Dante joins the podcast to break down the January employment report and provide his odds for an Eagles Super Bowl victory. The job market is starting 2025 in a great place, and the team discusses the implications of significant revisions to labor market data. Finally, the conversation turns to tariff policy as everyone weighs in on which tariffs, if any, are likely to stick around and the resulting impact on the economic outlook.
Dante joins the podcast to break down the January employment report and provide his odds for an Eagles Super Bowl victory. The job market is starting 2025 in a great place, and the team discusses the implications of significant revisions to labor market data. Finally, the conversation turns to tariff policy as everyone weighs in on which tariffs, if any, are likely to stick around and the resulting impact on the economic outlook.
Guest: Dante DeAntonio, Senior Director of Economic Research, Moody's Analytics
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 Analytics
Follow Mark Zandi on 'X' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by a few of my colleagues. My two trustee co-hosts, Cris deRitis and Marisa DiNatale. Hi, guys.
Cris deRitis: Morning, Mark.
Marisa DiNatale: Hey, Mark. Morning.
Mark Zandi: And we got Dante, Dr. DiAntonio.
Marisa DiNatale: Wearing his Eagles jersey.
Mark Zandi: Is he really?
Marisa DiNatale: Yeah.
Dante DiAntonio: I'm ready for Sunday.
Mark Zandi: Go Birds.
Dante DiAntonio: Go Birds. It's a good weekend.
Mark Zandi: Yeah, I'm excited.
Dante DiAntonio: Me too.
Mark Zandi: Yeah. Do you think they're going to win though, Dante?
Dante DiAntonio: I'm as optimistic as a Philadelphia sports fan can be. I feel pretty good, but...
Mark Zandi: So what probability have you attach to a victory on Sunday?
Dante DiAntonio: 65%.
Mark Zandi: See how he does that? Right below the 66% threshold.
Marisa DiNatale: So he doesn't have to change his forecast.
Dante DiAntonio: That's right.
Mark Zandi: What about you, Cris? Are you an Eagles fan or... I know you're a bocce ball fan, but are you an Eagles fan?
Cris deRitis: Having lived in Philadelphia area, I guess I have to be an Eagles fan. I can't declare otherwise, but...
Mark Zandi: That's not a resounding yeah.
Dante DiAntonio: That didn't feel like strong support.
Cris deRitis: I would be happy if they won. Sure, sure.
Mark Zandi: Okay.
Cris deRitis: I would be happier that they won than the Chiefs.
Mark Zandi: Okay. I'll take it. And Marisa, you don't care. This is not even on your radar screen.
Marisa DiNatale: No, it is. It is.
Mark Zandi: Oh, it is. Oh, it is? Okay.
Marisa DiNatale: I grew up in Philadelphia. Yeah. Yeah. I just don't follow the Eagles as much as I used to now living in California because I just don't get to see them. Right. They're not playing in the Rams division out here or whatever. So I have to go out of my way if I want to watch Eagles games if they're not on Monday night or something. But yeah, I'm an Eagles fan.
Mark Zandi: I had forgotten you were raised in the Philadelphia area.
Marisa DiNatale: Yeah. Yeah.
Mark Zandi: Oh, where'd you go to high school?
Marisa DiNatale: Downingtown.
Mark Zandi: How did I not know that? Or maybe I forgot.
Marisa DiNatale: You did at one point.
Mark Zandi: Oh, I did know that.
Marisa DiNatale: Yeah, we've definitely talked-
Mark Zandi: We've had this conversation like three times?
Marisa DiNatale: We have, yeah.
Mark Zandi: Well, I went to Upper Merion High School.
Marisa DiNatale: Yeah.
Mark Zandi: So a little bit to the east of you.
Cris deRitis: Are you arch rivals?
Mark Zandi: No, we weren't in the same, what do they call it? Not district or-
Marisa DiNatale: I don't know. I feel like we played upper and lower Merion sometimes in some sports, but maybe those were sort of like [inaudible 00:02:43]-
Mark Zandi: We were in a different league. We were in a different league. We were more playing all the schools closer to Philly.
Marisa DiNatale: Yeah, like the mainline sort of schools.
Mark Zandi: Yeah, the schools. Yeah. Okay. Well good. That explains a lot. That explains a lot.
Marisa DiNatale: Does it?
Mark Zandi: Yeah.
Marisa DiNatale: In what way?
Mark Zandi: Stuff. Stuff.
Marisa DiNatale: Okay. No idea what that means.
Cris deRitis: [inaudible 00:03:09] right there.
Mark Zandi: Well, we got a lot to talk about. This is Jobs Friday. We got the data for the month of January 2025. And a lot of moving parts. We're going to have to go down into the bowels here a bit to understand what's going on. A lot of revisions and all kinds of data. So I thought we'd spend a fair amount of time on that. We talk about tariffs. President Trump unveiled this first round of tariffs back about a week ago now. Is it a week ago? Am I right?
Cris deRitis: Yeah.
Mark Zandi: No, was it two weeks ago? No, a week ago.
Cris deRitis: It feels like-
Mark Zandi: It feels like a long time ago.
Cris deRitis: ... a lot of changes.
Mark Zandi: But I want to talk about that. We'll play the game, the stats game and maybe take some listener questions depending on how things go. We were practicing our Italian before we got on. What'd you think? Spaghetti.
Dante DiAntonio: Got some work to do. It's my opinion, but I'm just one man.
Mark Zandi: Did you see how quickly he offered that criticism? That was like, he didn't even delay.
Cris deRitis: It was fully [inaudible 00:04:09].
Dante DiAntonio: You were asking for opinions so I gave my opinion.
Marisa DiNatale: It's called [inaudible 00:04:10].
Mark Zandi: Okay, wait, wait. Parmigiano cheese. No? What do you think?
Cris deRitis: Let's get to the numbers.
Dante DiAntonio: Cris, can you take him to Italy with you at some point so he can practice a little bit?
Marisa DiNatale: He could be your translator.
Mark Zandi: Cris, say something in Italian. Just anything. Say, "Life is good."
Marisa DiNatale: Anything at all.
Cris deRitis: Spaghetti.
Mark Zandi: I love Italian.
Dante DiAntonio: Sounds good when you say it though, I will say.
Mark Zandi: Yeah. Oh, now you're saying you like the way he says it better than me?
Dante DiAntonio: I didn't bring you into it. I just said I like the way he says it. It feels like you're feeling [inaudible 00:04:48]-
Marisa DiNatale: Not all about you, Mark.
Mark Zandi: Yeah, it's funny. That's funny. Okay, anyway, where were we? Oh, the jobs report. So before you go into the down and dirty with all this stuff, because again, a lot going on here, just what's the overarching message coming from the report, Dante?
Dante DiAntonio: It's a good day. I mean, I think it-
Mark Zandi: It's a good day. Yeah.
Dante DiAntonio: Yeah. It was in line with expectations I think across the board.
Mark Zandi: Okay. So very consistent with a very healthy job market.
Dante DiAntonio: Yeah.
Mark Zandi: Okay. All right. Okay. So give us a rundown. Give us some detail here.
Dante DiAntonio: Sure. I mean, just focus on the sort of non-revision aspect of it first. I mean the normal stuff. So headline job growth was 143,000 in January, signals, I think moderation in job growth as we had expected. The last three months have looked a little bit strange. You got big positive revisions in November and December. So the three-month average is actually 237,000 now. But I think that's overstating the case a little bit. November and December were boosted by recovery from the hurricanes that hit in October of last year. Industries look mostly the same.
Mark Zandi: So I always ask you this, what's underlying job growth, monthly job growth, extracting in the vagaries of the data?
Dante DiAntonio: 150.
Mark Zandi: 150?
Dante DiAntonio: Yeah, I mean average growth over all of last year was just over 160 and we got 143 in January. I think we're right around 150.
Mark Zandi: Okay. So the industry detail.
Dante DiAntonio: Yeah, I mean the story hasn't changed a whole lot. Healthcare is still the biggest contributor. The public sector and retail were the other two big components they accounted for. Basically all of that top line number. If anything, I think you saw sort of smaller gains across the board than we've seen. You had very little sort of positive news elsewhere outside of those three industries, even leisure and hospitality pulled back just slightly after big gains the last two months. Again, construction, very small gain, manufacturing up very little, information, finance, all sort of very, very small gains. Most of it was concentrated in healthcare, government, retail.
Mark Zandi: There's been this lingering concern in circles that the job growth has been narrowly focused on government. And when we're saying that, it's not the federal government, it's mostly local government and healthcare. Healthcare, that seems to be a job engine through thick and thin. Retail comes in and out. I think that might be more seasonal adjustment than anything, but it's really healthcare and government. Do you have any concern about that, the job growth? Is that narrowly focused on those two sectors?
Dante DiAntonio: I mean, I think part of it is if we're expecting job growth to slow further, if we expect job growth to get down to 100,000 jobs a month sometime this year, and Realistically, healthcare I think will continue to be an engine of growth. So if healthcare is adding 50 or 60 K and we're only expecting the headline number to be 100 or so by the end of the year, there's not a whole lot of room for other industries to grow much in that math to me. So I think you'll have months where retail jumps one month and then it's down another month. I think you'll have a lot more of this back-and-forth movement in industries outside of healthcare. Obviously, government will be interesting in the near term. Federal government doesn't usually play a huge role in those changes, but certainly I think that could be a little bit bigger story here is [inaudible 00:08:29].
Mark Zandi: The DOGE. Right. It feels like that could be a big deal. I mean, I was doing a little ChatGPTing before this, preparing for the stats game, and not that I'm going to use ChatGPT, see how... I assure you no ChatGPT during the game.
Cris deRitis: Okay. That's [inaudible 00:08:52] Mark.
Mark Zandi: I pay 20 bucks extra a month to... I don't know why I do. Apparently I have a better version of ChatGPT, so I got to use it and I learned, correct me if I'm wrong, 2.1 million federal employees, ex-military, 2.1 million. And that's been-
Marisa DiNatale: And postal service, right? Ex-postal service.
Mark Zandi: Yeah, that's right. Ex-postal service. And that's been unchanged for a long time. Not years, but decades. And then this one I think we should check, but ChatGPT sounded pretty certain about it, 3.7 million private sector federal government contractors, folks in the private sector that contract to the federal government to provide services to the federal government. So if you add that up, that's not inconsequential. But anyway, okay. But there's this other kind of underlying current of thought that somehow the jobs created in government and healthcare are lesser than other jobs. They're more derivative, they're not... You've heard this criticism, right, Dante?
Dante DiAntonio: I have. Yeah. I don't know that I agree with it. I think there's still jobs. They're good jobs in large. I mean, especially in healthcare. I think the jobs, not that they're all high-paying excellent jobs, but I think we could do worse than adding more healthcare jobs every month. And I think the same thing with the public sector. They're maybe not quite as high paying as private sector equivalents in a lot of cases, but still good quality jobs that we can use and people want.
Mark Zandi: Yeah, I mean, I don't get that kind of strain of thought with healthcare at all, right? I mean, given the demographic trends, we need more people working in healthcare and that cuts across all occupations in every community across the country. That's a good source of high paying, good quality jobs across the wage and skill distribution. On government, it feels like the government was just slow to hiring coming out of the pandemic because of the lags that are involved in the hiring and firing process and the restructuring of government. So they're just kind of playing catch up. Yeah, you would agree?
Dante DiAntonio: Yeah. And to your point, it's not the federal government we're talking about.
Mark Zandi: It's local government.
Dante DiAntonio: A lot of it is state and local government and education payrolls in particular. I think those, again are jobs that we need and good jobs by and large.
Mark Zandi: Okay. The unemployment rate, that's the one statistic that actually surprised me a little bit. It went down to 4%.
Dante DiAntonio: Down to 4%. Obviously, there's a lot of moving parts in the household survey in January, getting the new population controls.
Mark Zandi: Which we'll come back to.
Dante DiAntonio: It's a little bit hard to look at the month to month changes. They do publish a sort of estimate of what they would look like in the absence of those controls, but it was largely a good story. The labor force grew, employment in the household survey rose, the number of unemployed workers fell, and that contributed to the unemployment rate falling to 4% as you mentioned. So I think stronger than I would've expected on that side of things.
Mark Zandi: And I don't want to dig too deep yet into the population controls, but I thought because the BLS was added to population because of the surge in immigration, that we'd see a tick up in unemployment because the unemployment rate for immigrant workers would be, this is my intuition, higher than or native born, but we did not see that in the number.
Dante DiAntonio: Yeah, I agree. I mean, I had expected it to maybe tick up to 4.2 as opposed to down to four. So I was thinking along the same lines.
Mark Zandi: Same lines.
Dante DiAntonio: At the end of the day, it's a pretty trivial movement either way, but-
Mark Zandi: Okay. And it's been 4% for amazingly, I think three years on the nose now. I mean round four, a little bit below, a little bit above, but hovering around four for three years, which is just incredible.
Marisa DiNatale: If it weren't for the population control, actually the population control did make the unemployment rate tick a 10th of a percentage point higher than-
Mark Zandi: Oh, it did.
Marisa DiNatale: ... it would've [inaudible 00:13:05] with it. So without that, it actually would be 3.9.
Mark Zandi: Ah, is that right?
Marisa DiNatale: Yeah.
Mark Zandi: I didn't see that in the report. Okay. Well maybe that explains partly why the tenure treasury yield sold off. We'll come back to that in a second.
Marisa DiNatale: Oh, did it?
Mark Zandi: Yeah. Long-term rates rose. I was wondering why. That might be the reason why. Okay. How about wage growth? That came in strong.
Dante DiAntonio: It did come in strong. It was 0.5% in January. I will say January wage growth tends to be a little bit hot. So that's the strongest reading since last January, which was also half a percent. And if you go back a couple of Januaries before that, you had a 0.7% in there, another 0.4. So it's not unusual to get a strong January reading. Year-over-year growth moved a little bit higher. I think it's at 4.1% now. It had been just under 4%. So I still don't think it changes the story on wage growth all that much. I mean, certainly if we start to stack up stronger wage gains like that, might be a little bit concerning, but I think the one-off January increase and the fact that the year-over-year growth rate is still pretty close to 4% doesn't cause a whole lot of concern in my book.
Mark Zandi: Yeah, and would that be, I'm just throwing this out, I don't know, minimum wage hikes? Because I know in Januaries past, that was a reason for those big jumps. You saw minimum wages go up. Do you know whether that happened this year as well or not?
Dante DiAntonio: I don't think there were as many. I mean, you had a few years ago, many more states implement beginning of year sort of automatic changes that were tied to CPIs. I think you do have more states that are increasing minimum wage just by legislation at this point every year. The other thing that happens in January is there's much more churn in January in terms of the labor market than usual. If you think about the non-seasonally adjusted job market, you have huge losses in January. So I think you have a lot more change in industry composition potentially that can affect those January numbers as well. You think about retail and leisure and hospitality sort of pulling back after the holiday season. Those are lower paid occupations. I think that can also contribute to that slightly stronger reading that you get in January as well.
Mark Zandi: Okay. So 4%, I mean 4.1% to be precise. I mean, the other wage data is very consistent. We got the Employment Cost Index ECI, I don't know if it was this week or last week,
Marisa DiNatale: Last week.
Mark Zandi: Last week. That was 4% too, wasn't it on the nose? Year over year 4%, I believe. Pretty close.
Dante DiAntonio: It was right around 4%.
Mark Zandi: Total compensation. So it feels like we're at four, and that seems exactly where you kind of want it to be consistent with 2% inflation and kind of 2% underlying productivity growth.
Dante DiAntonio: Yeah, I agree. I feel like that's been the story for most of the last year is that wage rates has basically settled where you would sort of expect it to be at this point.
Mark Zandi: Okay. Okay. And then the final key top line statistic, or I always get confused, is it top line or bottom line statistic? Do you get confused by that too? Is it top line or bottom line?
Dante DiAntonio: Well, I don't know what you're... I'm assuming you're talking about hours, but without knowing what you're talking about, it's hard to know which one it is.
Mark Zandi: "I have no idea what you're talking about." Okay, that's fair. That's fair. I'm not sure I do either. I'm just confused. Let's say the other key statistic, let's abstract from this top line, bottom line thing. We'll come back to that. We'll come back to that. I'm curious, Cris, how you say that in Italian? Bottom line, top line. But anyway, we'll come back to that. It's the other key statistic is hours work per week and that ticked down a 10th. Any information there or is that just monthly noise?
Dante DiAntonio: I mean, it is pretty low. I mean, obviously, it's been a little bit weak here over the last year or so. I mean, it's now down to, if you're looking at sort of average weekly hours for total private workers, it's down to 34.1 hours. That data doesn't go back that far. It goes back to 2006. That's the weakest it's ever been when we're not in a recession. So it was that week in early 2020, and it was that week for a while in 2009. But outside of that, it's never been that low when the economy is doing well.
If you look at the other production and non-supervisory employee series, so sort of a more limited look at hours, it's still weak, but it's not sort of historically weak like the all employee series is. So I don't know that I read a whole lot into it. I think we know that demand is a little bit soft. We know the firms have been a little bit reluctant to lay workers off. So to me, it's probably an artifact of that, that you've got slightly higher head counts than maybe you need. And so that's putting a little bit of downward pressure on hours. Does that create a problem where eventually we start to see that turn into layoffs? I think maybe, it depends on how the economy holds up here in 2025.
Mark Zandi: Okay. I thought maybe also the fires in LA, because generally natural disasters don't impact jobs because all you have to do is work an hour in the week when the BLS, Bureau of Labor Statistics conduct the survey to be employed. But certainly, your hours can be impacted. So generally a natural disaster shows up in weaker hours. I'm stretching, but maybe that is where it shows up.
Dante DiAntonio: I think it could have an impact. BLS gave the standard no discernible impact from the wildfires, but they've said that in the past when it certainly looks like there's at least some impact going on. Yeah.
Mark Zandi: Okay. Okay. So bottom line, top line, everything in between. It feels like a good report.
Dante DiAntonio: Yeah, it was as expected.
Mark Zandi: Labor market's healthy.
Dante DiAntonio: Yeah, the labor market's holding up well. Yeah.
Mark Zandi: Holding up well. Okay. Marisa, anything to add to that or want to flesh out, or do you take a different perspective on the job numbers?
Marisa DiNatale: Well, no, kudos to Dante for pretty much hitting it on the head with the forecast for what the number would be.
Mark Zandi: How come you don't suck up to me like you're sucking up to Dante. I just-
Marisa DiNatale: I'm not sucking up to Dante. [inaudible 00:19:10].
Dante DiAntonio: I just appreciate that she doesn't call me out when my forecast is bad. She only brings it up when it's good.
Mark Zandi: Now you're sucking up to Marisa. Everyone's sucking up to everyone except to me. Just saying. Anyway, sorry to-
Marisa DiNatale: It's called positive feedback, Mark.
Mark Zandi: Oh yeah.
Marisa DiNatale: Yeah.
Mark Zandi: Okay. I'll remember that. Yeah.
Marisa DiNatale: Please do. Do I have anything to add? Just I noted the weakness in leisure hospitality that Dante brought up, weakness in manufacturing, which has been ongoing, weakness in professional business services. I mean, the breadth of job growth was narrower over the month. If you look at the diffusion index, it is still above 50, but it fell from where it was. So definitely fewer industries kind of adding to this. And then, yeah, I mean I think it was a pretty solid report. And then other labor market data that we got over the past week, I think also bolster that assessment.
Mark Zandi: You mean the JOLTS, the Job Openings Labor Turnover Survey.
Marisa DiNatale: JOLTS.
Mark Zandi: The UI claims, [inaudible 00:20:20], all that.
Marisa DiNatale: Yeah.
Mark Zandi: Okay. All pretty consistent with a solid job market.
Marisa DiNatale: Yep.
Mark Zandi: Okay. Cris, anything?
Cris deRitis: Not really. No. I think it's summarized well. We can circle back to treasuries, the treasury market did jump up. So the 10 years over 4.5, or just around 4.5%. So I think that speaks to the strength of the report. Perhaps relative expectations with 4% unemployment rate, again, perhaps being stronger than investors thought and reducing the odds of an actual Fed cut anytime soon.
Mark Zandi: Yeah, I mean, as the Fed looks at this, they'll say, "I'm pretty happy where the funds rate is right now with this." Okay. Okay, good. I mean, I agree with you. I thought it was a solid report. I don't know if I've said this in the past, but I say it again, if I had soak it in, this brief shining moment perhaps, I mean the labor market's about where you want to see it on every front. Every measure that we look at, it feels like exactly where you'd want it to be. So got to be happy with the employment statistics. Okay, let's now dig deeper into the data. We had two sets of revisions to the data. We had the so-called benchmark revisions to the payroll survey. That's the monthly job growth numbers that we look at, where they come from. Once a year, the BLS, so-called dependws, they're survey-based estimates to actual employment counts from the unemployment insurance records. And there was a big revision down in that data.
And the other big revision was to the household survey. That's where we get the unemployment rate in labor force. And there, the Bureau of Labor Statistics incorporated new population counts that incorporate the impact of the surge in immigration we've experienced. And that increased significantly the size of the labor force and had other effects. And we're lucky because we've got two former BLS officials here. Both Dante and Marisa were at the BLS back in the day.
Marisa DiNatale: We were not officials. If you're listening to this, we were not officials.
Mark Zandi: You're officials in my book. I'm going to say official officials. It sounds more important, doesn't it?
Marisa DiNatale: It definitely sounds more important, yes.
Mark Zandi: But you are and were important, and key to the BLS is publishing of this data. So Marisa, I'll go to you first.
Dante DiAntonio: Positive feedback. Very welcome.
Mark Zandi: You see that? Did you see that? How I did that? Positive feedback. Now I'm sucking up to you. So which one of those revisions do you want to tackle, Marisa, the benchmark to the payroll survey or the population counts to the household survey?
Marisa DiNatale: I'll do the household survey. That was my hope of BLS.
Mark Zandi: Okay. Oh, there you go. Oh, there you go. See official. It's an official speaking officially. Go ahead.
Marisa DiNatale: Oh, you want me to go first? Do you want to do the population controls?
Mark Zandi: Yeah, I thought so because Dante's been speaking an awful lot.
Marisa DiNatale: That's true.
Mark Zandi: He's been monopolizing the conversation in my view.
Marisa DiNatale: So with the January release every February, BLS on the household survey, this is where the unemployment rate comes from, this is the survey of 60,000 households that the Census Bureau conducts, right? So every year, they benchmark the size of the estimates from that survey to actual Census Bureau population counts. And if you're a listener to this podcast, you know that we've talked quite a bit over the past year about how the surge in immigration across the southern border over the past three years has really affected estimates of population, estimates of other economic statistics. One place that it hadn't affected, and where we had seen a disconnect was in the household survey numbers. So that population surge had not yet been incorporated by the Census Bureau into the household survey. So with this revision to the January data, the Census Bureau finally put those estimates into the 2024 population numbers, starting in...
I'm sorry. They put the data from 2024 and subsequent years into the January 2025 estimates. The result of that is that if you look at the civilian non-institutional population, which is a subset of the whole population, but that's the population that the BLS uses, it added 2.8 million people to the population in January. It added 2.1 million to the labor force, exactly 2 million to the number of people employed, and a little over 100,000 to the number of people that were unemployed. And when the BLS does this, unlike what Dante is going to tell you about the benchmark revision, they do not go back and revise previous months. So that when we look at December '24 versus January, there's this big break in the series. They don't go back and smooth that.
Now, they used to produce an experimental series that they would publish on their website. This is before the pandemic, where they would do this smoothing exercise as kind of just a nice thing to do for people. They did say they're going to start doing that and they're going to release that with the... Did they release it today, Dante? I don't think it's out yet. I think they're going to release it.
Dante DiAntonio: It's supposed to be released today, but it wasn't out-
Marisa DiNatale: I didn't see it on the website yet when I looked. But they will do that. And that's just sort of as a courtesy to make things comparable, because this is such an enormous break in the series. So finally, what we have now is a household survey that makes sense vis-a-vis the payroll survey. So we'll hear that the payroll survey got revised lower, the household survey got revised higher. So this big gap that we've always talked about between the two in the past year has now been narrowed significantly. And just a couple things to note. I mean, this certainly is the effect of immigration. If you look at sort of the demographic breakdown of where this population came, it is disproportionately among Hispanics and Asians.
And if you look at the population change between now, what we had in January of '24 and January of '25, this is this bump, the bump for the foreign born was 6.1% in terms of the population, the bump for the native born was 1%. So it really is the result of this surge in immigration. And as we know, since the summer of last year, there's been basically a closing of the southern border. Immigration flows have dropped very, very markedly. And now particularly with the Trump administration and their policies that they're going to put forth on immigration, this should be a one-time adjustment that we see. We shouldn't see this again.
Mark Zandi: Can I ask, well, a couple things. One, even with this big upward revision of population and labor force and household employment did not affect the unemployment rate, you just want to explain why, or the participation rate, the rate didn't affect the inflation.
Marisa DiNatale: Yeah, that's a good point. So basically what this does is it's lifting the level of everything, and it did so in a proportionate way such that the rates of things really weren't affected very much by this. So when we look at calculations of the unemployment rate, the labor force participation rate, the employment population ratio, the effect of all of those things was a 10th of a percentage point. That was the result of this population adjustment. So not large. And if you remove the population adjustment, as I said for the unemployment rate, it actually would've been a bigger decline over the month. It would've been two-tenths of a percentage point, if not for this, but for the participation rate, it would've been zero. And for the EPOP ratio, it also would've been zero. So because you're adding to all of those categories in a pretty proportionate way, it's not really affecting the rates of things.
Mark Zandi: Yeah. Well also, I guess we may have to wait for the experimental data to get a consistent time series, but given what we've got now, do you have any sense of what underlying labor force growth is? We probably just should wait a few hours and get the data, but I'm just curious.
Marisa DiNatale: Yeah, I mean, if you remove the population effect between December and January, the labor force would've increased by about 91,000 month over month without that effect. So I don't know. We're probably looking at about... It slowed, right? It certainly has slowed.
Mark Zandi: Right. It has slowed.
Marisa DiNatale: It's kind of hard to say what underlying is because we were looking at over 200,000 added to the labor force maybe a year ago. And now it seems like that's slowed pretty markedly.
Mark Zandi: To about half that.
Marisa DiNatale: Yeah. That's what it seems. But we'll look at that experimental series.
Mark Zandi: Yeah, we'll wait and see. I ask because that gives me a sense of underlying potential growth of the economy, which is equal to the growth in the labor force plus productivity growth. And that's obviously been very, very strong, but it's clearly slowing. I mean, labor force is going to slow because immigration's coming way off, as you pointed out. And even the productivity growth numbers, we got for the fourth quarter, they show some slowing too.
Marisa DiNatale: Yeah.
Mark Zandi: Okay. Dante, do you have anything else you want to add on to what Marisa said about the household data and the population counts before we move to the payroll survey?
Dante DiAntonio: No, I think that pretty well covers it. Yeah, it's a big upward division. That's ultimately what we expected and what we got.
Mark Zandi: Yeah. Okay. Very good. Okay, so let's go to the payroll survey, the survey of business establishments, and that had a downward revision in the benchmark. You want to explain that revision?
Dante DiAntonio: Sure. So the revision process is a little bit different. On the payroll side, they do what's called a benchmark revision where they actually fix a level of employment for the previous March. So the benchmark here was March 2024. They're using the UI claims data, the unemployment insurance data, which is a near universal count of employment to set that benchmark level. So they essentially say, "Okay, here's the new level for March of 2024." They wedge that difference back through to April of 2023 to make it a smooth, consistent change in the data historically. And then that level in March of 2024 becomes the new benchmark point, and then they re-estimate the remainder of 2024 off of that new level. And they also update the seasonal adjustment factors throughout 2024. So you do get some changes in the data in 2024, but the real impact of the benchmark is actually from April of '23 through March of '24. So it's pretty backward looking.
The size of the revision was large relative to history, but it was actually smaller than the preliminary estimates. A few months back, they had estimated that the benchmark revision would be just over 800,000 down. The revision we got was about 590,000 down. So that March 2024 level moved lower by about 590,000. You got smaller revisions then through the rest of 2024 for the most part. What does that do in terms of actual employment change? So if you look again at that sort of benchmark period from April of '23 through March of '24, before the revision, average job growth was 242,000 over that period. After the revision, it's 196,000.
So again, it's a big shift relative to what it normally is, but it doesn't fundamentally change the story about how the labor market is doing. The fact that we were adding 200,000 jobs a month is still obviously fairly strong. If you look at full year 2024, I think I mentioned earlier that average is now 166,000 for the full year, which is also lower than it was previously. But again, I think fits the story here pretty well. That job growth is continuing to decelerate after it really peaked in 2021 coming out of the pandemic.
Mark Zandi: Remind me, I can't remember why, why the downward revision? Did we establish why there's such a large downward revision?
Dante DiAntonio: I mean, oftentimes, the issue here is new business creation, the so-called birth-death adjustment. In real time on a month-to-month basis, BLS is estimating the impact from net births and deaths of businesses because they can't sample and measure what's happening in those businesses that are opening and closing. So oftentimes, when you get a bigger than usual benchmark revision, we point to that as the factor here. They're using historical data for business births and deaths to try to forecast what's happening in real time. So if what's happening in real time is fundamentally different than what had been happening historically, that can lead to some problems. So my guess would be we were overestimating those business births relative to deaths, and then we got the real data that showed that there wasn't quite as much new business formation and creation happening. That's typically what we point to when there's a bigger than average revision.
Mark Zandi: The average feels like 250, 300 K, something like this. This is kind of double that.
Dante DiAntonio: Yeah. So if you look over the last 10 years on a percentage basis, the average absolute revision is a 10th of a percent. This one was four tenths of a percent.
Mark Zandi: Four tenths. Okay.
Dante DiAntonio: It's quite a bit larger than normal.
Mark Zandi: Yeah. Okay. Okay. It doesn't change the story. It doesn't change the picture of the labor market.
Dante DiAntonio: I don't think so. I mean 200,000 K a month is not all that different from 240 in terms of what we think about how the labor market's doing.
Mark Zandi: Okay. All right. Well good. That was both very helpful. Marisa, anything on that that did you wanted to add? No? Okay. That was very helpful, a very clear explanation. Before we move on to the stats game, anything else on the jobs numbers? Cris, anything you want to add? Just checking in.
Cris deRitis: Did we mention the upward revisions for December? That one is [inaudible 00:35:24], right?
Mark Zandi: No, we didn't mention that. That's a good point. Dante, you want to-
Dante DiAntonio: Yes, they were big, right? I think I alluded to the fact that they were large before. It's 100,000 in November and December combined. So it's a rather big revision. I think obviously, there's-
Mark Zandi: Just for the listener because they're probably totally confused. So we got down revisions, we've got upward revisions. I mean, what's going on?
Dante DiAntonio: Well, yeah, so November and December are even more sort of convoluted because there's a couple of things happening. So you had the benchmark revision, which changed the level, and you had updated seasonal adjustment factors that's affecting all of 2024, but October and November we get sort of normal revisions to the prior two months. So those are bigger changes because you're getting additional sample that's come in for November and December. You're getting more information about businesses and how they've done. And particularly because November and December had recovery from the hurricanes in October, I think it's not surprising that we sort of underestimated how big that recovery was initially, and now that we've got more data in, it's sort of solidifying that we had a pretty strong bounce back in November and December after a very weak October. So yeah, there's lots of things affecting those. It's the combination of the benchmark and seasonal adjustment and additional sample coming in for those two months.
Mark Zandi: So to summarize, average monthly job growth, 150 K, unemployment rate, 4%, 4%. I mean, if you're going to put on a piece of paper what you wanted to see in the labor market, it probably would be those three numbers, wouldn't it?
Dante DiAntonio: Yeah, right. Given what we think about labor force growth, I don't think you can hope for much stronger job growth at this point, right? I mean, that's about as good as it could get.
Mark Zandi: Well, I mean, yeah. And that even 150 K is pretty darn good because labor force growth, immigration has been a source of growth, but... Okay. Okay. All right, very good. Let's play the stats game. We each put forward a stat. The rest of the group tries to figure it out with clues, questions, deductive reasoning. The best stat is one that's not so easy. We get it right away. One that's not so hard, we never get it. And if it's apropos to the topic at hand, which I guess is the labor market, and we are going to be talking about tariffs next, all the better. Marisa, we always start with you. What's your stat?
Marisa DiNatale: My stat is 2.3%
Mark Zandi: From the job report?
Marisa DiNatale: No.
Dante DiAntonio: It's productivity growth over the year, I think.
Marisa DiNatale: Yes.
Mark Zandi: Yeah, no, over the year. Oh, you mean calendar year?
Marisa DiNatale: Calendar year for 2024.
Dante DiAntonio: The annual value, yeah.
Mark Zandi: Are you sure it's 2.3? I think it rounded down to 2.2. I'm just saying.
Marisa DiNatale: No, I think it's-
Mark Zandi: No. You think it's 2.3? I'm going to ask ChatGPT. I'm going to do it.
Marisa DiNatale: You're going to believe ChatGPT over me?
Mark Zandi: No, of course not. Why would I do that? That'd be lunacy.
Dante DiAntonio: I'm just glad you took this away from Cris. So thank you for bringing it up though. Cris couldn't bring it up.
Marisa DiNatale: Yeah. This is the annual average productivity growth for the year 2024, 2.3%. If you abstract from the year 2020, which we always have to do for obvious reasons, this is the fastest productivity growth we've seen since 2010 when we were coming out of the great recession. So productivity growth is typically very... We see it very strong coming out of a deep recession. So you can almost abstract from 2010 too and chalk that up to the recovery. This is really, really good solid productivity growth, now, growth slowed in the fourth quarter compared to the third quarter. So third quarter productivity growth was 2.3%. It fell to 1.2% in the fourth quarter. So a market slowdown, as you mentioned before, Mark, but over the year, very, very strong.
Mark Zandi: So I think year over year through the fourth quarter, now I'm making this up, 1.7, 1.8, 1.9, somewhere in there. Dante?
Dante DiAntonio: 1.6.
Mark Zandi: Oh, 1.6.
Dante DiAntonio: I've been focusing on that number more than 2.3, I think [inaudible 00:39:31].
Mark Zandi: Oh, I see. Being the productivity. I will say though, it does feel like this bump in productivity growth that we got this time last year appears to be fading a little bit and we're coming back into something that we've been experiencing more consistently. Do you agree with that, Marisa?
Marisa DiNatale: Yeah. I mean, it was solidly, we were seeing three and three point something percent when we were looking at over quarter productivity growth in 2023, 2024. It's slowed for sure.
Mark Zandi: Dante?
Dante DiAntonio: Yeah, I agree. I always caveat, I want productivity growth to be strong, but I think we're likely to settle in here at something a little bit under 2% eventually, but we'll see where it goes.
Mark Zandi: Cris, you've been the productivity bull, any comments on this?
Cris deRitis: This is just a transition here. We're handing off the productivity bump because of the quit rate. Remember we had that argument here. So that is petering out, the fact that you have a lot of new workers, new churn. You got a little bit of productivity boost there, and now we're going to see the technology productivity bump continue here. So don't lose faith.
Dante DiAntonio: So Mark can keep using ChatGPT more. That's what you're saying?
Cris deRitis: Yeah, absolutely.
Dante DiAntonio: That's the bump moving forward. Okay.
Mark Zandi: Well, I'm not sure it improves productivity because I got to hire someone to check whether the ChatGPT is correct or not. Just to make that concrete for the listener, what you're saying is that because of all of the quitting that occurred back three, maybe four years ago, people landed in new jobs that were more suited to their skills, education and interests. They're happier in their jobs. We can see that from the various surveys of worker sentiment, and that gives us a boost to productivity. But that doesn't feel like-
Cris deRitis: That's one time.
Mark Zandi: That's one time. That's not ongoing. And that's what we observed this time last year when we were getting those really strong productivity growth numbers. And you're saying your thesis is that that's now fading a little bit, but don't despair, all the productivity tailwinds coming from AI, and I don't know if remote work, but all these technological innovations are going to start to kick in a more meaningful way. That's what you're saying? You're sticking to it?
Cris deRitis: That's the truth. Yeah, absolutely.
Mark Zandi: Yeah, yeah, yeah. Got it. Yeah.
Marisa DiNatale: Are new employees less productive though?
Mark Zandi: New employees?
Marisa DiNatale: Yeah.
Mark Zandi: Oh, you mean? Oh, well-
Marisa DiNatale: If people are switching jobs and they're starting a new job, wouldn't you expect those people to initially be less productive?
Mark Zandi: But once they get up the learning curve after a few months, maybe a year, then they kick into high gear.
Marisa DiNatale: And they're more productive than they were at their previous job.
Dante DiAntonio: Than their previous job.
Cris deRitis: The argument was you had a huge amount of quitting in 2021 and 2022. That fueled strong productivity in 2023, but now that's starting to sort of peter out.
Mark Zandi: Yeah, I haven't seen any research on that, have you?
Cris deRitis: No.
Mark Zandi: It's just a thesis.
Cris deRitis: Yeah, just a thesis.
Marisa DiNatale: Cris, you can fill that void.
Cris deRitis: It's a good story. It's a good story. Yeah.
Mark Zandi: Okay. Dante, you're up next. What's your stat?
Dante DiAntonio: That's a good question.
Mark Zandi: You're unprepared?
Dante DiAntonio: Let's go with... No, I am. I just can't decide what I want to use. They're going super deep in the weeds. Let's go. We'll keep it a little more high level. 50.9.
Mark Zandi: Is that a diffusion?
Marisa DiNatale: Sounds like a diffusion [inaudible 00:43:08].
Mark Zandi: That sounds like an ISM survey.
Dante DiAntonio: Is that your guess? Which ISM survey are we talking about? [inaudible 00:43:16].
Mark Zandi: This is the employment component of the manufacturing purchasing manager survey.
Dante DiAntonio: It is manufacturing, but it's not the employment index.
Mark Zandi: Oh, it's the top line?
Dante DiAntonio: It is the top line, yeah.
Mark Zandi: Or the bottom line, which is it?
Cris deRitis: Top line or bottom line?
Dante DiAntonio: I'm going to call it top line. I think it's top line because there's things underneath it compounding.
Mark Zandi: It could be the bottom line though, I'm just saying, right?
Dante DiAntonio: Good. Sure.
Mark Zandi: Bottom line point is the 50.9. You see my confusion around the top line and the bottom line? Does anyone-
Marisa DiNatale: Maybe use the word upshot. The upshot.
Dante DiAntonio: The headline. How about we just call it the headline?
Mark Zandi: The headline.
Dante DiAntonio: There you go.
Mark Zandi: The headline.
Cris deRitis: Okay, the headline.
Dante DiAntonio: All right. So it's obviously above the neutral threshold of 50. First time it had done that in I think a little over two years. Obviously manufacturing sentiment has been pretty weak. I'm not really sure how to take that. I mean, we've seen these big spikes in sentiment-based surveys here since the election. There isn't a whole lot of evidence that underlying fundamentals for manufacturing have shifted in any meaningful way. So my guess is this doesn't translate into some sort of resurgence in manufacturing. My guess is it sort of fades back to something close to neutral here in the coming months, and we don't see any real movement on the employment side of things. There seems to be some optimism amongst manufacturers for policy changes under the Trump administration. Again, I'm not sure that I buy that story a whole lot, that there's going to be some huge positive shift in the dynamics for manufacturers, but that's at least the signal we're getting right now from sentiment.
Mark Zandi: Yeah. I'm not a big fan of these purchasing manager surveys or sentiment surveys in general because ISM is a little... That's referring to the purchasing manager. I say ISM. Is it still ISM, Institute for Supply Management, or is it purchasing managers?
Dante DiAntonio: It is ISM.
Mark Zandi: Half the questions are basically how you feel about something, right? It's a sentiment survey. It's not based on actual production or exports or prices, or half the survey is half the survey. And so I down-weighted, given how biased sentiment appears to be in this very politically fractured environment that we're in. Do you agree with that?
Dante DiAntonio: Yeah, and I think sentiment was actually sort of weaker than the sort of hard data would've suggested over the last couple of years. Sentiment was very strongly in contractionary territory and manufacturing wasn't doing well. It was sort of stagnant, but it wasn't as bad as-
Mark Zandi: Induction was flat. Jobs were flat. It was flat, it wasn't down.
Dante DiAntonio: Which would suggest it should be something around 50. And it had been sort of well below 50 consistently for the last several years. So I think we had this sort of weight on sentiment, and that seems to be lifted now post election. But I think the reality is that the dynamics haven't really changed.
Mark Zandi: The actual reality in terms of manufacturing activity is not changed. It's basically flat.
Dante DiAntonio: It's still basically neutral.
Mark Zandi: Basically flat. Okay. Okay. Let's do one more. Cris, you're up. What's your stat?
Cris deRitis: 0.3%.
Marisa DiNatale: Is it from the jobs number?
Mark Zandi: Jobs number?
Cris deRitis: No. I couldn't resist. It's not a jobs number.
Dante DiAntonio: Is that a yield?
Cris deRitis: It came out today.
Dante DiAntonio: Came out today.
Mark Zandi: Oh, is it inflation expectations from the University of Michigan?
Marisa DiNatale: Oh yeah.
Cris deRitis: Yes. One year ahead, 4.3%.
Mark Zandi: That's high.
Cris deRitis: From 3.3%.
Dante DiAntonio: Oh, wow.
Mark Zandi: Whoa.
Marisa DiNatale: And two months ago, it was two point something. It's almost doubled in past two months.
Cris deRitis: Yeah. Yeah. It was [inaudible 00:46:50]. Yeah, yeah, yeah, yeah.
Dante DiAntonio: Those egg prices that are getting people worried, again, that's...
Marisa DiNatale: You think it's eggs?
Cris deRitis: The prices?
Marisa DiNatale: I think it's tariffs.
Cris deRitis: It's tariffs, right? Yeah. It's got to be tariffs, right?
Dante DiAntonio: Yeah, I would think so.
Cris deRitis: Oh, gas prices rose as well over this period. So a little bit, but yeah, it's got to be tariffs.
Mark Zandi: Right. Yeah. People are preparing for that psychologically.
Cris deRitis: They're nervous.
Mark Zandi: Yeah. Nervous about that. Yeah. Interesting. Well, I even heard President Trump in just a TV clip where he said, I'm paraphrasing, "The American people are prepared for some price increases, that they expect it. We need that to accomplish what we're trying to accomplish." So if I'm a consumer and I listen to that, I go, "Oh, tariffs are coming and I'm going to have to pay a higher price for stuff." Yeah.
Cris deRitis: Yeah.
Mark Zandi: Interesting.
Cris deRitis: Also, in the UMich survey, they have the political breakout and the Republican sentiment is coming in, it's still high. And Democrats think this is just like-
Mark Zandi: The worst.
Cris deRitis: ... COVID-19.
Mark Zandi: Is it really that low for the Democrats?
Cris deRitis: Yeah, it's at that level.
Mark Zandi: That's amazing. Yeah, that's my point about these consumer sentiment surveys. Yeah, they're bogus. Okay, well, let's talk about tariffs. Big week. Last Saturday, the president announced increased tariffs on China by 10% at 10%. They were already around 10% based on the tariffs he imposed in his first term. He doubled them essentially, wanted to impose tariffs of 25% on imports from Mexico, and 25% on Canadian imports in the US that are non-energy. All the energy related imports from Canada were at 10%. Obviously a lot's happened since that Saturday. The tariffs on Canada and Mexico were put on hold for about a month. The Chinese tariffs were put forward. The Chinese responded with their own tariffs, not on a lot of products, but felt more symbolic, and then they came forward with some non tariff related responses to what President Trump did. It feels like we're off and running here on the tariffs.
Now, I guess the critical question is how high are the tariffs going to go? Which countries, how high, over what period of time? Because that critically determines what... It's going to be the macroeconomic consequence. I mean, if this is more short-term, few countries, no big deal. If this is a lot of countries, higher rates over a longer period of time, this is a deal both in terms of inflation, it's going to add to prices. And you could see that in the consumer sentiment survey results Cris was talking about. And it diminishes economic growth because it reduces trade, particularly if other countries retaliate.
And the question in my mind, I'm curious what the group thinks is what is the motivation or motivations behind the tariff increases by the president? Because I think that goes to exactly how this is going to play out. If it's an effort to raise a lot of tariff revenue, that could argue for much higher tariffs across more countries for a longer period of time, and economic consequences of that more significant serious. If it's simply more performative, satisfying a campaign promise because obviously the president talked a lot about tariffs on the campaign trail, then that would argue for things that are more inconsequential.
For example, he put the tariffs on Canada on hold when the Canadian said, "Oh, we're going to send 10,000 troops to the Canadian border," to do what exactly is unclear. It's not like there's a lot of, or any illegal immigrants coming across the border, and that's not going to stop any drug trade. So that feels just totally performative, political. It doesn't feel like there's anything substance. But if that's the case, then no big deal. The tariffs will really not have any particular impact. So my question is, what do you think is the president's motivation, the administration's motivation here behind the tariffs? To what do you ascribe this policy? Is that a fair question? Does that make sense? Cris, does that make sense?
Cris deRitis: It does.
Mark Zandi: Okay. So what do you think? And it can be more than one, could be a melange of stuff going on. I'm just really curious what the motivations are and how you think this is going to play out.
Cris deRitis: I do think it's a mix, and I think it's a mix that depends on the countries that we're talking about here. So yeah, to your point, I think the tariff threat on Canada is more performative. It's more about perhaps saying he made promises on the campaign trail and he's fulfilling those promises. Perhaps it's also sending a signal to the rest of the world that says, "Hey, look, we're serious about this. Fair trade is important. I want to make sure that the deals that we have are beneficial to all parties." So just kind of sending and saying, "This is how we treat a good ally and friend. We're not going to pull any punches here when it comes to trade."
But at the end of the day, I don't expect that tariff to go through. I think the actions the Canadians have taken probably are going to result in at least a sharp reduction in that tariff rate, if not a full backing off. But then in other cases like China, I don't think that's the case. I think that is truly about trade, about trade practices, feeling that there's a trade imbalance in terms of those practices, and therefore these tariffs are a response to those actions that China's taking, looking for more of a free or fair type of trade deal.
Beyond that, there is this revenue aspect to it. I think that that's certainly in the background, but I don't think that really what the motivation here is to really fund... There's been talk about going back to the McKinley days where we funded the government with a tariff revenue versus income tax revenue. But I think that's just talk. I don't see that as a serious rationale for imposing tariffs. We're not going to fill our fiscal needs through tariffs alone, certainly. And so I don't see that as... Maybe on the margin, but not a key factor in terms of the motivation.
Mark Zandi: Okay. So what does that imply about how the tariff war is going to play out here? What does it mean? I mean, just to put context to it. Yeah. Before President Trump's first term, the so-called effective tariff rate, that's the amount of tariff revenue collected divided by the value of imports was 1%. After president Trump's first term in the tariffs he imposed in that term, I'm rounding, but about 3%. What do you think happens here? I mean, are we going to see tariffs rise meaningfully above that given these motivations or not?
Cris deRitis: So I think the short-term, we very well may, right? So even though I've described these as primarily just threats in order to achieve some type of renegotiated trade deal, there certain could be the case where the tariffs actually go into place, they're active, we're collecting that tariff revenue, and then the negotiations occur, and then subsequently, the tariff rate is reduced, right? So I think that's the pattern in general. For countries outside of China, I think that very well could have, and we got very close, of course, with Mexico and Canada, and we still might impose tariffs there, and then a more formal negotiation process occurs. So that would be my expectation. China, I think, is different. I think we very well could see the tariffs imposed and very unlikely that there'll be a sharp reduction. Maybe there's some negotiation that goes on but the tariffs as in the first Trump administration stay in place, right?
Mark Zandi: So right now, the tariff rate on China is 20%. You think it stays there going forward, 20%?
Cris deRitis: I do.
Mark Zandi: Even go higher than 20%?
Cris deRitis: It could even go higher. It truly depends on what the negotiations look like, and right now, it doesn't look as though they're going to go anywhere. So we certainly could see that we end up with a permanently higher tariff rate on China.
Mark Zandi: Marisa, any other motivations here that you identify?
Marisa DiNatale: Yeah, I think one big motivation is immigration policy. I think that's what we're seeing with Mexico. So I think Mexico, it's different from Canada. I don't think there's any economic reason to go after Canada. I think that's political. I think with Mexico, I think President Trump really does see the crisis at the border, which has abated significantly over the past year. But I think he's really trying to tamp down on immigration over the border and drugs coming over the border. I think that is a big motivation. And I would say another motivation with Mexico is that it's seen as this back door to Chinese imports. So we saw a lot of Chinese manufacturers start production in Mexico and import through Mexico to get around tariffs. I think there's more of an economic reason there for Mexico. So I would expect some further negotiation going on with Mexico and perhaps tariffs going into place.
He says he wants to renegotiate the USMCA, which was used to be NAFTA. He wants to take another look at that, which I think with Mexico, there's more legitimate reasons, I think, for the tariff. With the Eurozone and Europe, not quite sure. I think that's a lot of political motivation there too. He's consistently gone after Europe for not funding NATO as much as they should be doing. That could be a political move to extract more defense dollars out of some of these European countries. But I think that is also more political. I think the real one with teeth is the tariffs against Mexico.
Mark Zandi: So you think tariffs on China, tariffs on Mexico, most likely if tariffs remain up, that's where they're going to remain up, those two countries?
Marisa DiNatale: Yeah, and I think that even when we talk about China, I mean, President Biden kept those tariffs in place against China. So President Trump had started them in his first term, but President Biden kept them there. So that really has served, at least in the eyes of these past two administrations, a real purpose, a real economic purpose. I think Mexico, maybe it's not an economic purpose, but it's a pretty stark political one that involves immigration and drug trade, and I think those are legitimate reasons that the administration is seeing putting tariffs on Mexico.
Mark Zandi: Okay. Dante, what's your perspective? Any other motivations you can think of and what does it mean for the trade war dead ahead?
Dante DiAntonio: No additional motivations. I mean, the one thing, I don't disagree with Marisa about the sort of rationale for Mexico being different. I am a little bit surprised that the tariffs were postponed for seemingly getting very little, right? I mean, it was similar to Canada, you get troops on the border, which again, it feels like almost nothing. So if you're willing to postpone them with very little in return, it makes me question how strong that motivation is to actually sort of move forward with something more. Or is it just to try to score political points and get something in return that you can make into a headline to make people feel like something's happening, even if it's not. So to me, outside of China, it feels a little more sort of political, trying to score points and have something to talk about, even if you're not really moving the needle in terms of changing immigration policy or trade policy.
My thing is, I think China aside, I just don't know that there's a wherewithal to deal with the inflation ramifications of tariffs being in place for a long period of time. To me, I find it hard to believe that the administration is going to tolerate a sustained increase in inflation that can be pinned almost entirely on tariff policy. I think you can get away with China being sort of the one place, and maybe that has a limited impact, but if you start slapping 10% across the board, tariffs everywhere, that inflation impact gets bigger. And it feels to me like they don't want to deal with that. They don't want to try to explain that away. So I think for that reason, I don't see a big sustained increase in tariffs across the board.
Mark Zandi: Yeah. I'll throw out a couple other possible motivations that I think the president has expressed. I'm curious to see if you think tariffs will address these motivations. One is the trade deficit. The US runs a trade deficit with the rest of the world. It's about 3% of GDP, that's some goods and services for goods. I think it's closer to 4%, which by the way, has been unchanged from almost a decade. It's been relatively stable, but it's still a deficit. And the president has expressed the view that deficits are, I think he's even used the word bad. They're bad, inherently bad, and that the solution is tariffs. What do people think about that motivation? And do in fact tariffs help address a trade war, help address the trade deficit, Cris?
Cris deRitis: No, I think the evidence is that they don't, because of the dynamics, right? You slap a tariff on, it just doesn't end there. You have the retaliatory tariffs you mentioned, you have the currency effects, so potentially strengthen the dollar, which would perhaps work in the opposite direction of reducing the deficit. So yeah, I don't see this as a strategy to achieve that goal if indeed we want to or need to reduce the trade deficit.
Mark Zandi: And you agreed with me that that is a motivation of the president.
Cris deRitis: He certainly stated it multiple times.
Mark Zandi: Multiple times.
Cris deRitis: It's unfair that the US... I think at least publicly, that's one of the primary motivations. And then of course, a response that's also given is to, "Well, we're also going to incentivize companies to come to the US and just produce their goods here as a way to counteract that deficit as well. So we won't import, we'll just produce it here," but that too is going to be very difficult to really attract a lot of foreign capital into the country as a result of the tariff.
Mark Zandi: And that's exactly where I was going to go. The other motivation I've heard from him publicly is this is a way to bring production here, keep production here, make it difficult for US companies to take production and jobs overseas, but also attracts more production here from foreign producers. Does that resonate at all with you that that is a policy?
Cris deRitis: Again, maybe around the margins, it could help. If we're talking about the employment aspect of this as well, I think Dante and Marisa would also agree that if we were to get more manufacturing back into the US, it would be very different than the manufacturing we lost 40, 50 years ago.
Mark Zandi: It's not about jobs. Manufacturing, it's not going to create jobs, right?
Cris deRitis: Right. Yeah.
Mark Zandi: Okay. Because manufacturing, what is, 10%? I think it's less than 10% of the employment base at this point. It's highly productive. And even if you bring production here, doesn't mean you bring many jobs here. My sense is that, let me make this comment. Of course, we have to do a forecast for the economy and to do a forecast, we have to have an assumption about the tariffs and how that's going to play out going forward. In our current baseline forecast, the most likely scenario, and obviously a boatload of uncertainty, which by itself is a big problem, right? That's one reason why the Fed's gone on hold and is probably going to weigh on investment decisions and slow economic growth. But in our baseline outlook, we have the effective tariff rate. I mentioned it was 3% going to as high as 10% by the end of the year. That would include tariffs on China at 20%. It includes basically 10% tariffs on many other countries with which we run a trade deficit, Mexico, we include Canada, the EU, Japan, India, Brazil, South Korea.
You can actually create a table of the US trade deficit by country. And those are the countries where we expect tariffs to be higher to his focus on the trade deficit as a motivation. But what happens in our baseline is that because of the increase in the tariffs from 3% effective tariff rate to 10%, it does damage to the economy just like the tariffs did in his first term, and those were much smaller in scale than what we're talking about here. There, it went from one to three. Here, we're going from three to 10, and it goes to inflation, prices rise, and it goes to the growth effects that weighs on economic growth through lots of channels. I mentioned uncertainty. I think that's a big deal. I think that's going to have a big impact.
I think we will have retaliation. I mean, I don't see that any country... The Chinese certainly aren't going to back down here and they'll go tit-for-tat. And the impact of that is higher inflation, higher interest rates, the Fed's going to be on hold for longer, lower economic growth, stock market ultimately is going to reflect that. And in our baseline, we assume that at that point, President Trump backtracks, cuts deals, declares victory, but backtracks like he did in his first term, and the effective tariff rate comes back in for all countries except for China. China stays where it is. There is widespread agreement that the Chinese aren't playing fair, and therefore this is a way to address that. While all of this does damage to the economy, it doesn't derail it. The economy is strong enough that it continues to move forward. Diminished, but not derailed. I just said a lot. Dante, what do you think of that baseline? If you had to push on anything, what would you push on?
Dante DiAntonio: No, I mean, I think I largely agree. I mean, I think it goes to my earlier point that it doesn't feel to me like there's going to be the wherewithal to keep higher tariffs on much of the world. I think you could see them come out, they could be announced. Some may get washed away before they even go into effect. Others maybe are in effect for brief periods of time, but it just feels like the potential for the inflation impact is going to be strong enough to not want to sort of keep those tariffs in place in a broad way for very long.
Mark Zandi: Okay. Marisa, any pushback?
Marisa DiNatale: No, I agree. I think that is what is going to happen. I think there's going to be a lot of bark and the bite will be minor in the end because I think that we'll back down. I mean, I would point out that you mentioned President Trump's first term and that there was a growth impact there and an inflation impact there. The difference here is that we're already in a higher than average inflation environment going into this, whereas we weren't back in 2017, right? So it was hard to see what the inflation impact. People didn't feel it, I think, as much, except on specific products back then.
Here we have inflation that's still well above the Fed's target. The Fed is working to bring inflation lower, and then we're going to essentially put a tax on... We're talking about putting a tax on everything that we import. So I think it's going to be felt more acutely this time around. It's going to be a lot more obvious when it happens. And I do agree that I don't think there's going to be much will to keep that in place when this will squarely be on the shoulders of this administration if that happens.
Mark Zandi: Yeah, you make a great point about the inflationary backdrop today compared to back in 2018, '19. Back then, it's hard to remember, but inflation was suboptimal. The Fed was fighting hard to get it back to the target.
Marisa DiNatale: [inaudible 01:08:44].
Mark Zandi: Inflation expectations were dead as a doornail. And we can see from Cris's stat on consumer expectations for inflation, they're highly sensitive to even the talk of tariffs they're jumping, not the actual implementation of tariffs, which is very, very different than was the case back in 2018 and 2019. So I totally agree with you. It's very different inflationary backdrop. Cris, any pushback on the baseline forecast, at least the assumptions around the tariffs?
Cris deRitis: No. If anything, I am expecting US businesses are already talking behind closed doors. Again, based on the first Trump term experience, you remember all the exceptions and the carve outs that occurred when particularly small businesses pushed back and said, "Look, these are key imports. I use these in my production process." So once we go down that road of trying to carve things out, that could certainly limit the power of some of these tariffs. And again, I make that distinction between China and the rest of the world as well.
Mark Zandi: Okay. Well, we're running along in the tooth, so I don't think we... Unfortunately, we're not going to get to listener questions again, but listeners, please fire away. We will get to them. I do want to-
Marisa DiNatale: We actually answered. They were a lot on tariffs and we answered a lot of them.
Mark Zandi: Oh, did we? Okay. Okay, good.
Marisa DiNatale: Yeah.
Mark Zandi: Okay. Well, I want to end this way in a way that we haven't in quite some time, and that's probability of recession in the next 12 months. And I bring this up because Cris, we have a macroeconomic meeting every month with the staff to go over assumptions. And we were talking about tariffs and other assumptions we make about monetary and fiscal policy, so forth and so on. And we always survey the participants, our colleagues, what they think the probability of recession is going to be over the next 12 months. And that jumped. Am I right, Cris, in the last survey, the survey we conducted yesterday?
Cris deRitis: The highest category was the 30 to 40%.
Mark Zandi: Yeah. Which is surprising. Well, I was surprised. I was surprised. Again, I guess we have to take all sentiment surveys with a grain of salt.
Cris deRitis: It's very consistent.
Mark Zandi: Very consistent. But let me ask you guys, and I will chime in as well, what is the probability of recession starting in the next 12 months, and has that changed since the low... If you can think about the low point in your probability, has it increased? I don't think anyone's probability has declined here. If it has, let me know. Dante, let me begin with you. What's your probability of recession starting at some point in the next year?
Dante DiAntonio: I would say 25%. That's probably maybe up slightly. Maybe I was probably as low as 20% at some point in the last six months. I'm not feeling overly pessimistic about a recession starting. I mean, to your point, I think I'm much more confident that the economy is going to slow over the next year, but I still don't think we're headed straight for a recession in the next 12 months.
Mark Zandi: Okay. Very good. Marisa?
Marisa DiNatale: Mine is up to a third, and I think I had been around 20, 25% earlier. I just see a lot more risk out there. I don't think there's going to be a recession. I think the economy is going to do fine in the end, but I just see a lot more tail risk now than I did a year ago or six months ago.
Mark Zandi: Yeah, Cris?
Cris deRitis: I'm at 30%. I think it was at 25% last time we spoke. So yeah, to Marisa's point, I think there's certainly more factors to worry about. I think also consumer balance sheets, certainly for lower middle income households are a bit weaker, so if we get hit with some shock, it might not be as easy to get out of it. And I guess I'd also add, I don't see the government policymakers coming to the rescue-
Mark Zandi: Good point.
Cris deRitis: ... as they might in other cases. So that also increases my odds.
Mark Zandi: Yeah, good point. Well, I'm at 25% and my low was 15. I had gotten as low as 15. 15 being what you would... That's the unconditional probability of recession, right? You get a recession every six, seven years, about 15%. So I was as low as 15. Now I'm at 25. And the reason I'm at 25 is the uncertainty. There's just so much influx everywhere on everything. We talked about tariffs, but immigration policy on tax policy, on government spending. But you see what's happening with DOGE, it seems like on every front, things are in flux, and it's just creating so much uncertainty. And I think that affects hiring decisions, it affects investment decisions, it affects spending decisions. It hasn't shown up in the stock market yet. I mean, the stock market's kind of gone sideways here since the election.
It has shown up in the bond market. Yields are higher, you can see it in mortgage rates, they're up 7% plus last I looked. So just given the level of, I think the word is uncertainty, I think that's the appropriate word, it just raises the odds almost by definition that there should be a higher... Because the distribution of possible outcomes is now flatter. Right? So you've got more [inaudible 01:14:19] of distribution, right? So just almost arithmetically, if you think the level of uncertainty is higher, you're going to have a higher probability of recession, right? Am I right, Cris? Is that right? That feels like a GARP article to me. [inaudible 01:14:32] what you said. No, right?
Cris deRitis: Yeah.
Mark Zandi: Am I wrong or right?
Cris deRitis: Well, I guess you could say, is it more... You're saying it's not more binary. You're not shifting the probabilities around saying either things could go really well or things could go really basic. The whole distribution has kind of flattened out.
Mark Zandi: The whole distribution has flattened out. Anything else to add before we call it a podcast, guys? I thought that was a good podcast. A lot of chock-full of information. All right. Well, with that, we're going to call this a podcast. Dear listener, thank you for listening. What? What?
Cris deRitis: Go Birds.
Mark Zandi: Go Birds. Go Birds. Go Birds.
Dante DiAntonio: Good job Cris.
Mark Zandi: Absolutely. Thank you. Thank you. Dante, you want to sing the fight song for us? Can you sing the fight song?
Dante DiAntonio: I think I'll pass on the singing.
Mark Zandi: Really?
Dante DiAntonio: I'll stick to my projection for an Eagles win on Sunday. I will hope for that.
Mark Zandi: Marisa really was hoping to hear the fight song.
Dante DiAntonio: I don't think anybody wants to hear that right now.
Cris deRitis: E-A-G-L-E-S.
Dante DiAntonio: There we go.
Mark Zandi: There we go. Way to go, Cris. All right, with that, Go Birds. We're looking for a victory. We'll talk to you next week, dear listener. Take care now.