Mark, Ryan and Cris welcome colleagues, Marisa DiNatale and Dante DeAntonio, to dig deep into the July U.S. employment report. They also discuss what the new data tells us about a recession, productivity and what it means for the Federal Reserve.
Mark, Ryan and Cris welcome colleagues, Marisa DiNatale and Dante DeAntonio, to dig deep into the July U.S. employment report. They also discuss what the new data tells us about a recession, productivity and what it means for the Federal Reserve.
Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics. And I'm joined by group of colleagues, my two co-hosts. Cris deRitis. Cris is the Deputy Chief Economist. And Ryan Sweet. Ryan is the Director of Real-Time Economics. And then we've got Marisa, Marisa DiNatale and Dante DeAntonio, are two job market mavens. Because you guys both came from the BLS, right, at one point or another. Now, I think we established that you guys did not overlap, right? They're shaking their heads. No.
Marisa DiNatale: We did not overlap.
Mark Zandi: You did not overlap. And, Marisa, what was the report you worked on when you were there?
Marisa DiNatale: Well, I worked on the household survey side. The CPS. But, the people in that office write the jobs report every-
Mark Zandi: Got it. So you were focused on that household employment survey.
Marisa DiNatale: Mm, right.
Mark Zandi: Which is the basis for the unemployment rate participation rate, that kind of thing, which we'll definitely come back to. And Dante, you were focused on regional, I believe employment.
Dante DeAntonio: Yeah. So it's payroll survey, but state metro employment, yeah.
Mark Zandi: State metro employment. So we've got some real expertise here. You got to make up for Ryan's deficiencies. I'm not sure about Ryan's-
Ryan Sweet: What were we, 3 minutes into this?
Mark Zandi: I'm just going to point out your forecast for the job gain this month was pretty bad I thought.
Ryan Sweet: We Maverick, we. You had the same forecast.
Mark Zandi: I know. It's true. We had the same forecast. 225 k.
Ryan Sweet: Yeah. I made an amateur mistake.
Mark Zandi: Oh, okay. I want to hear about that. Yeah. Because my mistakes are always professional, but I'd love to hear the... But anyway, we're obviously talking about the July employment number from the Bureau of Labor Statistics and we need the run down. So Marisa, you want to lead the way here? You want to [inaudible 00:02:24] into the report.
Marisa DiNatale: Yeah. So you guys were only about 300,000 off.
Ryan Sweet: I'll remember this.
Marisa DiNatale: The net increase in payrolls in July was 528,000. Huge. Very surprising. You weren't the only ones that are off, right? Consensus was nowhere near that as well.
Mark Zandi: I think it was 250, wasn't it?
Ryan Sweet: Yeah.
Marisa DiNatale: Yeah.
Ryan Sweet: The highest forecast was around 300. So this was way out of-
Mark Zandi: Oh, really?
Ryan Sweet: Mm-hmm.
Marisa DiNatale: So you're not alone.
Mark Zandi: The distribution was very narrow on the forecast. I think the range-
Ryan Sweet: It could be off by a little bit. I think it went from 40 to 350.
Mark Zandi: Wow. Okay. Interesting. Sorry, Marisa.
Marisa DiNatale: So 528,000 in July. And then if you look at May and June revisions, added another 28,000 to payrolls, both May and June were revised higher. The job gains were very broad based. We got a huge increase in leisure hospitality, employment. I'll say that the BLS in writing up their news release makes it a point to say, we're now back above where we were in February of 2020 in terms of payroll employment. And that's true of most industries. There's only a couple of industries now where payrolls are below where they were prior to the pandemic. So that's leisure, hospitality, education, healthcare, state and local government. And I think wholesale trade might be below as well, but everything else is back above where it was. So in that respect, the labor market is kind of back to normal. The unemployment rate fell.
Mark Zandi: Would you consider that normal though? In the sense that if there had been no pandemic, what [inaudible 00:04:16]. Presumably higher, right?
Ryan Sweet: Yeah. A lot higher.
Mark Zandi: How much higher, do you think?
Ryan Sweet: Well, if you think of what average job growth pre-pandemic was 150, 200,000 per month. So, that adds up pretty quickly.
Mark Zandi: Although, that probably would've slowed, right?
Ryan Sweet: Yeah.
Mark Zandi: Because we were at full employment. Given labor force, it probably been 100,000, maybe.
Ryan Sweet: Yeah. So 100.
Mark Zandi: Okay. So you're saying maybe 2.5 million more jobs, something like that?
Ryan Sweet: Correct.
Mark Zandi: So the pandemic is still weighing on the labor market.
Ryan Sweet: Mm-hmm.
Mark Zandi: Yeah. Okay.
Marisa DiNatale: We're back to where we were, right? We're back to where we were. The unemployment rate fell to 3.5%. And, that is where we were when we went into the recession induced by the pandemic, it was 3.5% in February and in January of 2020. The labor force participation rate actually didn't really change, it ticked up by a 10th of a percentage point-
Mark Zandi: Did it tick up? I thought it ticked down.
Marisa DiNatale: By a 10th of a percentage point
Mark Zandi: Ticked down.
Marisa DiNatale: I thought it was up.
Mark Zandi: See, you have all these problems with negative positive signs.
Ryan Sweet: Here we go.
Mark Zandi: It's like, here we go again. Yeah, what the heck?
Ryan Sweet: I think it fell.
Mark Zandi: It fell. Yeah. It fell 62 point. Right? Dante. Dante, did it fall?
Dante DeAntonio: It goes down by a 10th. Yeah.
Mark Zandi: Okay.
Marisa DiNatale: Down is really a 10th of a percentage point.
Mark Zandi: There you go. That's funny. That's very funny.
Marisa DiNatale: Let's see, what else? Average hourly earnings were up 0.4% over the month.
Mark Zandi: Are you sure? Are you sure they were up?
Marisa DiNatale: I'm just making things up.
Mark Zandi: Okay. Yeah. I think you're right. They were definitely up. Yeah.
Marisa DiNatale: Yeah. And the year-over-year growth rate though in average, hourly earnings has come down a bit. It's actually accelerated month on month, but, on the year, it's decelerated a bit over the past few months. So we are seeing real negative wage growth for most workers on-
Mark Zandi: I think the year-over-year is 52, 5.2%. Is that right? Ryan, do you know?
Marisa DiNatale: It's 5.1 or 5.2. Yeah.
Mark Zandi: Yeah. Okay.
Marisa DiNatale: Yeah.
Mark Zandi: It feels like at least in terms of average hour earnings, I think I'd go so far as to say, all the weight statistics, they're obviously not exactly the same, but they're all coalescing around the 5%-ish kind of wage growth. Would that sound about right to you?
Marisa DiNatale: If you look at ECI too and... Yeah.
Mark Zandi: Employment cost index and the plethora of data. Okay. My sense is we want wage growth to be consistent with 2% inflation, which is the fed's target where fed wants inflation to go appropriately. So that would be consistent with wage growth of what would you say? Something 3.5, 4%, something like that. That would be 2% inflation plus 1.5, 2% productivity growth, something like that. Okay. I'm asking you, Marisa.
Marisa DiNatale: Oh, sorry. Yeah. Sorry, I thought you said Ryan. 3-3.5%, yeah, I think that's right.
Mark Zandi: Okay. Very good. Sorry, I didn't mean to interrupt. I'm just-
Marisa DiNatale: Yeah, no, that's okay.
Mark Zandi: Yeah. Go ahead.
Marisa DiNatale: And in terms of the payroll survey, like I said, it was pretty broad based. The diffusion index was high, indicating that job gains are broad based across industries. I was looking at some of the industry detail. If you look at the job gains across industries, really don't see many negative numbers. Some in manufacturing, notably motor vehicles lost jobs over the month. But other than that, there weren't any major big industries that actually lost jobs over the month. It was mostly gains everywhere.
Mark Zandi: Right.
Marisa DiNatale: What else? It's a really good report. It's hard to find anything that's bad in this really.
Mark Zandi: Except for maybe the step back in participation, I guess, right? That would be the only sort of blemish.
Marisa DiNatale: Yeah. But I wouldn't read much into a one 10th percentage point move in either direction. It's not even in their statistical significance of movements in that statistics.
Mark Zandi: Yeah.
Marisa DiNatale: So whether it's up a 10th or down a 10th, it's really all the same.
Mark Zandi: Oh, okay. Yeah, that makes sense. That makes sense. Okay. So a good... well, depends on your perspective. Looking at it from a prism of growth, this unabashedly, good report, looking at it from the prism of the fed's prism, wage and price pressures, maybe not so much, they probably would have some issue with this or some concern with it, but we'll come back to that. Okay. Dante, you want to fill any gaps in there or anything you want to highlight? Anything that you think is important that we should focus on?
Dante DeAntonio: Yeah. I think, yeah, the one month moving participation doesn't matter so much, but there certainly looks like there's a trend forming in the wrong direction where over the last three or four months, it's continued to sort of tick a little bit lower. It's primarily driven by older workers. I think there was a little bit of step back in young workers this month as well. Prime age seems to be holding up pretty good, which is the most important piece. But certainly I think older workers, an increased share of retirements is going to be an issue at some point, if we continue to add jobs like this. Participation is going to matter more and more. And I think that older cohort of workers that have retired at higher rates over the last two years at some point is going to come into play in terms of availability of workers. So, that's one thing. And then, yeah, I still think seasonal adjustment-
Mark Zandi: Before you on the labor force participation point. So what you're saying is, yeah, one month down, no big deal, but it feels like it's slumping here a little bit. The participation rate caved when the pandemic hit, came back when the economy reopened, never got fully back and now feels like it's slumping a little bit, and that's a bit of a concern because labor force participation generally remains relatively low, certainly compared to pre-pandemic.
Can I ask you about that though? If you look at projections for the labor force participation rate pre-pandemic, look at our projections, look at projections from the congressional budget office, projections were for lower participation throughout this period, just given the aging out of the baby boom generation from the workforce. And I think if I'm not mistaken that the participation rate today is almost exactly where the CBO said it was going to be pre-pandemic. Does that make sense to you? Does that cushion the blow here in terms of your thinking as to what it means?
Dante DeAntonio: I think it certainly cushions the blow a bit, right? They had sort of spiked right before the pandemic in late 2019 and that trend certainly wasn't expected to continue. So I think that does make it a little bit of a softer impact. If you look at our forecast just for the size of the labor force, back at the end of 2019, relative to where we are now, there's still about a 3 million gap, I think, between sort of where we thought the labor force would be in terms of total size versus where we are today. So, certainly we're still missing some segment of the workforce that we thought would be there, absent the pandemic.
We weren't expecting growth to continue at the rates we saw in 2015 to 2019. But even if it had grown at slower rates, absent the pandemic, we'd have a bigger labor force today. There'd be more older workers in the labor force still. It would probably take some of that pressure off of wages that we're seeing sort of persist. So I think from the fed's perspective, in terms of wage and price pressures that the labor force issue is big because it's going to keep those wage pressures higher for longer, I think that there would be.
Mark Zandi: Yeah, I think that's right. I think though the thing that's a bit surprising isn't that labor force participation is as low as it is. Because that feels like that was going to happen more or less even without the pandemic. What is different though is working age population growth. That really got crushed during the pandemic and has rebounded a little bit. But, if you look at that, today's working age population is only a little bit above what it was pre-pandemic. And that goes to, I think, largely immigration. We just had so many fewer immigrants come into the country. Certainly leading up to the pandemic because of changing immigration law under President Trump, but the pandemic crushed the immigration and which is key to the labor force. So agree with that or-
Dante DeAntonio: Yeah. Thinking about long-term growth potential, especially immigration, if it doesn't ever come back to what it was before, as natural population growth keeps slowing, which almost certainly will, immigration would be a bigger and bigger piece of potential labor force growth moving forward. So it's a critical piece to watch out for, I think over the next few years.
Mark Zandi: Got it. Hey Ryan, anything you want to add to the rundown on the employment report?
Ryan Sweet: I think something that I found very encouraging is the drop in long-term unemployed. So the number of people that are unemployed for 27 weeks or longer, that fell more than 250,000 and is now lower than it was pre-pandemic. So, there's concerns about long-term scarring effects of the pandemic, unemployed, and structurally higher unemployment, doesn't seem to be coming to fruition. So I thought that was very encouraging.
Mark Zandi: Yeah. I didn't notice that. That's very interesting. Was that in the month or is that a trend that you've been observing in the date.
Ryan Sweet: Oh, it's been steadily declining, but there was a big drop in July and that put us back down lower than we were pre-pandemic. So the other thing I noticed was the number of people that were employed, but not at work because of own illness, that ticked up in July. I think that's COVID related.
Mark Zandi: Say that again?
Ryan Sweet: The number of people that are employed, but not at work because of an illness, that rose in July. Not a lot, but it ticked off and it's still elevated. So I think the pandemic is still having an effect on the labor market.
Mark Zandi: Could that be part of the labor force participation issue?
Ryan Sweet: It could be. There's some discussion that maybe long COVID is having an effect on the participation rate, which we have to dig into and see if there's any evidence of that. But there's lots of reasons why the participation rate's not going anywhere.
Mark Zandi: Yeah. Okay.
Marisa DiNatale: But that's bounced around, right? It didn't look like it was an unusual spike in July.
Ryan Sweet: The number of people out sick.
Marisa DiNatale: Yeah.
Ryan Sweet: Oh no, it wasn't unusual. I thought hopefully the trend was going to keep going down, but yeah, we're kind of bouncing back up.
Marisa DiNatale: Although if you look at the supplemental questions about COVID, the number of people who said that they were working from home because of COVID fell to the lowest it's been since the start of the pandemic and that's even with cases quite high in the US, right? I think we've talked about this before, I don't put a ton of stock in that particular question, but just directionally in the magnitude of it, the fact that it's reached a pandemic low, I think is significant just in terms of how people are coping with COVID differently now than they were maybe a year ago.
Ryan Sweet: Yeah. It's definitely less disruptive because the quarantine period has been slashed in half. But one thing I'm worried about is monkeypox because the quarantine period is two to four weeks. So if these cases really starts to increase, that could be very disruptive to the job market.
Mark Zandi: Hmm. Hey Marisa, the number of people that said they were not working because of COVID, was that the 550,000 people? Is that the number?
Marisa DiNatale: No, this is the number of... well, what I was referring to was people who said they were working from home because of the pandemic; teleworking.
Mark Zandi: Oh the teleworking.
Marisa DiNatale: And that was 11 million people or like that. It was 7% of employed.
Mark Zandi: I see. Yeah.
Marisa DiNatale: Yeah.
Mark Zandi: I think there's another COVID related statistic and the number of people saying that they're not in the labor force because of COVID is now 548, 550,000 something.
Marisa DiNatale: That's right. There's another number. Yeah. I'm not sure what it was, but you're right.
Mark Zandi: [inaudible 00:18:04]. There's still a lot of people, yeah.
Marisa DiNatale: Yeah.
Mark Zandi: So COVID's still playing a role, a meaningful role, but it's just, you're saying it's becoming less significant as we-
Marisa DiNatale: And I think it's just becoming less disruptive. I think some people are working from home, other people are kind of going about their business pretty quickly after a diagnosis. So it's a different world than we were in a year ago. If you, if you got COVID right? I think it was far more disruptive a year ago to the labor force.
Mark Zandi: So, here's how I think about it. So as you point out employment, payroll employment is now back to its pre-pandemic peak, a little bit above, 30,000k above. If not for the pandemic, I think it would be fair to say that employment would probably be about 2.5 million jobs higher than it is today. That's a 100k per month sort of on average, something like that. Of that 2.500 000k that it's called the missing, I'd say three quarters of that is... and this is kind of in my mind, I'm laying it out and like to hear what you think, but three quarters of that is related to the decline in working age population growth, relative to what it would've been because of the hit to immigration and that's largely policy and the pandemic.
And then the other fourth is still related to COVID. People not working because of COVID for some reason. Long COVID, fear of getting sick, fear of making their parents sick or their kids sick or whatever it may be. Also, little bit in there of the 2.5 million are people who are don't need two or three jobs, at least up to this point in time. They sheltered in place, saved money or they got government support, saved money and it's allowed them to be a little bit more leisurely in terms of taking a second or third job that they had needed to have before the pandemic.
So that goes to the fact that we've seen much fewer part-time jobs out there compared to full-time jobs. Does that characterization sound right to you or roughly right? Or would you have a different kind of frame? I'm throwing it out to the group if anyone's got an opinion about that. Does that sound about right? Good framework?
Dante DeAntonio: I think so.
Ryan Sweet: It does. I noted that the 55-plus crowd is the demographic that has stepped out at a higher rate and hasn't really come back in. So whether that's directly related to COVID or indirectly related to COVID because of the savings, they may have been able to build up. I'm not sure. But, I think that's a wild card, right? Will that group stay permanently out or are they going to come back in at some point>
Mark Zandi: Right.
Marisa DiNatale: Especially given what equity markets have been doing recently, right?
Mark Zandi: Mm-hmm. Well, if my frame is right, then we're never going to get all those jobs back, right? We're not going to have immigration above what it would've been otherwise for an extended period. Oh, it doesn't feel like that's unlikely. We might get the COVID related folks that have been affected by COVID back in, but that could take a long time to come back in and who knows? So, we may get part way back those 2.5 million that were down, but it doesn't feel like we're going to get most of those back.
When we look back 5, 10 years from now and graph employment and look at the level of employment, you're going to see a shift down in employment. We're not going to get all that back. It doesn't feel like, yeah. Okay. Hey Cris, I didn't ask you, anything else in the jobs report you wanted to call out? Were you as equally surprised? I don't know what your forecast was for this.
Cris deRitis: I was on the higher end, but not 500 K.
Mark Zandi: Yeah. Right.
Cris deRitis: So I was higher than consensus, but didn't expect this. So yeah, I think the report was stunning, to use one word, as well above expectations here and really, I think Marisa made the point, hard to find any real sign of weakness in any sector in the industry. Any demographic, look across education, gender, age, strong across the board. That's a hint for the statistics game. I really had to dig to find something. Yeah, I think it's a strong report. Good for households. Good for the overall economy. Not so great for my productivity forecast, right? The strength and labor market, given the weakness in GDP really points to weakening productivity growth. And I've been a-
Mark Zandi: You've been a productivity bull.
Cris deRitis: I'm a technological evangelist, so yeah, doesn't point in that direction.
Mark Zandi: Yeah. We'll come back to that. Because we've got Dante on, too, and he's the productivity skeptic.
Cris deRitis: I know.
Mark Zandi: We should talk about that a little bit. Before we go there, I do want to talk about what this means for this whole debate around, are we in recession? Have we been in recession? This feels like this-
Marisa DiNatale: Obviously not.
Mark Zandi: Obviously not, right?
Ryan Sweet: You can't even use the R word anymore.
Mark Zandi: Right.
Marisa DiNatale: And does it matter?
Ryan Sweet: It's a tiresome debate.
Marisa DiNatale: It is. I think it's a side show kind of debate. It's sort of semantics. It's like if you're a household and how are you doing? Do you have jobs? Are you getting raises? Is inflation eating into your spending, which it probably is? Right. There's a lot of households that are hurting just because of gas prices and elevated prices across the board. It probably doesn't feel great. So I just think whether or not we label anything a recession, at this point, that's not the discussion that people should be focusing on. We can't be in a recession when the unemployment rate is falling and it's 3.5% which is about as low as it's almost ever been. And we're adding half a million jobs a month. That's not a recession at all.
Mark Zandi: Yeah.
Marisa DiNatale: So then the question becomes, well, what are the things that are wrong in the economy and how can those be addressed? And that's the discussion, I think, that we should be having.
Mark Zandi: More productive. Yeah. And, that's inflation.
Marisa DiNatale: Yes.
Mark Zandi: At least the most immediate problem.
Marisa DiNatale: Yes, absolutely.
Mark Zandi: Absolutely. Yeah. Right. Okay. Dante, would you take exception? I know you like to take the other side of these kinds of arguments. You do it with me all the time.
Dante DeAntonio: I have a few reasons why I'm a little bit skeptical of how strong the jobs report was. Yeah. I think there's reasons to believe that it's pretty overstating, pretty strongly sort of how many jobs added. Maybe after the game, I'll get into a little more detail, but I think I have probably three reasons why I think maybe this doesn't tell us the whole story in terms of how strong the job market is.
Mark Zandi: So productivity might be stronger.
Dante DeAntonio: Well, I don't know there's enough with the productivity script, but certainly, I don't know that 500k is the real number this month. I think we're doing fine. The job market is fine, but yeah, I think we're certainly probably overstating the case this month in terms of how strong it really is.
Mark Zandi: Well, you teased us three reasons. Are you saying we should wait to the game before we get the three reasons? Is that-
Dante DeAntonio: Yeah, I'm going to giveaway one of my reasons if I do them all.
Mark Zandi: Oh, okay. All right. Well, we'll wait then to hear the three reasons why it's not as strong as it appears. Okay. Okay. So let's just put that to bed. We're not in recession. We have not experienced recession in the first half of the year. Just how it's not possible with falling unemployment and booming job growth, doesn't make any sense. Yeah. That would be the case. Okay. All right. So then let's go to the question you brought up a minute ago, and that is productivity. So kind of at face value, you got GDP declining, GDP fell in the first half of the year, two quarters of consecutive decline. That's the value of all the things we produced. That's output. And then jobs are booming. Hours worked are booming. So, one divided by the other, which is productivity, that feels like it says productivity is declining.
So Cris, how do you square this circle given your thinking that your productivity bull, that your technological innovation is going to drive very strong productivity growth going forward? Are you giving up on that view or what? How are you squaring this circle?
Cris deRitis: Not giving up long term, certainly. I think there's some noise in the data here first. That's always the economist explanation, right? Number one. If the data doesn't match your theory, the data must be wrong. But, I think there's some legitimacy, right? We've been talking ad nauseum about the GDP report and issues in terms of measurement, high probability things get restated. So it's probably not as dire as what those numbers suggested. But, even if first and second quarter don't change, third and fourth quarter, I think, still look pretty good.
So there could be some blips here, but if you smooth it all out, GDP probably is still in a relatively fine shape. So the other point to make is that, clearly there are business cycles, right? So productivity may not go up with a straight line. All right, there's going to be some ebbs and flows, but generally speaking, I still believe that we're remote work. All the technological innovations we've adopted over the last couple years, they are going to pay some benefits in the longer run. They might not be as strong as 2% type of growth, but still, I think we'll get reasonably higher or higher than pre pandemic levels of productivity growth going forward.
Mark Zandi: So just to frame this, and then I'm going to turn to you Dante in a second, since World War II, productivity growth, I believe non-farm business productivity growth is almost 2% per on the nose.
Cris deRitis: Right.
Mark Zandi: In the heat at the apex of the slowdown in productivity growth, back in the mid part of the last decade, 2015, 2016, kind of in the wake of the de-leveraging from the financial crisis, we were at 1%, it felt like we were at 1%, give or take, what do you think underlying productivity growth is now? Underlying meaning abstracting from the bakeries of the data, the quarter to quarter movements, even in the effects of business cycles, getting under the underlying trend, what do you think it is now?
Cris deRitis: Oh, between 1.5-2. Probably.
Mark Zandi: Okay.
Cris deRitis: Point estimate, I would say probably 1 on three-quarter.
Mark Zandi: Okay.
Cris deRitis: That's my bullishness.
Mark Zandi: And that's your forecast for this foreseeable future.
Cris deRitis: Long run, yeah.
Mark Zandi: That's where we are 1 in three quarters. Which, by the way, I think before the pandemic hit, it felt like we had seen that come up to.
Cris deRitis: We were moving in that direction, yeah.
Mark Zandi: Definitely moving in that direction. Okay. And, you think that's where we are, somewhere 1.5, 2%? If you had to pick a number which you do for forecast, 1 and three quarters percent. Okay. Which by the way, going back to wage growth, that would imply that the kind of the sustainable amount of wage growth consistent with the 2% inflation would be 3 and three quarters percent. Right? That would be 2% inflation plus 1 and three quarters percent. Obviously, there's a lot of other things going on here on the margin, but that's roughly the case. Somewhere between 3.5 and 4% on-
Cris deRitis: That's right.
Mark Zandi: Okay. And you point to remote work, I'm helping you build your case against Dante here because I can feel Dante is really going to come at us pretty hard here. But the other thing is, correct me if I'm wrong and Ryan, you probably know this data better than I, feels like businesses are investing very aggressively in labor saving technologies, the software and equipment, intellectual property. And, that probably goes to the fact that they realize that labor's going to be a problem. It's going to be a shortage because of the demographic trends we've been talking about; aging out of the boomers, immigration flows, that kind of thing. Is that right? Do I have that right? That investments's been strong.
Ryan Sweet: It's been very strong, particularly in intellectual property. I mean quarter after quarter, it's been growing very, very rapidly. That leads productivity growth by a couple of years. So we'll start to see the fruits of those investments over the next couple of years.
Mark Zandi: Oh, so you're a productivity bull as well.
Ryan Sweet: Mm-hmm. Yeah, I'm with Cris.
Mark Zandi: You're with Cris. Where are you on this, Marisa? We're trying to isolate Dante here. Don't worry, Dante, we're coming back to you in just a second. Where do you stand on this, Marisa?
Marisa DiNatale: I maybe not as optimistic as Cris and Ryan are, but I do think there's some evidence that over the past few years, we've invested quite a bit in labor saving technology. The remote work thing, I don't know that in and of itself is a huge long term boon to productivity growth. I think it's more of the other sorts of technological investments that companies have made in the last couple of years. I think the jury is still out on whether remote work by itself is productivity enhancing.
Mark Zandi: Can you see that [inaudible 00:32:35]. On that point though, and of course the jury is out, we need data points, but did you see, there was this really cool study that Nick Bloom, the Stanford professor, who's kind of been out on this issue, looking at the productivity of engineers and they had this controlled experiment within a company; folks that are working remotely and folks that are working in the office. And, for these kinds of coders or programmers, they can actually see how much line of code they're actually writing every day. And they found that the folks that are remote work actually written 8% more code than the folks that were working in the office. Did you see that study? I thought it was pretty cool.
Marisa DiNatale: That sort of doesn't surprise me in that sort of job. I wonder what that looks like economy-wide with other people who are working remotely that maybe do more collaborative work or group work or something where there's more face to face that's part of their job.
Mark Zandi: So let me ask you, has your productivity growth improved? You're remote?
Marisa DiNatale: Well, I've always been remote.
Mark Zandi: How's your productivity growth going?
Marisa DiNatale: So I would say that it's improved since the pandemic because everyone else is now remote.
Mark Zandi: Oh, okay. Well, okay.
Ryan Sweet: There you go.
Marisa DiNatale: That's been an enormous change, right? Because I've been remote for seven years, but I was sort of one person isolated who was remote and you guys were all together in an office and meetings would be very challenging because you'd all be sitting around a table together. You know how that goes? There's a lot of crosstalk. You forget that somebody's on the phone. The person on the phone has a hard time getting into the conversation. Now that everyone is remote, it's like a whole new world for me. It really is.
Mark Zandi: We were dragging you down.
Marisa DiNatale: You were dragging me down. Yeah. You really were. And now it's great because now I can have fruitful discussions and conversations with people face to face. So the fact that everyone is-
Mark Zandi: That sounds like an argument for why it could be a big deal as you hit critical mass, right? Technology improves...
Marisa DiNatale: Yeah.
Mark Zandi: So the other thing I wonder about is, as companies form, now, it doesn't feel like they're going to optimize around a cube in an office building. It feels like they're going to optimize around remote work. You go to a whole different level of potential productivity gains because you're building from ground zero around the remote work dynamic, as opposed to like us, we're kind of gerrymandering into remote work because that's not what we did, pre-pandemic.
Marisa DiNatale: Yeah. I still think it's an interesting question about the cultural sorts of transfers, the innovation, the water cooler conversations you have with people that are spontaneous, that might spark new ideas when you're in an office and you're face to face. I don't do much spontaneous Zooming of people just to chat, right. Whereas, in an office you do that sort of thing. And sometimes that generates ideas or collaborations that you might not be getting at home. These are all completely open questions. I'm not even arguing that's not happening. Maybe it is. But I think it's going to take a while until we know what the real impact of that kind of... Even if you're forming a business, right, that to me seems like something that really being in person... and you know, Mark, being in person, being able to-
Mark Zandi: I never really liked being in person with my brother. I'm just saying. Much better over Zoom. I just-
Marisa DiNatale: Because you can hang up on him.
Mark Zandi: No, I never hang up on him. He hangs up on me. Yeah. No, good point though. All good points. So Dante that's-
Cris deRitis: That's interesting. Oh.
Mark Zandi: Sorry, Cris, go ahead.
Cris deRitis: One quick point here. So I think these are all great points. I think there are some open questions here. My assumption really is just predicated on the better matching of the labor market itself. I think that alone already gives you some predictivity.-
Marisa DiNatale: That's a point, yeah.
Cris deRitis: You're tapping into a national maybe even international labor market now versus something that's more regional and that has to produce some better quality matches.
Mark Zandi: That's a great point. Yeah. Okay. Dante. So what do you think of this? I kind of sort of cut you out here, isolated you off in this whole corner over here. So fight your way out. So of course the data's on your side.
Dante DeAntonio: Yeah. So far. Before I get into my main argument, quick counterpoint to Cris's argument about better matching is, I think the jury's still out in terms of what the impact of remote work will have on turnover. Yeah. I think if more remote work leads to persistently higher levels of turnover because people find it easier to switch jobs, I think that ultimately hurts firm level productivity if you have higher rates of turnover than you had pre-pandemic. So just one small point.
I don't think that's a major factor here. In my mind, the two big competing forces here are technology sort of broadly speaking and demographics. We, Mark, you and I, worked on a paper a few years back, right. We quantified the impact of demographics, specifically aging on productivity, right? And the biggest impact of aging on productivity was in the last decade and in the next decade, right? So we're in sort of the middle of the 20 year period where the aging of the population we think has the biggest headwind against productivity growth. Right?
So I think that's my main reason why I think it's going to remain weak in the near term, right through this decade. What we've seen historically is that technological change takes a very long time to translate into much stronger productivity growth. The demographic issue is, we're already in the midst of it, right? It's happening, it's going to continue to be a headwind. So, if you're thinking about sort of estimates of productivity growth, yeah, I'm more pessimistic, I think, through this decade where I think we're probably something like 1 and a quarter percent instead of 1 and three quarters percent like Cris would say.
I still think that might settle higher long term, once the sort of baby boomer headwind moves largely passed, at the end of the decade. Maybe you settle out, 1.5% longer term. But I just think the demographic issue is a bigger factor right now and will continue to be for the next couple years, at least versus the sort of the benefit that we're getting from technological change right now.
Mark Zandi: I had forgotten about that paper. That was a classic, actually.
Dante DeAntonio: Right? You were... That's right. It's all-
Mark Zandi: Yeah. It's funny, the aging population, it has been a very significant factor weigh on productivity and we explored kind of why would that be the case? And we had two theories, one the wise man theory, which was my favorite. And that was when aging boomers like me retire, we take all this institutional knowledge with us and you millennials and other generations behind us, you're left diminished by that. And it hurts productivity growth. Turns out that's not the case, we couldn't see that at all in the data. It's more the Albatross theory. And that is, guys like me are holding guys like you back, we're the age ceiling over your ability to execute on new ideas and incorporate new technologies. And obviously that's key to productivity growth and that's what we found.
It's interesting though, my take on that study and what it means for productive growth is a little different. You're right that the aging has lowered productivity growth, but we're well beyond the peak impact of that. That felt like that was back in the late latter part of the last decade. And that, that weight on productivity growth is now diminishing over time and will be the case over the next decade and a decade from now, it basically goes away. Is that right?
Dante DeAntonio: Yeah. I think, yeah, basically started in roughly 2010. Peak maybe, roughly 2020. And it's basically like a 20 year period with the peak in the middle. So we're on the downside of that impact, I think. But I still think that impact is big enough, at least over the next couple years to outweigh the upside in productivity from pandemic related changes, I think.
Mark Zandi: I see. Well, I think you'll both take solace in the fact that our actual baseline forecast is for 1.5% productivity growth. So it reflects both your views, I think, quite well.
Dante DeAntonio: We're equally unhappy.
Mark Zandi: Pardon me?
Dante DeAntonio: We're equally unhappy.
Mark Zandi: And, that's the way as it should be, we're all unhappy. Yeah, because we don't get exactly our forecast, but it's 1.5%. Okay, good. Anything else on the productivity debate that anyone wants to bring up? No. Okay. So far, I think most of us have taken this report in a strong job gains as a glass half full kind of development. This is, how can this be bad if the economy's resilient, we're creating a lot of jobs? But let's talk about in the context of the federal reserve and monetary policy, because that goes to the future. This feels more like a glass half empty kind of report. Would you agree, Ryan, with that perspective?
Ryan Sweet: Yeah. 100%. Yeah, because look at how the bond market reacted. Good news is bad news for the bond market now because now they're expecting the fed to be very aggressive again in September and possibly even in November and December. So it's kind of, the fed wants the job market to cool off so we don't blow past full employment, which would give them even more headaches because returning to the economy to full employment, without pushing it into a recession is very difficult for the fed to pull off.
So yeah, I think the fed's looking at this... and the job market's giving them cover to continue to aggressively raise interest rates. So I think we have 50 basis points in our baseline forecast I think, depending on [inaudible 00:43:16]... for September. Depending what the CPI does next week, I think odds are pretty high that they go 75.
Mark Zandi: Oh, really?
Ryan Sweet: Yeah. They're going to keep pushing hard because they want to get inflation down and I'm just afraid they're going to overdo it.
Mark Zandi: Huh. Okay. Well, I think their number one priority is inflation. So we get a, as you say, consumer price index report, CPI report for the month of July next Wednesday. And of course, the June CPI report was a disaster, big increases. Of course, oil, gasoline prices peaked back in June. And we had 9.1%, I believe year-over-year CPI inflation of a 40 year high. Can you give us a sense... I know this is early and you have a lot of work to do to give you... and you're really good at this, to give us a sense of CPI, but can you give us an advanced preview? Because gasoline prices have come way in, diesel prices have come down, jet fuel prices have come down, the whole energy price structures come in between June and July. We should get, I think, a much better number, but what do you think? What is CPI looking like for-
Ryan Sweet: Gasoline alone. So the CPI for gasoline should shave 0.5 off month-over-month growth in the CPI. So we're looking at a very small increase. Right now, I have 0.2.
Mark Zandi: Oh, okay.
Ryan Sweet: Increase month-over-month for the headline CPI. What I think is going to be interesting is the core CPIs going to come in hot. So that core CPI excludes food and energy. And that should be up 0.5 to 0.6 right now. So, that's what the red's going to cling to.
Mark Zandi: Why do you say that? What are you looking at, that would give you that kind of a number, 0.5, 0.6 on core CPI?
Ryan Sweet: Oh, if you look at apparel prices, if you look at new and used car prices, all these prices are going to continue to increase. There's no indication that used car prices are coming down. I mean, caveat-
Mark Zandi: Shelter. Wait, on the used car prices, they are coming down. They're just, you're saying not in the... if you look at the auction prices of used cars, that's based on our data, we look at the auction price of vehicles, that's definitely coming down, right?
Ryan Sweet: That's not what the BLS uses though.
Mark Zandi: Okay. That's what you're saying, you're saying the BLS-
Ryan Sweet: [inaudible 00:45:34] at transaction prices.
Mark Zandi: I've been waiting for used car prices to really roll over here in the CPA. And you're saying not in the month of July,
Ryan Sweet: Not in July, but it's coming.
Mark Zandi: It's coming. Okay. All right.
Ryan Sweet: Yeah. So I just think July's going to be with regards to core, to Cris's point, rent, it's not going to peak until later this summer. So that's going to juice the core CPI as well.
Mark Zandi: Ooh. Okay.
Marisa DiNatale: Why do you think it'll peak later this summer?
Ryan Sweet: Just giving the lags between market rents and when they feed into the BLS measure of owners equivalent and rent or tenants rent. It's about a year, 18 months. So that's coincides with late summer early fall when growth should peak,
Mark Zandi: Are you asking why it's going to peak at all? Marisa, is that what you're asking?
Marisa DiNatale: Yeah, I wasn't thinking of the OER component, I was more thinking of tenants rent. And, why would that peak in a couple months? I could see why OER would peak at some point.
Mark Zandi: Owner's equivalent, right?
Marisa DiNatale: Yeah.
Mark Zandi: Well, I think the market rents have on a year-over-year sequential, month-to-month and on a year-over-year basis have peaked. I think they peaked a while ago, like six months ago or so. They're still very high. I think it's still double digit, but I think it's kind of rolled over, but not [inaudible 00:46:56]. Anyway. Okay
Ryan Sweet: There's been a lot of multi-family construction over the past year or so.
Mark Zandi: There has. Yeah. And a lot coming because there's a lot in the pipeline.
Ryan Sweet: The pipeline. Yep.
Mark Zandi: So you're expecting that to take an edge off of rent growth here towards the end of the year going into next, but still your point is, in July, we got a big increase in CPI shelter.
Ryan Sweet: Correct.
Mark Zandi: And core is going to be hot. Core was up 0.5, I think, in June, right? And you're saying we're going to get another 0.5 in July.
Ryan Sweet: Because a lot of the prices that were up in July for the core CPI are sticky and they don't really mean revert very quickly.
Mark Zandi: Right. Okay. What about food prices? Any sense of that? Everything seems to suggest that should be down to, or at least-
Ryan Sweet: Yeah, for month-over-month, they've been rising around 1%. They've been just pretty steady, but commodity prices have come down a lot.
Mark Zandi: Right.
Ryan Sweet: With diesel prices coming down, that should help take some heat off food prices as well.
Mark Zandi: Because, over half the cost of food is just getting it from the farm to the store shelf.
Ryan Sweet: Correct.
Mark Zandi: Yeah. Okay. All right. So what you're saying is this, given the strong jobs numbers, which are obviously too strong for the fed's taste, lower unemployment, that's the wrong direction in the fed's view, which should be moving north. Obviously the prism is inflation and they want it cool off wage and price pressures. And you're saying the CPI report, it'll look good top line, but underneath the hood, the core is going to give them some ajada. Is that a word, ajada? It is a word. Okay. Ajada. Okay.
Marisa DiNatale: Talking to three Italians here.
Mark Zandi: Yeah. Oh, you all know ajada. Your mom would say you're giving me ajada.
Ryan Sweet: We all have it.
Mark Zandi: We all have ajada. Okay. And we have three Italians. I didn't even think of that. We got deRitis, DeAntonio. Oh my gosh. DiNatale. It just dawned on me. You guys knew you guys were-
Ryan Sweet: The three Ds.
Mark Zandi: The three D's. Oh, wow. Cool. Very cool. And then we got one Irish dude. You're Irish, aren't you, Ryan?
Ryan Sweet: No. Scottish.
Mark Zandi: Oh, same difference, Scottish. No. Okay. Very good. That's so cool. Where were we? Oh, what's the market say, Ryan, about the fed in September? Are they now pricing in 75 basis points?
Ryan Sweet: So before the employment report, it was a 60% probability of a 75 basis point rate hike. Now last time I checked, it was close to 70%.
Mark Zandi: Ooh, boy.
Ryan Sweet: And that will go up after the CPI next week.
Mark Zandi: All right. Okay. All right. We have not changed our forecast yet though. We're still at 50. We're going to see-
Ryan Sweet: Yeah. We need to see the CPI.
Mark Zandi: We need to see the CPI. Okay. All right. Okay. Very good.
Cris deRitis: September 21st is long way, away still.
Ryan Sweet: Yeah. A lot can happen in between.
Mark Zandi: Yeah. A lot can happen. A lot can happen.
Ryan Sweet: Not just the CPI report.
Mark Zandi: A lot can happen. Yeah. And, as to Dante's point, I don't think underlying job growth is 500k plus. I don't think it is. I think it's definitely south of that. Probably half that. And if that's right, then that'll shine through here before the fed meeting in September. But anyway.
Ryan Sweet: I don't want to steal Dante's numbers, but the seasonal adjustment factor is pretty favorable in July, particularly for state and local government education. So usually that falls by a million. It didn't fall anywhere close to that. Same thing with leisure and hospitality.
Mark Zandi: Oh, you're saying the seasonal's flattered this 500k game.
Ryan Sweet: A little bit. Yeah.
Mark Zandi: And so, the seasonals are not going to do so in August and... well, August will be the key report for the FOMC.
Ryan Sweet: Remember, August always comes in-
Mark Zandi: Oh yeah. August. Oh yeah. We always get wacko-
Ryan Sweet: Yep. Wacko taxes and a weak August employment report.
Mark Zandi: Always weak in August. Yeah. Okay. And, our thesis, was that because of the response rate to these surveys by businesses and households. Or businesses-
Ryan Sweet: The response rate in July was the lowest since 2010. They just been consistently really low this year.
Mark Zandi: Wow. That is interesting.
Ryan Sweet: We'll see when we get the annual benchmark revisions.
Mark Zandi: Yeah. Okay. Let's play the game. The statistics game, as you recall, people get annoyed at me for repeating the rules because we need to because we have folks on the podcast that do not play by the rules unless you articulate them every single time. And the rules are, each of us gives a statistic. The rest of us try to figure out that statistic through a questioning and deductive reasoning and clues. The best statistic is one that's not so easy that we all get it quickly. We don't want that's too hard, that we never get it. And it needs to be, or should be... except I can break this rule every once in a while, but should be the case that it's this last week or so, or relevant to the topic at hand, which is obviously the labor market.
Okay. With that, I think we should go with Dante first. Because I really want to know what these three reasons are. So let's go back to Dante. Dante, what's your statistic of the week?
Dante DeAntonio: 349,000.
Cris deRitis: Oh, I know what that is.
Ryan Sweet: Oh, is it negatives?
Dante DeAntonio: No, not negative.
Ryan Sweet: Oh, okay.
Mark Zandi: Oh, so you don't know what it is?
Ryan Sweet: No. Nevermind. I thought it had to be negative.
Mark Zandi: What's negative 349?
Ryan Sweet: That was the change in non season adjusted employment in July.
Mark Zandi: Oh, this is the-
Ryan Sweet: No, that's the number, obviously, negative 300-something thousand was the change in non season adjusted employment in July.
Mark Zandi: Hold it. Hold on. So what? In July, not seasonally adjusted employment fell 349,000?
Ryan Sweet: Mm-hmm. Usually, it falls a lot more.
Mark Zandi: Oh, because of schools. Oh, I see. Yeah, that's right. Yeah. Right. Schools let out. Okay. Got it.
Ryan Sweet: Cris deRitis-
Cris deRitis: Yeah. This is the difference between the payroll and the household survey.
Dante DeAntonio: Should have went with the harder version, the averaged. Yeah. That the difference between the status and survey and household survey employment.
Cris deRitis: Average of 350, right?
Mark Zandi: Well-
Dante DeAntonio: Yeah. So over the last-
Mark Zandi: Oh wait, well, Cris, how did you know that? That's a weird statistic to know. Huh?
Ryan Sweet: That's collusion.
Cris deRitis: We were-
Mark Zandi: It's called collusion?
Cris deRitis: We were preparing for a webinar this week and I pulled this up.
Mark Zandi: Oh, that's right-
Cris deRitis: So I looked it up. I was thinking of it as a statistic, but-
Mark Zandi: Oh, you had a chart with payroll versus household employment, right?
Cris deRitis: Yeah.
Mark Zandi: Okay. So Dante why'd you pick that?
Dante DeAntonio: So the number I really wanted to use over the last four months, the average change in household employment is negative 42,000. Right? So it's down on average over the last four months. The gap between payroll employment and household employment is big over the last four months. And I'm not a big proponent of household survey employment, no offense to Marisa's former career.
Mark Zandi: No, that's exactly what you... You definitely dissing, Marisa.
Marisa DiNatale: None taken. No offense.
Mark Zandi: What you talking about? I'm not dissing, Marisa.
Marisa DiNatale: Exactly.
Dante DeAntonio: Over 1, 2, 3 months, we see these gaps form all the time and usually they revert back, but now we're getting to that point where it's starting to look like maybe it's something where at four months where you've got payroll survey employment over 400,000 average over the last four months, and you've got household survey employment, which is negative over the last four months, certainly makes me think that there's some weakness there in the payroll survey that we're not seeing.
Again, over the next couple months that could flip and everything could look fine over the course of the year, but it's getting to that sort of time horizon where I start to think about it a little bit more in terms of a potential issue.
Mark Zandi: That was one of your reasons for thinking the job numbers, the report isn't quite as strong as it appears. I look at household employment, which is the survey of households that's been showing much weaker, even declines in employment in recent months compared to this booming gains in the payroll survey.
Dante DeAntonio: Right. And Ryan, I'm assuming Ryan's going to tell me, I should look at the adjusted concept for household employment, which-
Ryan Sweet: That was up 610,000.
Dante DeAntonio: Is better right this month. But the average over the last four months is still much weaker. It's only 180k average over the last four months. So it's still less than half the payroll.
Mark Zandi: You got to love the comradery here. Dante knew exactly where Ryan was going to go after a month. He immediately knew. Even before Ryan said anything, he knew.
Ryan Sweet: Couldn't get the number out.
Dante DeAntonio: Yeah. I knew you were coming. I knew you were going to come at me with it. Yeah. This month it was strong. But yeah, over the last four, it's still much weaker. Even if you adjust-
Mark Zandi: This is a tight group, this is really a tight group. We can read each other's minds. He knew. He had to get it out quick because he knew Ryan was going to bounce on him.
Dante DeAntonio: Yeah. I could see him just waiting to throw that in my face.
Mark Zandi: Coiled spring over there. Yeah. Very cool.
Dante DeAntonio: So, that was the one reason. Ryan touched on the other two reasons, right? The response rate is still historically low and 2022 on average is looking like it's going to be terrible. 2021 had set a record for low response rates. 2022 is trending even lower than that in terms of average response rates on the first print estimates. And then, the seasonals are-
Mark Zandi: Can you explain that just for the listener out there? These are surveys. Surveys of businesses, surveys of households. And of course it's not compulsory. It's not like you have to fill it out from the Bureau of Labor Statistics. And you're saying that the percent of businesses that are responding to the BLS survey is way down compared to historical norms.
Dante DeAntonio: Right. I think this was the weakest July since 2008. And, even if you look on average across the whole year, response rates have been down. In 2021 and even further down in 2022, they're the weakest in 15 years, probably.
Mark Zandi: What's going on, do you think? Why?
Dante DeAntonio: Some of it is survey fatigue. I feel like over the last years there's been just an increased number of surveys in general. And I think some of it is just exhaustion of filling out surveys and more important things to do in terms of business finances and business prospects than answering a survey about employment.
Mark Zandi: I got fatigue, definitely got fatigue.
Dante DeAntonio: Yeah.
Mark Zandi: I filled out so many surveys, many Moody surveys.
Marisa DiNatale: Although much of this is automated now. It's pretty rare that someone at a company is filling out a survey. Most of the payroll survey is an automated kind of thing. Maybe it's the working from home thing, maybe with all-
Mark Zandi: Productivity is going down, to Marisa's point.
Marisa DiNatale: There's disruption in the way business has been transacted, right, over the past and things have happened over the past couple years. So maybe it's that, maybe it's business formations. Well, we get the benchmark preliminary next month, right? So we'll find out if this response rate issue, how big of an issue it's been.
Mark Zandi: That's when the BLS benchmarks the survey based information to the actual counts of employment based on unemployment-
Marisa DiNatale: Trends, yeah.
Mark Zandi: Yeah. So we'll get a full view of what's going on in the labor market. This is their initial-
Marisa DiNatale: It's a preliminary, yeah.
Mark Zandi: They don't actually incorporate it until January, I believe.
Marisa DiNatale: Right.
Ryan Sweet: Usually the preliminary is very close to the final.
Marisa DiNatale: Yeah.
Mark Zandi: Yeah. I'm curious. So that's two. What's the third reason that-
Dante DeAntonio: The third was seasonal adjustment, which Ryan touched on. For July, it's the big factor, right, outside of January, July has the biggest seasonal adjustment factor of any other month. Pre-pandemic, that adjustment was about 1.2 million on average, up. So July employment unadjusted is typically way down. Seasonal adjustment was lifted by about 1.2 million. Pre-pandemic, in 2020 and 2021, that got cut to about 750 K. And this year, in 2022, that bounced back up over 900,000, the adjustments. So, if the adjustment had stayed where it was the last two years, this number would've been in line with the average over the last two amounts, it would've been sub 400,000.
But, the seasonal adjustment bounced back up by 150 K. So that's providing some support. I think it's hard to know what is the right number, right? Is the seasonal adjustment, should it be more like 2020, 2021? Or should we be moving backwards 2018, 2019? I don't know what the right answer is, but I think it adds uncertainty to that number.
Mark Zandi: Yeah. Okay. Well, that's pretty convincing. So you're saying strong report, but probably there's less there than meets the eye.
Dante DeAntonio: Yeah. It's certainly not a negative in any way, I think.
Mark Zandi: No, right.
Dante DeAntonio: I think it's probably more like trend growth over the last three months than it is any sort of acceleration in job growth.
Mark Zandi: Yeah. Yeah. I think if you take a three month moving average, the monthly job gain is for... I hope this isn't anyone to statistic, I think it's 430, 435, something like that. Yeah. That's still strong over a 100 K, but okay. Okay. Very good. Cris deserves plaudits, not a cowbell because he nailed that pretty quickly. He's so modest, you didn't even... If I had done that, you would've definitely known that I had done that.
Marisa DiNatale: Where is the cowbell?
Ryan Sweet: Cris, do you have one?
Mark Zandi: We all have cowbells. Can I use my cowbell?
Marisa DiNatale: But yet no one gave Cris a ring.
Cris deRitis: Well, it happened last week too, Marisa.
Marisa DiNatale: I heard.
Mark Zandi: [inaudible 01:01:22]. Didn't happen. You're right, you got it last week, too. Yeah. Okay. Marisa, you're up. Let's go to you.
Marisa DiNatale: Okay. 6.7%.
Mark Zandi: Is that U-6?
Marisa DiNatale: You got it.
Mark Zandi: Oh, okay. Wait. That is a cowbell.
Marisa DiNatale: Oh, so now it's a cowbell.
Ryan Sweet: Look at the excitement on his face. Almost jumped out of his chair.
Mark Zandi: I love the game. I love it when I-
Cris deRitis: Oh, I love this game.
Mark Zandi: Yeah.
Marisa DiNatale: Yeah. I know that was-
Mark Zandi: Ryan, were you impressed?
Ryan Sweet: I was impressed. I was impressed.
Mark Zandi: He was impressed. Impressed. Okay. U-6. What's U-6?
Marisa DiNatale: Obviously it was pretty easy, but I picked it because-
Mark Zandi: Oh, geez. Fair enough.
Marisa DiNatale: U-6 is the broadest measure from the household survey that we have of labor under utilization. So it includes the traditional unemployment rate. It includes all the people that are counted as officially unemployed, but it also counts people that are working part-time for economic reasons, which means they don't want to be working part-time but they have to either, because that's all they can find or because they're employer cut their hours. And it also includes people that are marginally attached to the labor force, which means they're not working and they haven't looked for work in the past four weeks, but they looked sometime in the past year.
And, that includes people that are not looking for work for variety of reasons. That could be people that are discouraged over job prospects. It could be people that are sick or have to take care of a family member. So it's kind of the biggest, the most encompassing metric of labor market under utilization. And I picked it because 6.7% in July is the lowest that, that has been since December of 1969.
Mark Zandi: Oh really?
Marisa DiNatale: Yeah.
Mark Zandi: That's interesting. Oh, okay. Wow. So unemployment 3.5 is back to pre-pandemic. 6.7 is the lowest-
Marisa DiNatale: Is even lower than that. Yeah. When you add in all those other groups.
Mark Zandi: That's very cool.
Ryan Sweet: Yeah. Well, 3.5 is still among the lowest in 15 years.
Marisa DiNatale: Yeah. It's close, right? 6.7%. It's been like 6.8% or something before, but yeah, but it is the lowest since 1969.
Mark Zandi: That's another one of those glass half full, glass half empty kind of things. I'm going, that sounds great. Then they go, oh my gosh.
Marisa DiNatale: Yeah. Well, I kind of had the question, Ryan, when we were talking about the fed and obviously the fed is keyed in on inflation, but in terms of how they're measuring, what full employment is, can you talk a little bit about what you think they're looking at? Because if we're saying that we don't think the participation rate is going to get back to where it was, right, because of demographics, then how are they measuring what full employment is?
Mark Zandi: Well, Ryan's got his favorite one. What's that?
Marisa DiNatale: The prime age.
Mark Zandi: Yeah.
Marisa DiNatale: Prime age to pop.
Mark Zandi: Employment to population ratio. And that is 25 to 50. What was it?
Ryan Sweet: 80%.
Mark Zandi: It was on the nose. Yeah.
Ryan Sweet: From 79.8% in June.
Mark Zandi: But 80%, that's a reasonable, full employment. It's not above full employment. It's not below full employment. It feels like that's exactly on full employment, right?
Ryan Sweet: Yep.
Mark Zandi: Yeah. So you look at that and you don't go into high alert. The economy's overheating.
Ryan Sweet: No, [inaudible 01:05:10].
Mark Zandi: Yeah. But it feels like it's been hovering around 80%., the employment to population ratio, for six months now or something.
Cris deRitis: Yeah, you're right.
Mark Zandi: Yeah. Okay. But 6.7, that's really interesting. That's really interesting. Yeah. Very good. Okay, Cris, you're up?
Cris deRitis: All right. I'll reverse Marisa's, 7.6 million.
Mark Zandi: Why is that a reverse?
Cris deRitis: Oh, she was 6.7. This is 7.6.
Mark Zandi: Oh, okay. Did anyone else [inaudible 01:05:44]-
Cris deRitis: My words. 7.6 million, 4.8% is related to that, to give you-
Ryan Sweet: This is coming from the jolts?
Cris deRitis: Nope. Came out today.
Mark Zandi: 7.6 million. And what was the percentage?
Cris deRitis: 4.8%.
Mark Zandi: 4.8%.
Ryan Sweet: Is this one of the blemishes you had to find?
Cris deRitis: I had to dig.
Mark Zandi: Yeah. Was this in the household survey? What's that, Dante?
Dante DeAntonio: Deep down in the demographic cuts of the household survey, is that where we are here?
Cris deRitis: It's in the household survey. Yes.
Ryan Sweet: Is that a deal to do with teenagers?
Cris deRitis: Nope.
Mark Zandi: And this is a blemish. This is something-
Cris deRitis: Well, it's-
Mark Zandi: Sort of a blemish.
Cris deRitis: Kind of, sort of, it's not a-
Mark Zandi: Yeah. Big deal.
Cris deRitis: Big deal or a detractor if you will, but put some color on the payroll survey.
Marisa DiNatale: Oh, on the payroll survey.
Cris deRitis: Well, but it's from the household survey, but this figure-
Mark Zandi: Is it part-time, full-time kind of thing?
Cris deRitis: No, you're getting closer though.
Ryan Sweet: Working for economic reasons?
Cris deRitis: No, you're getting farther.
Marisa DiNatale: Oh, I know what it is.
Cris deRitis: You got it?
Marisa DiNatale: Multiple job [inaudible 01:06:56]-
Cris deRitis: You got it. Oh, good job.
Mark Zandi: Very good.
Cris deRitis: That is definitely cowbell worthy.
Mark Zandi: Cowbell worth.
Cris deRitis: That was a tough one.
Mark Zandi: Yeah. Cowbell worthy.
Marisa DiNatale: Why'd you pick that?
Cris deRitis: What's that?
Marisa DiNatale: So why did you pick that?
Cris deRitis: Yeah, so it's up. So 7.6 million people have multiple jobs versus 7.5 last month. So about a 100 K. Right? So it's increasing. It is still below what it was prior to the pandemic. Right? So people are taking more jobs, right? Individuals are taking more jobs, but it's not quite at the level either in number or percentage terms as we had pre-pandemic. So do expect this to continue given all that demand that's out there. And if finances are tight, especially for folks at the lower end of the distribution, you can expect them to be picking up more jobs. So again, puts a little spin on the payroll number, which of course counts the jobs versus households which are counting people.
Mark Zandi: Right. Good one. That was a good one. Yeah. Good job, Marissa. Okay. And Ryan, you're up.
Ryan Sweet: 206,000.
Mark Zandi: 206,000. Was that in today's jobs report?
Ryan Sweet: No comment. If I answer that question, you'll get it.
Mark Zandi: Really? That seemed like a pretty innocuous question.
Ryan Sweet: No, it wasn't-
Mark Zandi: Because if answer is no, therefore-
Ryan Sweet: The answer is no.
Mark Zandi: The answer is no. Is that something related to UI claims?
Ryan Sweet: It is.
Cris deRitis: How?
Mark Zandi: Is that seasonally unadjusted-
Ryan Sweet: Dante got it.
Mark Zandi: Oh, what do you mean Dante got that?
Ryan Sweet: He beat you.
Mark Zandi: He did? I didn't hear him.
Ryan Sweet: This one's for you, Dante.
Mark Zandi: Oh, geez.
Cris deRitis: I didn't hear him.
Marisa DiNatale: You didn't hear him because you were talking.
Mark Zandi: My normal state of affairs action. Yeah. Okay. Actually, this is really important. I forgot to bring it up, but go ahead, fire away, this is really interesting.
Ryan Sweet: So initial claims, which counts the people filing for unemployment insurance benefits have been ticking up on a seasonally adjusted basis throughout July. And I think there were close to 260,000 last week, but July you have auto retooling. So I thought, all right, maybe the timing of when they normally switch over models is thrown off UI claims. But when you look at UI benefits, unadjusted for seasonal fluctuations, they're moving sideways. So they're exactly where they were during the June payroll reference period. So that increase kind of factored into the forecast for weaker job growth. But if I had looked at this sooner, I would realize that UI benefits really hadn't ticked up. And in today's employment data, you can look at the labor force flows. And the number of people going from employed to unemployed did not increase. So, the increase in UI benefits is a little bit misleading or very misleading.
Mark Zandi: Really interesting. So we've been looking at the seasoning adjusted weekly unemployment insurance claims, which we focus on because that's a kind of a real time indicator of what's going on. That had been trending up. We were down close to couple 100,000 in the spring. Last week, it hit 260. That is kind of at the high end of the range you feel comfortable with. Anything above that, you start saying, oh, the job market's really going to start to slow here. But, you're saying, if you look at the seasonally unadjusted UI claims, no real increase. Did you mention Massachusetts? Did you mention-
Ryan Sweet: No, I didn't. Something courty going on in Massachusetts because you saw a big spike in initial claims in July or the first half of July, they come back down a little bit, but there's still very elevated relative to where they were in June. So I'm not quite sure, there's been a few strikes in Massachusetts and people that are on strike can't receive UI benefits, but it doesn't stop them from filing. Or, there's the Massachusetts unemployment insurance fund is kind of running dry. They paid out billions during the pandemic. So I don't know if that... Marisa and I were talking about this. I don't think this is a factor, but I don't know. Maybe people rushed out to try to file before.
Mark Zandi: Oh, interesting.
Ryan Sweet: I don't know. I don't have an explanation for what's going on in Massachusetts.
Mark Zandi: Right. I think if you take total US nationwide UI claims, subtract Massachusetts seasonally unadjusted, I think we're actually at a new low on claims from unemployment insurance.
Ryan Sweet: Yep. So one state is throwing off a lot of the big.
Mark Zandi: Your conclusion is, there's been no pickup in layoffs and layoffs are very low by any [inaudible 01:11:28]. That kind of counter to Dante's reason for it to be weaker, the labor market's booming. Yeah.
Ryan Sweet: Mm-hmm.
Mark Zandi: Hmm.
Ryan Sweet: I focus on UI, especially at turning points, when UI benefits start going up, that means the umpire is going to start going up and then you get that vicious cycle that kicks in.
Mark Zandi: Yeah. Very interesting. Very interesting. Okay. I'm going to give you mine.
Ryan Sweet: Yep.
Mark Zandi: And, this will be a segue into the last part of the conversation. $4 and 11 cents.
Ryan Sweet: Is that copper?
Mark Zandi: No, copper's $4.35.
Marisa DiNatale: Average national gas price.
Mark Zandi: Way to go, Marisa.
Ryan Sweet: Wow. Marisa's on fire.
Mark Zandi: She's on fire, baby. Putting us all to shame. She's making up for that-
Marisa DiNatale: Making up for my lack of-
Mark Zandi: Participation rate.
Marisa DiNatale: Yeah. The employment report.
Mark Zandi: Yeah. That's very good. Yeah, $4.11 cents, that's AAA. Yeah, as of yesterday, I believe. The all-time peak was $5 a gallon on the nose and that was mid-June. So we're almost down a full buck. And just as a kind of point of reference, I think in a kind of a well functioning economy with oil prices at equilibrium, which we put at 75 bucks a barrel, something like 70, 75 bucks a barrel, gas should be going for 3 and a quarter, $3.50. So, we're on the high side of where it should be, but that's the big deal, that's coming in very fast.
And just to give a sense of how important, remember going back to the consumer price index, CPI inflation is 9.1. Of that, 3.5 percentage points is directly related to these higher energy prices. And of course, that doesn't account for the indirect effects, the diesel prices on food that we talked about or jet fuel on airline tickets, that kind of thing. So this is a big deal in terms of overall inflation. And we all know that gasoline plays an outsized role in kind of the collective psyche, how people kind of view the world; inflation expectations and how they think about their own financial fortunes.
So this decline in gas price and oil price is a big deal. Hey Ryan, one quick question, you look at wholesale prices to guide where retail prices are going to be in a couple weeks. What are wholesale prices saying?
Ryan Sweet: That the price that you and I are paying, will get close to $4 per gallon in the next couple weeks.
Mark Zandi: Okay. Okay, good. Here's the other thing I find fascinating, there's this old adage that gasoline prices rise like a rocket and fall like a feather. So when oil prices go up, oil companies jack up gas prices very quickly. When oil prices come back down, they don't bring down gas prices as quickly. That does not seem to be the case here. They're falling fast, right?
Ryan Sweet: Yeah, very quickly.
Mark Zandi: Yeah. They've come down as fast as they went up. Yeah. Which is interesting. Okay. And this is, I think, a good segue to the last part of the conversation and that's, well, what does it all mean for the economy and recession risks and odds and recession, that kind of thing? Now, let me preface this conversation this way, I'm so confused because every thing I've been looking at over the past week, really over the past month, six weeks makes me feel better about the economy. Today's jobs numbers make me feel, boy, the labor market's very resilient. Businesses may look through the business cycle and keep on hiring. We'll see slowing, but they're not going to cave here because they know that they've got a big problem filling those unfilled positions in the long run.
I mentioned gasoline prices, stock prices. Stock prices, they were down 25% at one point or pretty close, I think. From the peak back 4, 6, 8 weeks ago, we're now down 15 to 20%, which is down but off this incredibly high level. And doesn't feel consistent with the idea that we're going to recession. I look at the ISM surveys for the month of July. They were good. Actually, the ISM surveys is non-manufacturing. That actually rose during the month.
I look at all that and I go, wow, it feels like the economy's doing pretty well. But here's the thing that I get confused at, the fly in the ointment, the thing that is a stick in my side, any other ways of describing how I feel... you get my point is that yield curve, the difference between 2 year, 10 year treasure yields, that is a very [inaudible 01:16:20] leading indicator, it gets it right. That is sometimes [inaudible 01:16:25]. It's negative. What is it negative now?
Ryan Sweet: Minus 40 basis points this morning.
Mark Zandi: 40 base, 0.4%. That's a hard inversion. There's no ambiguity around that. And it's been inverted now for more than a month. So, that would signal recession. Okay. Are you as confused as I am and how are you resolving that in your own mind and where are you landing? I'll go around the circle, get people a sense of how they're thinking about the economy, recession risk. Give me your odds of recession in the next 12 months, 24 months. And then I'll give you mine. So does that sound like a reasonable way to attend the conversation? Okay. We'll begin where we started with Marisa. How are you thinking about things?
Marisa DiNatale: Did we start with me? I don't know. I thought we started with Dante. Well, anyway. Okay.
Mark Zandi: No, hold it. Didn't you give the rundown.
Marisa DiNatale: Oh, you mean back then? Okay. Yeah. I thought you meant the game.
Mark Zandi: Oh, the game.
Marisa DiNatale: Seems like an eternity ago.
Mark Zandi: Yeah. You want to forget the beginning, that's the issue.
Marisa DiNatale: I do want to forget it. Weirdly, I feel a little more optimistic than I did maybe even a month ago before the Q2 GDP came out. The job market looks better. Those ISM surveys looked a little better. Things seemed a little better than we were expecting. The yield curve, yeah, it's not really wrong, right? So I'm kind of at 50% over the next year, year and a half, I think.
Mark Zandi: Okay. Even odds.
Marisa DiNatale: Yeah.
Mark Zandi: Yeah. Okay. That makes sense. Any other statistics that sway you're thinking one way or the other that I did not mention.
Marisa DiNatale: So not really big national statistics. One thing I have been looking at is just household spending and credit, right? It looks like credit markets are tightening up a little bit. They're still pretty loose though. The Census Bureau Pulse survey, which we'd mentioned a few times on the podcast, one thing that's concerning, and this just goes back to inflation is, they ask people if they're having trouble making ends meet. If they're having trouble just meeting their monthly household obligations, that was 40% of households said they're having trouble making ends meet at the end of July here. And that's the highest it's been since they started taking the survey when the pandemic started. And it was a year ago, it was 27% said they were having trouble just meeting obligations. And now it's 40. So I think inflation is really the problem here. So if we're assuming that this is peaking and it's going to be better from here on out then, that also makes me feel a bit better about the prospects of the economy.
Mark Zandi: Okay. Dante, what are you saying about things?
Dante DeAntonio: I'm at 50/50, too. If you could engineer what you'd want to happen with the labor market, maybe we want things to slow a little bit more quickly, but layoffs don't look like they're really elevated in any meaningful way. And at the same time, job openings have come down by over a million in the last three months, which is exactly what the fed wanted to happen, right? They want some of the froth to come out of the labor market. Some of those openings to go away, to take some of the heat off of wage and price pressure without layoffs inching up, right? Which is what we've seen happen now over the last few months.
And so the question is, will that continue? And, it feels like we're in a better place for that to continue happening over the next couple of months than we maybe were given the strength of the jobs report. So, if we can continue to see openings come in without UI claims or any other measure of field layoffs, starting to inch higher, I think that's where we want to be.
Mark Zandi: So you can see a path forward that does not include recession, but obviously it's a narrow path.
Dante DeAntonio: Yeah. It's a narrow path, but I think, right, we need to see openings continue to come down. We need to see labor demand pull back a little without layoffs flying higher. Yeah.
Mark Zandi: Right. Okay. Cris, where are you?
Cris deRitis: I'm still at 60%.
Mark Zandi: 60.
Cris deRitis: I haven't really budged there.
Mark Zandi: Especially odds over the next year.
Cris deRitis: Over the next year. I think we're in a good news is bad news situation.
Mark Zandi: Yeah.
Cris deRitis: Fed is operating with a lag and I think they're going to overdo it, overshoot it here. And with higher probability that we go into recession, I am also looking at confidence, right. Consumer confidence remains quite low. Maybe it turns around with gas prices. But I worry that's going to wear on spending and the outlook overall and housing, right? Housing slowing. I'm not seeing that picking up substantially anytime soon, I don't think that's going to be a drag on activity's-
Mark Zandi: Right. That's by design, right?
Cris deRitis: It is a weight. Yeah. It is a weight though. You put that on top of these other factors and the recession probably goes up.
Mark Zandi: Yeah. Okay. And how much weight do you put on the yield curve inversion?
Cris deRitis: A lot.
Mark Zandi: A lot.
Cris deRitis: So the 40 basis points, 10 too. That's definitely why I'm over 50. If the 10 year, 3 month were to invert, it hasn't yet, but it's narrowing, then I'm going higher. That's really, for me, very precious.
Ryan Sweet: That's going to invert in September.
Mark Zandi: If they go 50 basis points, it'll be close, right?
Ryan Sweet: Yeah. But if they go 75?
Mark Zandi: If they go 75, yeah.
Ryan Sweet: They're going to invert it.
Mark Zandi: But as we said, there's a lot of ground to cover between now and then.
Cris deRitis: Now and then. Yep.
Mark Zandi: Yeah. Okay. All right. So Ryan, where are you?
Ryan Sweet: I'm still at 65. Okay. And it's because I'm with Cris, I think the fed's, they're going to kill something. They're going to kill inflation or they're going to kill the economy. And I think they're going too aggressive. They're behind the curve. So they're trying to make up for lost ground. So if it goes 75 in September, I think that's going to be too much.
Mark Zandi: Right. And, how much weight do you put on the yield curve?
Ryan Sweet: Zero. Because, the yield curve is basically saying the same thing. They're saying that the fed's going to overdo it and they're going to have to have to start cutting interest rates sometime next year. Fed funds futures are already pricing in rate cuts in late 2023.
Mark Zandi: Right. But that sounds like you're putting some weight. You're saying that the yield curve was saying something completely... If it was positive 40 basis points, that would not change your odds at all.
Ryan Sweet: No.
Mark Zandi: The yield curve is not playing a role in your thinking.
Ryan Sweet: I'm a skeptic of the yield curve.
Cris deRitis: Just a coincidence.
Mark Zandi: Oh yeah.
Ryan Sweet: You're on record. You said we had a hard inversion. So if we don't have a recession, if we avoid a recession, does that put less weight? Are you going to be less of a yield curve?
Mark Zandi: I have to be by definition, right?
Ryan Sweet: Just saying.
Mark Zandi: Yeah, no, by definition. Well, I'm at 50% too, even odds. Because, I can't give them these countervailing things. It's hard to come land one side or the other on this. My thinking is maybe evolving here. My sense had been that if we're going to go into recession, it would be a near term recession. Sentiment is really bad now. And if something doesn't stick to script, we go in, people lose faith. We go into recession, businesses cut back. They lay off, we go into recession. But, maybe the recession is not near term. Maybe the recession is actually sometime a year from now. Because if you take the 2 year, 10 years yield curve, the lead historically on average and there's a distribution, but on average is about 12 to 18 months. I think to be precise, 15 months on average.
So, that would put the recession into end of next year. Sometime later next year. And maybe what bond investors are saying is that the issue isn't with the economy going into recession now, jobs are fine, economy's resilient. The problem is, it's so resilient that inflation wage growth remains stubbornly high, inflation remains stubbornly high, core inflation remains stubbornly high and the fed ultimately has no choice, but to really keep stepping on the breaks and ultimately it breaks the economy, like as you say.
It breaks not end of this year early next, which is kind of, sort of what I was thinking, but maybe it breaks end of next year and maybe that's how you square this circle. That's how you can get all these strong numbers now while the equity market seems to be okay now, because the equity market doesn't have that long of a horizon and the curve is even further out. And it's saying it's towards the end of the year. What do you think of that?
Ryan Sweet: Did you see what a lot of fed officials said this week?
Mark Zandi: No.
Ryan Sweet: That a recession is avoidable.
Mark Zandi: Is avoidable?
Ryan Sweet: Is avoidable, which means it's not avoidable.
Mark Zandi: Okay. All right. Explain that.
Ryan Sweet: No. When the fed comes out and says, oh, we still think we can avoid a recession, that's not going to build a lot of confidence. And just to me is kind of, you're making your own bed.
Marisa DiNatale: Well, they couldn't possibly say, we can't avoid a recession.
Ryan Sweet: Right. Oh of course. But just usually when they say stuff like that... Go back to Bernanke and he said that, is there no problems in the subprime mortgage market?
Mark Zandi: Oh yeah. Well, he even gave a speech, wrote it down on paper. Yeah. Okay. All right. Okay. Very good. So even odds, even odds, even odds, 60%, 65%. Okay. We got to keep that into mind. Okay. Anything else you want to bring up? Anything we missed? We covered a lot of ground. I thought this was going to be a shorter podcast, but couldn't keep Dante quiet. So anything else, Dante?
Dante DeAntonio: Nope. I'm good.
Mark Zandi: You're good. Okay. All right. Well, very good. We're going to call this a podcast. I hope you found it of interest and we'll be back next week. Talk to you soon.