sectors that are more likely to employ people with less than a high school education. This has been sort of the way that this has stacked up now for a long time. If you look at the unemployment rates, people with less than a high school education have had a higher unemployment rate for quite some time. So despite the fact that the job market is really strong, there's still matching issues.

And we saw actually in the, I hope this isn't somebody's statistic, well, I'm not going to say a statistic, but the ISM service sector. ISM came out this past week and some of the comments about the labor market were not being able to find qualified labor or not being able to match job openings with qualified labor. So in some industries there's still a matching problem.

Chris deRitis:

And leisure hospitality is still down in terms of payrolls, right? From 2019 levels. So despite all the demand-

Marisa DiNatale:

The growth.

Chris deRitis:

... [inaudible 00:25:46] hiring.

Mark Zandi:

Yeah, maybe that's it. Maybe it's the retail because retail was down in the month.

Chris deRitis:

Also, yeah.

Mark Zandi:

Interesting. Okay. That was a great statistic.

Chris, you want to go next?

Chris deRitis:

Yeah, 2.6%.

Mark Zandi:

2.6%. Labor market data?

Chris deRitis:

Not today's report.

Dante DeAntonio:

Is that the quit rate?

Chris deRitis:

Oh, yes.

Marisa DiNatale:

Wow.

Chris deRitis:

I forgot Dante's on here.

Mark Zandi:

We're getting too good at this game, boy. You guys are getting too good at this game. 2.6% is the quit rate. Okay. From the JOLTS report.

Chris deRitis:

Yeah.

Mark Zandi:

The job opening labor turnover survey. So, explain.

Chris deRitis:

Two points. So you explain the definition that is up, right? So about 4 million people quit their job last month, or what is it? May. In the month of May, that had been on a downward trajectory. Not collapsing, but it was declining, which we were interpreting as a positive for some of that wage growth. So there's a strong correlation between folks quitting their jobs and wage gains. Typically, when you quit your job, you move to another job. You do get maybe what, 10, 15% bump up in wages.

So we had been forecasting that quit rate would continue to come in nicely, and that would help to bring the wage gains down as well. So this is maybe a movement in the other direction here. Something clearly to watch. If the quits are jumping up again, people are feeling confident enough to quit their job and move to another one, it could be a signal of some of that persistence in the wage growth that the Fed would have to address.

Mark Zandi:

I'm going to use a technical term. I think that's a squiggle. Is that a word by the way, squiggle? Is it a word squiggle?

Marisa DiNatale:

Sure.

Dante DeAntonio:

I think so.

Mark Zandi:

I think so. Good. Yeah, that's a squiggle, Chris,

Dante DeAntonio:

I also read somewhere that there may be-

Mark Zandi:

You know what I mean by that, right? I mean it feels like a squiggle.

Marisa DiNatale:

It's an aberration.

Mark Zandi:

It goes up, it goes down.

Chris deRitis:

Well, it's been going down.

Mark Zandi:

Okay.

Chris deRitis:

Now it's coming back up.

Marisa DiNatale:

Let's not forget the survey response rate on the JOLT-

Mark Zandi:

Oh, wait. I was going to ask about that. What is it?

Marisa DiNatale:

... dropped to like 30%.

Mark Zandi:

How much?

Dante DeAntonio:

Fair enough.

Marisa DiNatale:

It's about a third now. It's in the thirties I think. And it was above 50% prior to the pandemic. So there's a big margin of error around some of these numbers.

Mark Zandi:

So your point being-

Marisa DiNatale:

I don't know, we can look at the report and see if it's within the statistical significance.

Mark Zandi:

You're saying that the response rate to the JOLTS survey, which is the basis for the quit rate, has steadily declined. Now only a third of those canvassed are responding and that's way down. And therefore it might be biasing kind of what we're looking at here. And creates more volatility, more squiggles.

Marisa DiNatale:

Yes. More squiggles.

Mark Zandi:

More squiggles. Data squiggles.

Dante DeAntonio:

There you go.

Mark Zandi:

Boy, that feels like that should be in the title too, somehow in this podcast. Relaxed and squiggles. We got to think-

Marisa DiNatale:

People have no idea what the hell they're about to listen to.

Dante DeAntonio:

Exactly.

Mark Zandi:

It's all about relax, squiggles.

Dante DeAntonio:

There you go.

Mark Zandi:

I love that word. I can't stop saying it. Okay. I got to stop saying it. That was a good one.

Marisa DiNatale:

What were you going to say, Dante? Were you going to say something about the quit rate?

Dante DeAntonio:

I read somewhere, I didn't get a chance to look into it, I also think seasonal adjustment might play an issue. I think if you look at the unadjusted quit state, it was basically flat and it was the seasonal adjustment that picked it up. And there could be a little bit of shifting seasonal pattern around quits sort of in the last couple years that maybe is playing a role there too. So all that is, I think I support the squiggle argument is probably not a whole lot to read into on a one-month basis.

Mark Zandi:

And of course the squiggles have gotten worse because of seasonal adjustments gotten a lot harder because the pandemic really messed stuff up in terms of trying to tease out seasonal patterns. Okay. Dante, you're up. What's your statistic?

Dante DeAntonio:

It's 379,000.

Mark Zandi:

Well, it sounds like in employment numbers.

Dante DeAntonio:

It is.

Mark Zandi:

Today's jobs numbers. Payroll survey? No? Okay.

Dante DeAntonio:

It's not directly reported. It's a sum over the last six months. So it's not a number directly from the report today.

Mark Zandi:

Sum through the last six months, 379,000.

Marisa DiNatale:

Positive or negative?

Dante DeAntonio:

Positive 379,000.

Mark Zandi:

Dante always gets his pluses and minuses right. If you ever had a problem there, Marisa, just saying. Got to go back to podcast number 58 or something.

Marisa DiNatale:

One.

Chris deRitis:

25.

Mark Zandi:

Number one. Yeah, podcast number one to understand why we're laughing at that one.

Okay. Is it employment? Employment in some sector? Gain in some sector? Okay.

Dante DeAntonio:

Right.

Mark Zandi:

Is that construction jobs over the last... No. Manufacturing job? No.

Marisa DiNatale:

Temp help?

Dante DeAntonio:

No.

Mark Zandi:

Are we on the right track?

Dante DeAntonio:

It is an industry. It's job growth in an industry since beginning of the year.

Mark Zandi:

Oh, okay. Over the last six months?

Marisa DiNatale:

Since the beginning of the year? Okay.

Dante DeAntonio:

Yeah.

Mark Zandi:

So construction feels like it's 379, but okay.

Dante DeAntonio:

It might also be.

Marisa DiNatale:

Is it leisure, hospitality? Oh, no. Is it government?

Dante DeAntonio:

It is government.

Marisa DiNatale:

I'm just going to guess every industry.

Mark Zandi:

Oh, government.

Chris deRitis:

Ah.

Mark Zandi:

There's a reason for bringing that up. So why'd you bring that up?

Dante DeAntonio:

Yeah. So I mean, it's substantially higher than it's been, right? We added 275,000 public sector jobs in all of 2022. We've already added 379,000 in the first half of the year. It's distorting, I think a little bit, the trend in job growth. If you look at just private sector payrolls, they've been under 200,000 in four of the last five months. We've had this big sort of swing in government jobs since the beginning of the year, which I think is masking a little bit of the weakness in private sector payrolls. And I don't think any of us believe that government job growth is going to drive growth over the long term. I think you got a little bit of buyback from some weakness last year.

But looking at private sector, I think it's more clear that the labor market has slowed and maybe slowed more aggressively. And that's before we even take into account what sort of future revisions might look like. So I think certainly job growth is weaker than the top line might suggest.

Mark Zandi:

Yeah, my kind of thought there, I noticed the big increase in government, is that the government had a hard time hiring a year a ago because labor market was really tight. Businesses were really aggressive and pay to try to get workers on board. Now the private sector, as you say, is more relaxed, it's not trying as hard, doesn't need to. And that allows government to kind of start hiring people, that the labor pool is now freed up for them a bit, and so they can hire more. Does that sound right to you? Healthcare is the same way, kind of the same thing, right?

Dante DeAntonio:

Yeah, I think the public's playing catch up a little bit in terms of-

Mark Zandi:

Catch up, yeah.

Dante DeAntonio:

... hiring that they would've liked to do 18 months ago that they couldn't. And now they're sort of fulfilling those needs.

Mark Zandi:

And just obviously more difficult for government in the healthcare sector to change their pay scales to kind of compete. It takes time for them to do that, given just the bureaucracy of it all. And they really couldn't match the pay that the private sector was coming forward with and kind of left out, but now they're catching up. That's kind of how it feels. So it's still strength, it's just...

Dante DeAntonio:

It's strength, but I don't think it's strength that we can expect... They're adding over 60,000 jobs a month in the first half of the year. I don't think that continues for a long period of time. I mean, eventually they're going to catch up and be done. And that will go back to 20,000, 25,000 jobs a month probably.

Mark Zandi:

Yeah, that's a good one. Okay. My statistic is 2.9 million.

Chris deRitis:

I think it's-

Marisa DiNatale:

From the JOLTS?

Mark Zandi:

Not from JOLTS.

Dante DeAntonio:

It's from today's report?

Mark Zandi:

From today's report. Household survey.

Dante DeAntonio:

Is it labor force growth over the last year?

Mark Zandi:

Ding, ding, ding, ding, ding, ding.

Marisa DiNatale:

Wow.

Mark Zandi:

Way to go. 2.9 million people added to the labor force over the past year. That's a lot of people. And that goes to, I think what you said, 225,000, 250,000 per month. And that is allowing businesses to hire 200,000, 250,000 and keep unemployment at 3.5%, 3.6%.

And I just don't see how anyone could square that number with we're at full employment. If we were at full employment, how's that possible? That's just a boatload of people coming into the workforce so it doesn't feel like we're at full employment. Am I missing something in that conclusion? No?

Dante DeAntonio:

I agree.

Chris deRitis:

Where do we go from here though?

Mark Zandi:

Huh?

Chris deRitis:

Where do we go from here, right?

Mark Zandi:

Eventually it's got to slow. I'm just saying, there's a lot of hand wringing over there out in the world. 3.6% unemployment is, we're never going to get wage growth back in. We're never going to get inflation back in because we're well beyond full employment. And it just doesn't resonate with me. It doesn't resonate that we're full employment for lots of reasons. And this is one of them.

The other is, we were at 3.6% unemployment before the pandemic, and wage growth and inflation wasn't the issue. In fact, the issue was inflation's too low, not too high. So I'm having such a hard time with this idea. And you can look at the Federal Reserves forecast for the unemployment rate in the long run, kind of what they think the full employment unemployment rate is. And I think it's 4% plus, it's not 3.6%. And I don't get that. I just don't get it in the context of all this. But I've ranted about this before and I will continue to rant about this going forward.

Okay. Very good. That was great. We're getting pretty good at nailing down these statistics. Pretty amazing. Let's end it this way. Maybe Chris you know, I'm putting you on the spot, but has market expectations shifted with regard to what the Fed's going to do here at the end of the month in some September as a result of the today's report? I know coming into this, there was pretty strong expectations that the fed's going another quarter point at the end of the month, probably in September again. Have you taken a look at that? Do you know by any chance?

Chris deRitis:

I looked earlier today. Yeah, the July 25 basis point hike is almost a lock, well, from the market's perspective, I think it was something like 80%, 90% of participants. And then for September, also a majority, certainly. Well, actually I take that back, for September it was still mostly a hold.

Mark Zandi:

Oh, okay.

Chris deRitis:

There was about a quarter of the population suggesting an additional hike. But that was before this report came out.

Dante DeAntonio:

It's actually up to 95% now for July. So, like Chris says-

Chris deRitis:

Yeah.

Mark Zandi:

95?

Dante DeAntonio:

Almost a slam dunk in terms of expectations that we get a hike in July. September, it's still only about 20%. Expect two consecutive hikes in July and September.

Mark Zandi:

Oh, interesting.

Dante DeAntonio:

Strong support for two hikes in a row.

Mark Zandi:

Oh, that's interesting. Okay. So still less than 50/50. That's consistent with our forecast, right? We did add a rate hike, quarter point increase in the funds rate for late this month, and that is now the terminal rate.

And the other change we made in our forecast baseline was to extend out when the Fed starts easing again. We previously had that in March of next year, and now we pushed that out to, I think June, early July, something like that. I can't remember when the meeting is at that point. So almost a year of rates at the terminal rate, the highest the rate will get in this cycle.

Let's end the conversation again, talking about probabilities of recession. And we had a macro meeting yesterday. This is all the economists get together and talk about the U.S. economy and talk about the assumptions that go into our forecast, our baseline forecast, and we run a poll. Marisa, do you want to go over those results? Last I looked... Well, tell us what the poll said among our economists in terms of recessions.

Marisa DiNatale:

Yeah, we [inaudible 00:38:18] 42 people respond. And the question was about the probability of recession over the next 12 months. So we're looking through the middle of next year now. 48% said their probability of recession was between 40% and 50%. 24% said the probability of recession is 30% to 40%. 17% said between 50% and 60%. 7% said between 20% and 30%. And one person said between 60% and 70%.

Mark Zandi:

That's got to be Chris.

Dante DeAntonio:

I was going to say, Chris, was that you?

Chris deRitis:

That was not me.

Marisa DiNatale:

It's an anonymous poll, so we don't know.

Dante DeAntonio:

Yeah, we have no idea.

Mark Zandi:

So it sounds like the distribution-

Marisa DiNatale:

So we're still in that 40 to 50. Like right below 50.

Mark Zandi:

Just kind of skewed a little bit lower. Just a little bit lower.

Marisa DiNatale:

Yeah, it's moved a bit to the left since the start of the year.

Mark Zandi:

Okay. That's a good benchmark. So let's go around the horn here. Marisa, what's your probability of recession over the next 12 months?

Marisa DiNatale:

It's about 45%, I would say.

Mark Zandi:

45?

Marisa DiNatale:

Yeah.

Mark Zandi:

And has that changed at all?

Marisa DiNatale:

No.

Mark Zandi:

No? Okay. Dante?

Dante DeAntonio:

Yeah, I'm in that 40% to 50% camp as well. I would say, if anything, it's trending towards the lower end of that range now.

Mark Zandi:

Closer to 40 than 50?

Dante DeAntonio:

Yeah.

Mark Zandi:

And has that changed?

Dante DeAntonio:

I mean, probably down a little bit, but-

Mark Zandi:

Down a little bit?

Dante DeAntonio:

... it's still within that range over the last few months.

Mark Zandi:

Okay. Chris, where are you at? Ooh, de de deep. I need some music.

Chris deRitis:

Suspense. Through July of 2024, 50%.

Mark Zandi:

All right. Does that come in a little bit? It feels like it's coming in.

Chris deRitis:

A lot. Yeah, it has. I'm at 60% through the end of next year.

Mark Zandi:

And you were at-

Chris deRitis:

So I'm still worried.

Mark Zandi:

And where were you on that?

Chris deRitis:

But I was at 65.

Mark Zandi:

Okay, so you brought it in a little bit.

Chris deRitis:

Coming in.

Mark Zandi:

Yeah, I'm at 40% over the next 12 months. And I'd say 50% through the end of next year. But 40% and I'm increasingly more confident in no recession. Just feels, well, we talked about it. I just feel like we're on script here.

Very good. Well, I said this was going to be short and sweet, about 45 minutes, maybe a little less than that. But I think we've all got stuff to do this Friday afternoon. And anything else, guys, you want to bring up before I call it a podcast? No, we're good? Okay. Very good.

Chris deRitis:

CPI next week, I guess, right?

Mark Zandi:

Yeah, CPI next week. And I'm feeling really good about the CPI.

Chris deRitis:

Even the super core?

Mark Zandi:

Even super core.

Chris deRitis:

All right.

Mark Zandi:

The seasonality here. I think we've got something. Well, we'll talk about that next week, but-

Chris deRitis:

All right.

Mark Zandi:

... anyway, dear listener, I hope you enjoyed this. We'll catch you next week. Take care now.