Dante joins the podcast to break down the January employment report. Fitting for Groundhog’s Day, the jobs report delivered an eerily similar upside surprise to what we saw in January 2023. Following the January meeting of the FOMC this week, the team discusses what the Fed is likely to do in light of recent data.
Dante joins the podcast to break down the January employment report. Fitting for Groundhog’s Day, the jobs report delivered an eerily similar upside surprise to what we saw in January 2023. Following the January meeting of the FOMC this week, the team discusses what the Fed is likely to do in light of recent data.
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Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn 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 two of my colleagues, Chris, Chris deRitis. Hey Chris.
Cris deRitis: Hey Mark. No Marissa today.
Mark Zandi: What's she up to?
Cris deRitis: She's taking some, well-deserved time off, I think.
Mark Zandi: Ah, okay. Very good for her. I will miss her on Jobs Friday. I don't know that you should be taking a day off on Jobs Friday. That doesn't feel like the right thing to do.
Cris deRitis: She gave me her forecast before she left just to show how dedicated she is and she did take the upside to her credit, but not far enough apparently.
Mark Zandi: Yeah, that was a big number, which we'll come back to. And we've got Dante, Dante DeAntonio. Hey Dante.
Dante DeAntonio: Hi Mark. How are you doing?
Mark Zandi: Good. You must've been surprised by the number.
Dante DeAntonio: Took me a few minutes to gather my thoughts before I started writing about it.
Mark Zandi: Well good. Well, we are going to talk about the jobs number for the month of January. A lot of labor market data came out this week. Give us a good sense of what's going on with the economy. The Fed met this week. I think we should talk a bit about that. And I also published our election model results for 2024 with two of our other colleagues, Brendan Lacerda and Justin Begley. So maybe we can talk about, if you guys are curious, did you guys look at the results of that election model?
Cris deRitis: I saw the headline.
Mark Zandi: You saw the headline.
Dante DeAntonio: Took a quick look. Yep.
Mark Zandi: Yeah, okay. We can talk about, and the winner is, we'll talk about that. Anything else we should be talking about on this podcast, do you think? That's a lot, but just asking.
Cris deRitis: I'm sure something will come up.
Mark Zandi: Okay. Sounds good. All right. Okay, well let's talk about the jobs numbers. Dante, you want to give us a sense of the numbers?
Dante DeAntonio: Sure. So headline job growth came in just over 350,000 in January, which was just about double consensus expectations on our own forecast. So certainly a upside surprise in a big way. Big revisions, at least to December, not so much to November, but upward revisions the last two months totaled just over 125,000. So on a three-month average basis. Last month when we got the report, job growth was averaging 165K and now after revisions and the January number, the three-month average is 289. So quite a big shift in terms of what job growth looked like over the last three months. Much broader job growth across industries. So we had been talking towards the end of last year about the narrowing of job growth into mostly healthcare and the public sector and leisure and hospitality. That seemed to widen back out a bit in January.
Almost every major industry added to payrolls except for mining, even manufacturing got a bit of a boost, a bigger gain than we've seen outside of the strike effect for about a year or so. Biggest gains were still in healthcare, not surprising. But we also got a big gain in professional business services, which was a bit of a turnaround after a sluggish stretch of job growth in the second half of last year. Retail trade put up a pretty strong number for the second month in a row, although there's always some, I think, skepticism around seasonal adjustment, particularly around the holidays in retail trade. So I'm not sure how much to read into that in terms of an actual turnaround, but on the industry side of things, things look pretty good.
On the household survey side, there wasn't a whole lot of news. The updated population controls that they put into place every year in January didn't have a huge effect. The unemployment rate held steady at three seven. Labor force participation held steady. So there really just wasn't a whole lot to write home about on the household survey. Most of the attention I think will be on the payroll survey side of things with wage growth probably being close to the top of that list. Wage growth over the month was up 0.6%. It's the biggest monthly gain since early in 2022. Year-over-year growth is back up to four point a half percent now by that measure after it had gotten as low as about 4% a few months ago. So moving in the wrong direction there from the Fed's perspective, I would assume, although we can certainly talk about other measures of wage growth, which are probably not quite so volatile and not telling quite the same story.
The one thing that I think maybe caught me off guard more than anything was average weekly hours was down by two tenths to 34.1. That's, if you rule out the initial pandemic impact, that's the lowest level of average weekly hours since mid 2010, in the throes of the great recession. Again, it's one month, so I don't know how much to read into that, but it certainly was a big surprise on the downside, especially given the ongoing strength and job growth that we're seeing.
Mark Zandi: Yeah, a lot of cross currents in this report. Of course, this is for the month of January, and I think that's difficult for the Bureau of Labor Statistics keeper of the data to get right because seasonally fewer people are working. They try to seasonally adjust the data to make it agnostic to the seasonal patterns in the labor market. But doing that is not easy, particularly post pandemic because the pandemic scrambled all the numbers and really made it difficult to tease out the seasonal patterns in the data. There's big positives, big negatives, you add it all up, a lot of noise, but what's the bottom line? How's the economy doing, do you think, based on all your gut instincts. If you throw everything into the pot, you stir it around, you've looked at these data many times, so what is it? How do you read these numbers?
Dante DeAntonio: The economy is still obviously doing well. I don't think this changes my expectation of what happens in the labor market in 2024. I still think on net job growth will be slower in 2024 than it was in 2023, and I don't think one strong reading here in January changes that expectation for me.
Mark Zandi: Okay. So the economy's fine, doing well. Okay. Now every month I ask you, I think almost every month, what is the what I call the underlying rate of job growth. So abstracting from the vagaries of the data, these seasonal adjustment issues, and I guess weather might've also played a role in January. I don't know, we had a few big storms. I'm not sure maybe that affected the hours worked number.
Dante DeAntonio: Perhaps.
Mark Zandi: I think that might've played a bit of role, but extracting from the vagaries of the data, what do you think underlying monthly job growth is right now?
Dante DeAntonio: I still think it's in the 175 to 200 range, closer to where the average was in December than where it is now.
Mark Zandi: Right, okay. And that feels like it's consistent with underlying labor force growth, probably. I'm mixing and matching employment series here now, but unemployment was 3.7, 3.7% and rock solid. It hasn't budged all that much in I think two years, right? It's been pretty amazingly low and stable.
Dante DeAntonio: Yeah, that's right.
Mark Zandi: Okay. All right. There was also so-called benchmark revisions. Do you want to describe that just a little bit? It turned out it didn't really change the picture very much, but I think it's important just to call that out too because again, adding to the storyline that there's a lot of statistical things going on in this report that make it a little bit more difficult to interpret.
Dante DeAntonio: Sure. So once a year, the Bureau of Labor Statistics benchmarks the employment data that happens with the release of January data in the beginning of February every year. And that's essentially a process of setting the level of employment to match what we get from the QCW program, the Quarterly Census of Employment and Wages, which is almost a full census count of employment. So what happens is that you have to look backwards pretty far. So the level for March of 2023 was benchmarked to that QCW level. The level of employment that had been previously reported by the payroll survey is adjusted to match that new March employment level.
Everything forward of that, so from April 2023 through December, that data is then estimated off of that new level. So when you're talking about the revision that happened in December, it's the result of not only the normal reasons for revisions where you get additional sample data coming in over the next two months. But it's also confounded by the benchmark change as well where we're sort of estimating job changes off of a different level of employment than we had before. To your point, didn't have a huge impact. This year is a small downward revision by historical standards. I think it shaved something like 20,000 jobs a month off of the average 2023 gain. So in terms of I think what we're thinking about and what's important moving forward, I'm not sure that it really impacts the story much at all, but certainly does convolute some of those changes and revisions that we're talking about.
Mark Zandi: Okay. All right. Chris, what do you think? Any gaps in Dante's assessment here? Anything you'd call out that he didn't call out?
Cris deRitis: No, not really. I think he covered some of the cross currents as you mentioned, that payrolls are strong, but the work hours are lower. There's an index of hours, total hours that actually fell. Aggregate hours, sorry. So hire more people, but they work less, we have some conflicting signals there. I think the average hour earnings certainly is getting a lot of attention in the markets. But again, to Dante's point, I don't know how much to read into that for one month, but certainly something on the Fed's mind that we need to follow closely here. Again, I don't know that at this point I don't think the report changes Fed policy, what they plan to do. There's another report before they meet again in March.
Mark Zandi: Yeah, well, I am sitting here eating my cereal. I had my blueberries, I had my raspberries before 8:30. I wait till eight 30 to pour my cereal so I can look at the report while I'm eating my cereal before I tweet out something. And I see 300, is it 355,000? Was that the number?
Cris deRitis: 353.
Dante DeAntonio: 353.
Mark Zandi: 353? And I go, "Ooh, whoa." The immediate thought in my mind was, "Well, everyone's now going to think the economy's going to overheat."
Cris deRitis: Yeah.
Mark Zandi: Everyone had been saying economy's going to go into recession. That obviously is not true, but what could happen is the economy could rev back up and inflationary pressures revive. And the Fed not only doesn't cut interest rates like everyone's widely expecting, it has to start raising rates again.
Cris deRitis: Hike, yeah.
Mark Zandi: And I think you can't rule that scenario out. That's a scenario. So I'm looking at that. Then I see the average hourly earnings and I go, "Oh my goodness." That just adds to that concern that okay, average hourly four and a half percent year over year. That's on the high side of the comfort zone. I say it's north of the comfort zone because you want earnings growth to be consistent with productivity growth in the 2% inflation target. And if you do the arithmetic that comes in south of four, it's not north of four, it's certainly not four point a half percent, that kind of thing. But then-
Cris deRitis: Unless the productivity we saw this week sticks, right?
Mark Zandi: Yeah, exactly. Exactly. That could be the case. Well, I'll come back. I'm telling you that my thought process. It's taking me a long time to describe what was happening in my mind in nanoseconds, but this is my thought process. Then they go, "Oh, but look, hours worked fell, and hours worked is pretty low in the grand historical scheme of things." I think is it 34.1 hours? That's the average weekly hours? Correct me if I'm wrong, Dante, but if you look in history, at least certain in the last decade or so, that's really low. You have to go back to the teeth of the pandemic shutdowns to find it as low as that. Am I right? I think I'm right.
Dante DeAntonio: Yeah. It basically only happens in recessions. If you look back in recent history, you only get hours worked that low during a recession.
Mark Zandi: And then I look at the household survey, the payroll survey is a survey businesses, and we all look at that first. That's the 353,000. Then we go, "Okay, let's look at the household survey." That's a survey of, I think it's 60,000 or so. I think it's maybe more than that. Maybe it's 80,000 households, I can't remember. That's where the unemployment rate comes from. But we also get an estimate of employed employment and labor force. And if you put that decline, household employment actually declined, I believe, and correct me if I'm wrong, Dante. Am I wrong?
Dante DeAntonio: So it did as reported, but they changed the population controls in January and they don't actually revise the historical data. So they do publish an estimated change if you remove the effect of the changing population control. So if you do that, the employed series was actually up in the household series, household survey.
Mark Zandi: But if you put it on a payroll survey basis?
Dante DeAntonio: That I actually did not look at.
Mark Zandi: Yeah, you go take a look at it's a big decline.
Dante DeAntonio: Okay.
Mark Zandi: So maybe I'm pretty sure even with the population controls. I'm not sure they published that data, but I'm guessing because the decline in the household survey based on the same measurement as the payroll survey, I'm speaking from memory, but I think it was down 250,000 jobs, something like that. And even with the population controls, I bet you it's still down. So I guess my point is immediately go in one direction, then I go in the other direction and then the bottom line of all this zigging and zagging is nothing's changed. The economy's fine. The economy's fine and prospects are good. Okay. Anyone disagree with that assessment? Bottom line assessment? No.
Dante DeAntonio: No.
Cris deRitis: Did you revise up your December giddiness?
Mark Zandi: Did I revise up my December?
Cris deRitis: Because there were upward revisions for the December number, although some of that's convoluted by the benchmark revisions.
Mark Zandi: No, no, because I want just right. The December number previously was just right now it's not quite just right. So actually diminishes my giddiness a little bit.
Cris deRitis: Okay, fair enough.
Mark Zandi: Although having said that, I think we might need to start revising or thinking about what is the sustainable level of employment growth, at least for the near term. Not forever, but next year or so, going back to the fact that we're getting so many immigrants into the country and that looks like it's really juicing up labor force and allowing the economy to create a lot more jobs and otherwise would be the case without generating inflationary pressures. And the other thing I just wanted to point out, going back to wages. We got the employment cost index this week, didn't we? The ECI?
Cris deRitis: We did, yep.
Mark Zandi: Yeah, it's all a blur. So what did that say? And wouldn't you put much more weight on the employment cost index and the average hourly earnings number?
Dante DeAntonio: I would, yeah. And it actually came in slightly below expectations for the fourth quarter year-over-year growth at the end of 2023, and the ECI is 4.3% for private industry workers. So that's obviously not that far off from the four point a half percent here, but the pattern I think makes a lot more sense. In the ECI. It peaked at 5.7% back in mid 2022 and has been on a pretty stable downward trend to 4.3%. It looks like it's still moving lower, whereas in average hourly earnings, there's a lot more noise month to month and it bottomed out around four and now looks like it's coming back up again. So I think it's a little bit more confusing to try to figure out what's going on.
Mark Zandi: Yeah, so the ECI definitely is, I think you said it was 4% on the nose, wasn't it?
Dante DeAntonio: ECI is 4.3% year over year.
Mark Zandi: And then quarter over quarter annualized, I think it was 4%.
Dante DeAntonio: It was probably around 4%. Yeah.
Mark Zandi: And that I'd say is very consistent with the Fed's inflation target given underlying, or given where productivity growth is at certainly at the moment. Okay. Okay. So bottom line, a lot of noise. The signal though is the same, the economy is fine and all the trend lines, at least in the near term, look pretty good. Did anyone disagree with that?
Dante DeAntonio: No.
Cris deRitis: No.
Mark Zandi: Okay. Chris have been following markets, I have not been. Have you been following markets this morning? How are they taking this? Is their interpretation similar to our interpretation? What's the stock market doing? What's the bond market doing? Do you know?
Cris deRitis: I haven't checked recently, but the initial reaction was some readjustment of the Fed's reaction here. That March is clearly off the table in terms of a rate cut and increasingly pushing it out to May, even June. So bond yields rose, equity market fell, I don't know. Again, might've already-
Mark Zandi: I'm looking right now.
Cris deRitis: Adjusted.
Mark Zandi: Looking right now the stock market is basically flat.
Cris deRitis: Flat.
Mark Zandi: Dow is down, NASDAQ's up, because we've got great earnings from Amazon and Meta.
Cris deRitis: Meta, yeah.
Mark Zandi: And the S&P is up a little bit of green, but the big changes in the ten-year treasury yield. Although that's weird too because it has been falling pretty sharply in the last couple of days, which I couldn't quite get. I didn't understand. And now with this surge today with the employment report, I think the ten-year treasury yield, I'm looking right now, it is
Cris deRitis: Just over a 4%.
Mark Zandi: Yeah, 4.04%, which is exactly where I'd expect it to be. So not sure what to read into that.
Cris deRitis: Just some noise this week.
Mark Zandi: Right. Okay. Well, you brought up the Fed, the Federal Reserve Board, and they had their meeting, the FOMC, the Federal Open Market Committee had its meeting this week to set monetary policy, and no surprise they didn't change policy. I guess the big surprise, if there was one, at least to some market participants, was that the Fed, at least Chair Powell, J. Powell, indicated that March rate cut was unlikely to happen. Any takeaways, Chris from the Fed meeting that you'd want to point out? Was that a surprise to you?
Cris deRitis: No, I didn't think March was going to happen for a while now. Obviously there's still some room here to make some adjustments, but yeah, I don't think the Fed's statement was all that surprising. I think Powell was as expected, a little bit cautious in terms of monetary policy going forward. Really need to see inflation coming down solidly towards the 2% target for a sustained period of time before they rush in to cut.
Mark Zandi: Dante, anything on the Fed?
Dante DeAntonio: It didn't seem surprising. It seems like the natural progression of them shifting language in favor of cutting at some point soon. A couple of months ago there was still rate hikes on the table, and then they've gradually taken that off the table, but still making clear that they're not immediately going to cut. So I would assume in March, barring some major change in data coming in, that they're going to increasingly push that language in favor of rate cuts starting in May or June.
Mark Zandi: And I think we have in our forecast, and have had in our forecast the first rate cut being May thinking that, yeah, they'd probably be cautious cutting rates at least initially until they're absolutely sure that inflation is back to target. But the inflation statistics all feel like they're moving in the right direction here. The core consumer expenditure deflator a measure of inflation, which is the measure the Fed uses for gauging its 2% inflation target. That was a little south of 2% I think annualized over the last six months of last year. So I'm sure that overstates the case. I don't think we're there yet. I don't think we're at the 2% target, but we're closing in on that target, I think relatively quickly.
Here's the thing though that I'm having a little bit of difficulty with. Okay, you're the Federal Reserve. You have two objectives by law. Your mandate is one, full employment, you want to keep the economy at full employment. I'd say, correct me if I'm wrong, mission accomplished. 3.7% unemployment, we've been between three and a half and 4% for two years. Unemployment is low across every demographic. I was just looking at some of the unemployment rate for different ethnic groups, and they're very low. So I think we can all conclude full employment. The second mandate is getting inflation back to target, they've set the target at 2%, and as we just discussed, we're not quite there yet, but we're pretty darn close. And it feels like we're going to get there certainly by the end of the year, probably may even be earlier than that, sometime in the second half of this year. So if that's the case, you're now on the FMC at the Fed and you're in September, October, November, December, you've achieved your mandate.
You've achieved both objectives, full employment inflation at Target. Wouldn't that argue that the federal funds rate, the interest rate, the Fed controls should be at its long-run equilibrium rate? Meaning the, so-called r-star, that rate that's consistent with monetary policy, neither restraining or supporting growth. The Fed's estimate of what r-star is 2.5%, that's at least implied in their forecast that we see every quarter from the summary of economic projections. That's where they put the fund rate at in the long run. Two and a half percent. I suspect it's higher than that. In our forecast, we have it at three. But okay, let's say 3%. Funds rate's, currently five and a half. That's a pretty big gap between five and a half and three. What does that mean? Chris, any views on that? I've got a view what it means, but what does it mean?
Cris deRitis: I think if things stuck at that level, we are at equilibrium, then yes, by definition it would suggest it has to be higher. R-star has to be higher.
Mark Zandi: Higher than three?
Cris deRitis: Yeah. If indeed, where cruising along and everything is just inflation is-
Mark Zandi: Oh, that's your view. Your view then is that the funds rate is going to settle in at a much higher level than the feds two and a half percent in our 3%.
Cris deRitis: Well, I'm not convinced that that's equilibrium. I think there might be more weakness ahead.
Mark Zandi: Okay.
Cris deRitis: So I think that-
Mark Zandi: Okay.
Cris deRitis: I don't think we stick at four or four and a half. I think we-
Mark Zandi: Right. That's interesting. Okay. That's not my takeaway from all this. Your takeaway is maybe the equilibrium rate's a lot higher than we think it is. It's not two and a half, it's not three, maybe it's four, maybe it's four and a half.
Cris deRitis: Well, no. Well, what you described was a world where we are at equilibrium, right? Unemployment is fixed, inflation is solid.
Mark Zandi: Well, that's the world that our forecast says we're headed to, and that's the world that it looks like that's coming. That feels like the world that's dead ahead, no?
Cris deRitis: Yeah. Well, but our forecast suggests that the Fed does have to cut in order to hit that objective that we do get back to 3%.
Mark Zandi: Okay, Dante, what's your perspective on this?
Dante DeAntonio: Yeah, I think I see what Chris is getting at. Is the expectation that inflation stays on this glide path and just stops at 2% if the Fed doesn't do anything? I think that's what you're suggesting. Could that be possible that we're just in equilibrium now inflation gets to 2% and stays there even if the Fed does nothing. I don't think that's true.
Mark Zandi: So r-star is not 5.5%,
Dante DeAntonio: No. To Chris's point, our forecast has inflation getting back to target and staying there, but that's under the assumption that the Fed obviously starts cutting rates and goes down to 3% over time. That's necessary to keep inflation around 2% instead of it falling much below that. Is it 3%? Is it three and a half percent? I think that is probably a fair debate, but given how much room there is to cut to get to 3% at this point, and it doesn't feel like the inflation dynamics are such that it's going to go to zero all of a sudden if the Fed doesn't do anything. It feels like inflation will still stick somewhere in the positive range, even if they stayed at 5.5%. So yeah, I think there's, like you said, it's a big gap that you're talking about closing. And what impact does that have on inflation over time if you do that?
Mark Zandi: Okay. Well, my sense of what this means is the Fed is going to have to be cutting rates very aggressively in a short period of time, and the longer they wait, the more likely they're going to have to be cutting. They run the risk of causing the economy, the banking system, the financial system, the economy to start to really weaken and seize up. And they're going to be under pressure to move very rapidly when they start to move.
In our forecast, we've got the Fed beginning to lower rates in May. They lower rates four times this year, a quarter point each time, four more times in 2025, a quarter point each time. Then I think a couple of times, you have to do the arithmetic a couple of times in 2026, and you get back to three and a half percent, or excuse me, get back to 3%. That's the equilibrium rate in our forecast here in the immediate future. I guess what I'm asking, or arguing or just wondering about is maybe they have to go a lot faster than that. Because you've hit your mandate, and if the r-star actually is 3%, then you're playing with fire, with keeping rates elevated for an extended period. You're going to have to cut rates a lot more quickly than our forecast would suggest, which is very consistent with I think most forecasts of the funds rate going forward.
Dante DeAntonio: But does that... Go ahead, Chris. Sorry.
Cris deRitis: Go ahead, Dante.
Dante DeAntonio: But does this idea that cutting rates much faster, does that fit with a labor market that's adding 200, 250,000 jobs a month and wage growth is on the upper end of 4%? Isn't there some concern that if they start cutting rates more quickly than we expect, that that has some sort of positive impact on a labor market that already feels like it's running on the verge of hot?
Mark Zandi: Well then what you're arguing is that r-star is a lot higher. You're arguing that the economy is going to be much more resistant to the interest rate, to the high interest rates, and that r-star is not two and a half, it's not three, it's something a lot higher than that. It's four. It's four and a half. That's what you're arguing in that scenario, aren't you?
Dante DeAntonio: Well, right. If the labor market can stay strong-
Mark Zandi: Yeah, exactly.
Dante DeAntonio: With rates at five and a half, then sure. I guess that's an argument.
Mark Zandi: Yes.
Dante DeAntonio: Yeah, that's fair.
Mark Zandi: Right. So that could very well be the case, by the way. The economy does feel like it's rate insensitive for lots of different reasons, which we've talked about. Households and businesses have done a very, and I'm speaking in aggregate with a broad brush, not everybody, but households and businesses did a very good job locking in the previously low record interest rates. And so even with the higher rates that the Fed has engineered here over the last couple of years, you haven't really seen debt service, the cashflow businesses or the income of households going to servicing debt rise because they've locked in.
There's other ways that higher interest rates affect the economy, no doubt about it. But that's a way, an example of why the federal funds rate, the equilibrium rate actually might be a lot higher. So I guess what I'm saying is either the equilibrium rate is a lot higher or they're going to be cutting rates a lot faster than anyone thinks they're going to be cutting once they start cutting. And the longer they wait to cut, the faster they're going to have to cut to make sure that they don't wreck the economy, or push the economy. Again, if r-star is higher. Am I missing something, Chris?
Cris deRitis: No, I guess I am thinking of what is the long run? So it could very well be that r-star is 3%, but to your point, this cycle it's going to take a lot longer to get there. So r-star over the next couple of years may in fact be closer to four, but then I assume that these lock-in effects in terms of the interest rates on housing, all the cash that households and corporations have, that might be buffering some of that transmission mechanism of interest rates, that will eventually wear off or that will adjust. But to your point, I think it may take a while to get there.
Mark Zandi: And I think, this is a statement that really meant to be a question. Or maybe it's a question that is meant to be a statement, I'm not sure. But either way I'm going to say it and I just get your reaction. I don't think we should think of r-star in a long run context. In terms of its usefulness for the conduct of monetary policy, who cares about the long run? I don't care about the long run. I don't care about on average over the next 10 years. What I care about is what's r-star over the next year or two. That's what I care about.
Cris deRitis: Okay. All right. So more of a dynamic r-star.
Mark Zandi: Yeah. Yeah. And that's how I would think about r-star. It's not this immutable thing etched in concrete and changes very slowly over time. It evolves over periods of time. And so it could very well be the case that in 2024, 2025, r-star is not, I don't think it's two and a half under any circumstances, and it may not be three, which is our forecast. It actually may be four, four and a half percent, something like that. So anyway, that was a a reasonable conundrum to conundrum over, don't you think?
Cris deRitis: I think so.
Dante DeAntonio: Yeah. Absolutely. Absolutely.
Mark Zandi: Okay. Okay. Anything else on the fed? No. Okay. Let's play the statistics game. And the game is we each put forward a statistic. The rest of the group tries to figure that out with questions, deductive reasoning and clues. And the best stat is one that's not so easy we get it immediately and one that's not so hard, we never get it. And if it's apropos to the topic at hand, all the better. Dante, what's your stat?
Dante DeAntonio: So I'm going to preface this by saying this is a little unorthodox, but I'm going to use it anyway. 517,000.
Mark Zandi: Employment related?
Dante DeAntonio: It is employment related, but not from today's report. It's backward looking a little bit.
Mark Zandi: Is it a measure of jobs?
Dante DeAntonio: It is a measure of jobs, yeah.
Cris deRitis: Some revisions?
Dante DeAntonio: It's not revisions. It's a number that was published at some point in the past.
Cris deRitis: Oh.
Mark Zandi: It has nothing to do with revisions?
Dante DeAntonio: No.
Mark Zandi: And is it a change in employment or is it a level?
Dante DeAntonio: It's a change in employment, yeah, job growth.
Mark Zandi: Is it annualized change over a year?
Dante DeAntonio: Nope. It was a monthly gain at some point in the past.
Mark Zandi: Oh, oh, was it like one January back, January of 2021?
Dante DeAntonio: Not that far back.
Mark Zandi: Oh really? Did we get a... 2022? January 2022?
Dante DeAntonio: Even closer.
Mark Zandi: January, 2023?
Dante DeAntonio: Yeah, January 2023, we added 517,000 jobs, which was at the time a huge upside surprise. That's eerily similar to today. So at that time, job growth was stronger. Underlying job growth, the three-month average coming into that was about 300K. And we got 517 in the initial report. today coming in, job growth was averaging 165 and we got 353. So you got about 200,000 above trend in both cases. I went back and looked, the title of the podcast from a year ago when we talked about January, Jaw Dropping January Jobs. So I feel like we could have-
Mark Zandi: Should use that again.
Dante DeAntonio: I could have copy and pasted, I think my conversation about the release. It just feels very much the same conversation that we got this big number in January and then obviously it didn't ultimately matter that much for the rest of the year. Job growth average 250K in 2023, so the 517 didn't ultimately matter all that much. So all that is just to come back to, I don't think this number today should fundamentally change the picture about what we expect to happen in 2024 because we've seen the story before.
Mark Zandi: Now that is so interesting. Has that 517,000 job gain held up with these revisions?
Dante DeAntonio: It's now at 482. So, it's still very strong.
Mark Zandi: 482.
Dante DeAntonio: It's come down a little bit, but it's still very strong. Yeah.
Mark Zandi: Oh, so it just feels like this is a seasonal adjustment issue. Is that...
Dante DeAntonio: Yeah, to your point, January is always tough. I mean, I did look at the seasonals. There doesn't appear to be any big red flag, but January is the month where there's the biggest change in employment on a not adjusted basis.
Mark Zandi: Right.
Dante DeAntonio: And so the seasonal adjustment factor matters a whole lot in January. And I think you can get these odd numbers cropping up because you have such a big change in employment happening.
Mark Zandi: Okay. This may be a little unfair, but can you explain to us how the pandemic could mess with the seasonal factors? What's the mechanism through... And I'm assuming that January is always difficult, but the pandemic probably has scrambled things to even a greater degree. Do you agree with that? And if you agree with that, can you explain it?
Dante DeAntonio: Yeah, I would generally agree. In simple terms, seasonal adjustment looks at what usually happens in this month of the year. So in January we usually see jobs fall by about two and a half to 3 million on an unadjusted basis. And so seasonal adjustments looking at that average change, and it's applying an adjustment to try to get rid of the seasonal component of that. So that big part of that drop is just what happens every January and trying to leave you with the trend piece, what's new this year relative to those prior years. So because it's based on this idea of comparing a change now to a change in recent history, obviously the pandemic had an effect on those normal seasonal patterns.
And so the BLS had to work hard at trying to figure out do we exclude some of those years? Do we include them? The 2020, 2021, 2022 period, are those representative of the seasonal patterns that we expect to see moving forward? Or are they fundamentally different? So it just leaves a lot of room for adjustment assumptions around which seasonal pattern is right. Do we expect the seasonal patterns to flip back and look like they did in 2018 and 2019, or do we think things have shifted since then and should they really look like they did in 2022 and 2023? So to your point, I think it just leaves more room for interpretation, more room for this possibility that you get these odd numbers that might not be really representative of underlying job growth.
Mark Zandi: Yeah, okay. That is so interesting. And what's really interesting is I have no recollection of that whatsoever. Do you, Chris?
Dante DeAntonio: I didn't either. I just happened to see they published the January 2023 number with the January 2024, and I saw it was big, and I'm like, I don't remember that. And I went back and I looked at what I wrote last year and I was like, huh. Yeah, it was basically the same story.
Mark Zandi: Yeah. There's only kind a similar story coming out of the financial crisis. I think it was, I can't remember what year it was. It might've been 2011. So that was in the wake of the financial crisis, and we weren't quite sure whether the economy was kicking into gear or not. And we had been getting a few months of positive job growth, meaningful job growth, and then August of 2011, it was like zero jobs, no jobs created, and everyone went into a tizzy. "Oh my gosh, the world's not what we thought it was."
And of course that was a head fake, just like presumably this was a head fake. And it goes back to measurement. August is also a very difficult month to measure for the BLS because people are on vacation and they get low response rates. Which by the way, I don't know, did you look at the response rates to this survey by any chance? Maybe you can take a quick look. I'm really curious what the response rates were to the survey that also plays a role. Okay. That was a really good one. A really, really good one. Chris, what's your stat?
Cris deRitis: 3.2%.
Mark Zandi: 3.2% in the employment numbers?
Cris deRitis: Nope.
Mark Zandi: Is it jobs employment related?
Cris deRitis: Kind of.
Dante DeAntonio: Is it a number to rub something in my face? Could it be productivity?
Cris deRitis: Indeed it it. Nicely done.
Mark Zandi: Explain.
Cris deRitis: That is Q4 output per hour productivity growth annualized. 3.2% is still a very strong number. I chose this because it's really the key to the outlook. If productivity growth can remain strong above 2%, certainly that makes life easier for the Fed, makes life easier for consumers, we can sustain higher wage growth. So this is an important number to watch here.
Mark Zandi: Well, you got to explain Dante's comment about rubbing his nose-
Cris deRitis: Well, we have a
Mark Zandi: In the eye, whatever the description...
Cris deRitis: Have a long-running debate.
Mark Zandi: Slap him in the face. No, go ahead.
Cris deRitis: Long-running debate on future productivity growth. We had historically, prior to the great recession, sizable productivity growth, closer 2%. In the decade since the great Recession say great recession until the pandemic, we have very anemic productivity growth. And so that certainly is a concern. But since the pandemic, we've seen some revival. Well, actually a little bit of fits and starts, if you will. So we initially had a big surge in productivity during the shutdowns. We cut out a lot of labor, but continue to produce at a high level. So we've had a little bit of a pullback, and now we've seen somewhat of a resurgence here, and there's a lot of debate whether this is going to be sustained productivity growth. Is this just again, due to some temporary adjustments or is the shift to remote work or the adoption of AI going to usher in a renaissance of stronger productivity growth? I'm on the pro technological change camp here that I think we will get some boost. And Dante is a little bit more dour in terms of the outlook here.
Mark Zandi: Dante's always dour. Have you noticed that?
Dante DeAntonio: I don't think that's fair, is it? Am I that negative all the time?
Cris deRitis: That's a little harsh.
Mark Zandi: Maybe is just a little harsh. He's cautious. Let's put it that way. He's not dour, he cautious.
Dante DeAntonio: Maybe that's fair.
Mark Zandi: So what do you say, Dante?
Dante DeAntonio: I am not ready to change my outlook just yet, but I mean harder to stick by it here quarter by quarter. We keep getting strong output growth and hours are basically flat to slightly down. And so that leads us to the assumption that productivity is much stronger. I think my question still is it sustained? I don't think, obviously, I think Chris would agree I don't think 3.2% is sustainable. So what is sustainable over a year or two years? Three years? Is it 2%? Is it above 2%? Is it below 2%? The data's volatile. I think it's hard to get a read even over four quarters sometimes about what's really going on. So yeah, I'm getting closer to maybe edging off my pessimism about productivity, but I'm not quite there yet.
Mark Zandi: Although just point out, I did a little back of the envelope. What do you think average annual productivity growth has been over the past four years? So before the pandemic, go back to 2019 Q4, compare it to productivity in 2023 Q4. So that four year period in the post pandemic, what do you think average annual growth in non-farm business productivity was during that period? And don't Google it.
Dante DeAntonio: Since 2020?
Mark Zandi: Since Q4, 2019. I picked Q4 2019 because it got hit in Q1 with the pandemic.
Cris deRitis: 1.7, 1.8?
Mark Zandi: Yeah.
Dante DeAntonio: I was going to say two.
Mark Zandi: 1.6% per annum. What was it four years prior to the pandemic? So go back to the fourth quarter of 2015, compare it to the fourth quarter of 2019.
Dante DeAntonio: About the same, probably. One and a half.
Mark Zandi: 1.7%. So I don't know. My intuition and my hope is consistent with Chris's world view here on productivity. I think he's right, but I don't know. I think it's way too premature at this point. Very much. I had thought remote work would be productivity enhancing, but the evidence that we've gotten so far is not supportive of that. If anything, it might be at least so far a bit of a constraint on productivity and A.I. holds a lot of promise, but it's just promise at this point. It feels like more hype than anything up to this point in time. I don't know. Chris, what do you think?
Cris deRitis: So pessimistic, what's going on? Mark?
Dante DeAntonio: I appreciate you making my point for me though. Thank you, Mark.
Mark Zandi: No, I'm just saying, I do think that all the quitting that went on, that probably has helped out productivity. It has to have, right? To some degree. People got into jobs that... They quit jobs that they didn't like. Wasn't suited to their skills and education talents, and they moved in the last couple, three years, four years to jobs that are more suited. So after you get up a learning curve, you would expect that to help productivity growth. And maybe that's what we're observing, but I don't know.
Cris deRitis: That's a one time yeah deal then, right?
Mark Zandi: Yeah. It's a one time deal. Yeah, that's exactly right. Anyway, so my intuition is on the side of Chris, but, and also all the work that we've alluded to, we've mentioned this in the past, Dante and I did this work trying to understand the demographic effects on productivity and found that the aging population and aging workforce is a constraint on productivity growth. The aging is still weighing on productivity, but over time it's becoming less of a weight right here going forward, but I don't know. I don't think we've gotten there yet anyway.
Cris deRitis: Disagree with that thesis, by the way.
Mark Zandi: Oh, the-
Cris deRitis: Aging. As I celebrate some milestone birthdays.
Mark Zandi: Oh, I see.
Cris deRitis: Rejected wholeheartedly.
Mark Zandi: No, I think-
Dante DeAntonio: I don't think you were quite in the age bracket that we were focused on, Chris. Unless you're really fooling me, I don't know.
Mark Zandi: I think I'm the guy who's in the age bracket who's the problem.
Dante DeAntonio: And obviously you're lifting us all up, Mark.
Cris deRitis: Exactly. Exactly.
Dante DeAntonio: Let's just be fair. There's the optimism.
Cris deRitis: Beautifully done.
Dante DeAntonio: There it is, right?
Mark Zandi: I appreciate that. Very kind of you. Okay, you ready for my stat? 308?
Cris deRitis: Sorry, what?
Mark Zandi: 308?
Cris deRitis: 308. No, thousands, no units.
Mark Zandi: No, no units. 308. Exactly 308.
Dante DeAntonio: Just a unit-less figure.
Mark Zandi: What do you mean it's unitless?
Dante DeAntonio: Is it something-
Mark Zandi: The number is 308.
Dante DeAntonio: Is it from something that came out today?
Mark Zandi: No, it didn't come out today.
Dante DeAntonio: This week though?
Mark Zandi: It came out this week.
Dante DeAntonio: Okay.
Mark Zandi: Yeah.
Cris deRitis: Is it an index?
Mark Zandi: No.
Cris deRitis: Is it an electoral vote count?
Mark Zandi: Yes, it is.
Dante DeAntonio: There it's, yeah, that's right.
Mark Zandi: That is excellent. Great job. Oh, wow.
Dante DeAntonio: Digging deep.
Mark Zandi: What made you think that? That was good. That was really good.
Cris deRitis: I was thinking the next topic.
Mark Zandi: The next topic, the presidential election. Yeah, so 308 is the number of electoral votes we are projecting President Biden will get in the 2024 election. That's based on our presidential election model. We've been producing this model at the state electoral college level now. I think we've done five, six elections. We dusted it off, we updated it, we improved it. And with, as I mentioned earlier, Brendan Lacerda, our colleague and Justin Begley came out with a report. We had a webinar, and it's 308 electoral votes. Just for context, you need 270 electoral votes to become President of the United States. Biden got, just for context, Biden got 306 electoral votes in the 2020 election. So 308 is pretty good. It's close. It is still a very close race. Five states are within one percentage point, so they're just enough to swing most of them over to Biden. But they are very close.
And obviously there's a boatload of assumptions we're making here in forecasts. One of the key assumptions is around turnout. Turnout really matters, and we're assuming that the Republican turnout is consistent with the turnout that occurred in 2020, and it was pretty high. There was a lot of Republican enthusiasm, and Democratic turnout was very high as well, but we're assuming the same. And of course, if it's even higher than that, that could swing the election. The other assumption is around third party candidacies. We're assuming that the number of votes that go to the third parties in the 2024 election is similar to recent elections, and that's been pretty low. And that could be, we could see something very different in this election. There's a lot of potential third party candidates. You've got Robert Kennedy out there. You've got Cornel West, No Labels. That's the self-appointed nonpartisan group that may come forward with a candidate. And if that happens, typically that hurts the incumbent. So if we get a lot of third party votes, this go around, that could be a problem for Biden.
But the reason why Biden wins is the economy. In our forecast for where the economy's going to be as we approach election day, we expect the unemployment rate to remain low, real incomes after inflation incomes to continue to improve. But here's the two variables that matter a lot, which I found a little surprising. Gas prices. Gas prices matter a lot, and if right now the cost of a gallon of regular unleaded is $3.15, if it rises to closer to $4 a gallon in a consistent way, not just for a day or two or a week or two, but for a couple three months, $4 or more, the election will swing to Trump all else being equal. So that gives you context there.
And the other key variable is the mortgage rate, and it had been at 8% to 30 year fixed. Now it's down below seven. If it goes back to 8.5% and stays there for, again, not for a week or two, but for a couple three months, all else being equal, that'll swing the election as well. So the election, we expect Biden to win, but the election is going to be very close and could turn on a few things here if it goes in the opposite direction. What do you think?
Cris deRitis: I guess a question. Is it just the level of gas prices or is it the trend? They're coming in I'd assume-
Mark Zandi: That it's a change in, it's actually a change in.
Cris deRitis: Change in.
Mark Zandi: It's a change in, yeah, and that's a great point. Most economic factors, variables, it's not so much the level, although with the mortgage rate, it is the level, we tried to change too, but it's the level. And that may go to affordability. If you're 8% plus first time home buyers, it's just impossible with these high house prices to afford to buy a single family home, so they're locked out. So that's maybe why the level matters more. But for most economic variables, it's the change in. We also have real household income in the model, and it's the change in real household income after inflation income per household.
Cris deRitis: Interesting. And what's the window of time? You said three months prior to the election, that's really the key-
Mark Zandi: Yeah.
Cris deRitis: Window it's not that people are looking back over that-
Mark Zandi: Well, it's the change over that year landing in the second, third quarter of the election year that matters. That matters.
Cris deRitis: Okay. So my expectation is that turnout is going to be low this year.
Mark Zandi: Really? Why do you say so?
Cris deRitis: Because a repeat, right? I don't see a lot of enthusiasm. I expect that the ratings on any debate are actually going to be low. I don't see a new message from either candidate. I think everyone kind of knows what the message is. So that's my take is that it's going to be hard to generate enthusiasm. So what does that imply for, you talked about higher turnout, lower turnout? How would that-
Mark Zandi: It's relative, whether Republican or Democrat, incumbent, challenger, if President Bidens turnout, Democrat turnout is lower than typical or [inaudible 00:55:52] it's kind of the relative turnout between the two. Oh, that's interesting that you think that because the rule of thumb historically is you go look at the midterm election, the turnout in the midterm election, and that gives you a really good forecast for what turnout is going to be for the upcoming presidential election two years later. And of course, the midterm election turnout was very high, and that would suggest a high turnout for 2024. But you make a good point. That'd be very interesting. But we'll see. We're going to update the results every month as we move forward here, and we'll do further analysis on the candidate's proposals as they are put forward and try to assess their macroeconomic consequences. Okay, good.
Anything else before we kind of wrap it up here? We'll keep this relatively short, this podcast relatively short. There was a plethora of other economic data that came out this week. Maybe we'll end this way, of all the other economic data that came out, what would you call out for listeners to be focused on? I've got a couple that are on my list. Dante, do you have anything that you want to point out that we didn't talk about?
Dante DeAntonio: Yeah, I think something looking ahead to February and beyond, I don't typically put a ton of weight on the Challenger Report, layoff announcements, but they did jump pretty significantly in January. Aside from last year. It was the highest January total since 2009. Layoff announcements were just over 80,000, which mirrors what we saw at the beginning of last year as well. Although the reasons cited appear to be different, we had an uptick in layoff announcements in the first quarter of 2023, and the reason that was cited was deteriorating economic conditions. At least in January this year so far, the biggest reason cited was restructuring.
So it's not that firms necessarily feel like conditions have deteriorated, but cost savings trying to size themselves after a year of pretty strong job growth. Obviously there was a lot of negative feelings about where we were headed at the beginning of last year as headline layoffs were up quite a bit. I'm not sure this generates that same kind of negative outlook for people, but I think something to keep an eye on, and some of that could carry over into the February employment reports. UI claims are creeping up a little bit over the last couple of weeks off of a very low level admittedly, but it would fit with this idea that late in January we saw layoffs start to pick up a little bit, and so could give some headwind to February's employment growth.
Mark Zandi: Yeah. Have you heard this criticism of the UI claims? Initial claims from employment insurance had been very, very low around 200,000 per week. As you pointed out, they pushed up a little bit in the last couple of weeks, but they're still low. That maybe is sending a biased signal because one reason is UI eligibility is down. And I have not investigated this, I'm just repeating what I've read. And the other factor is that because of high inflation, UI benefits on a real basis are not that great, and therefore people much rather go get a gig job or some temporary job that's going to pay more and better than the UI because it hasn't kept up with inflation. Does that resonate at all with you, those arguments?
Dante DeAntonio: It does, yeah. I think it has been years, but I did some work on the eligibility issue, and I think it does have a meaningful, will meaningfully depress the level of claims that we can see at any one time because eligibility has been cut back pretty sharply in a fair number of states over time. I think the other thing too is just the unemployment rate's 3.7%. So even if you have an uptick in layoffs, the labor market certainly seems more capable of absorbing people that are looking for new jobs much more quickly. So if you think your outlook to find a new job is pretty good, you may hold off on even filing a claim because you think you might land a new job in a few weeks anyway, especially if benefits aren't that valuable given inflation. So I think all of those things together, I wouldn't be surprised if claims are depressed by those factors.
Mark Zandi: Although, I point out that the JOLTS, layoffs in the Job Opening Labor Survey-
Dante DeAntonio: Also low.
Mark Zandi: Really low. I mean not low, just really low consistent with low UI claims.
Dante DeAntonio: Right. Yeah, it does fit together.
Mark Zandi: Yeah. Okay. Chris, any statistic you want to, because again, there was a plethora of them this past week. Any other statistic you wanted to call out?
Cris deRitis: Yeah, I was going to call out the JOLTS report itself, that you alluded to. Just to me, it showed continued strength in the labor market. Job openings remain pretty solid, 9 million. Quits are a bit down, but that's, again, a bit consistent with the Fed's objectives here. So there's no real surprises here. Nothing that screams that there's a real risk of the labor market falling apart anytime soon.
Mark Zandi: Yeah. Dante, any other interpretation of that data?
Dante DeAntonio: No. Yeah, I thought JOLTS was positive. We had seen a big dip in hiring, and that at least partially reversed. That seems like more noise than anything else at this point.
Mark Zandi: Yeah. Yeah. I thought that was good. I'll call out the Consumer Sentiment Confidence Surveys. You saw the Michigan survey, I think they came out this morning with an update. See a Michigan survey, which has been very, very depressed, and it rose to 79. And just for context, if you go back to November, it was 61.3, so that's a pretty big change in the last couple of months. I think the Conference Board Survey, which I like even more than the University of Michigan survey for reasons we've discussed and we won't go back into, has improved also quite dramatically. Dramatic is too strong a word. Has improved meaningfully over the last couple three months.
The other thing that's happened is inflation expectations in the survey, in the University of Michigan survey continue to move south, and I think they were down again, 2.9% for a one-year ahead. And I think they also for five year ahead inflation expectations, both very good. So the point being that the economy's been improving, looks very good, but that hasn't really translated into people's perceptions, or at least seemingly hasn't translated into people's perceptions. But even the surveys now suggest that, well, maybe that's changing. People are starting to feel better about things.
Cris deRitis: Does that enter the election model?
Mark Zandi: It does. I didn't mention it, but we have the Conference Board Survey in there. But the way it enters in is only if it falls to a level that's consistent with recession. So there's the average, I'm making this up, but roughly speaking, the average through time and this conference board has been conducting the survey back into the seventies and you take an average of all the survey responses, it's equal to a hundred. That's the index value right on the nose. If it falls below 80, historically, that's a clear signal you're in recession. So that's the variable that we have in the model, so it falls below that threshold. Just for context, I think, and again I'm making this up, but if memory serves, I think we rose to 114 on the survey.
Dante DeAntonio: Yeah, it's in that neighborhood.
Mark Zandi: We're above average and recession is not even close to being suggested by the survey. Okay, good. Very good. Anything else you want to bring up before we call it a podcast? Chris? Dante?
Dante DeAntonio: Do you want me to quickly close the loop on response rates? I did look it up.
Mark Zandi: Oh, Yeah. What was the response rate?
Dante DeAntonio: So one, we should have, I don't think we talked about it last month, but last month was actually shockingly low on the first release for December data, it was the lowest, I'm just eyeballing a table of numbers, but I think it was about the lowest first print response rate since 1990 across any month of the year, it was below 50%. So probably shouldn't be surprised that December got a big revision. And even now in the second release for December, the response rate is still much lower than it usually is. So I wouldn't be surprised to see another big revision to December in either direction when we get the next release of data. For January, response rates, they weren't quite as low as December, but still much lower than they are normally in January. So it opens the door for a potentially bigger revision to January's data as well next month.
Mark Zandi: Probably up to 517.
Dante DeAntonio: You never know. Right.
Mark Zandi: That was the number, right? 517.
Dante DeAntonio: 517, yep.
Mark Zandi: Yeah, 517. Okay, good. Well thanks for doing that. Chris, anything else?
Dante DeAntonio: Nope, just looking forward to having Marissa back next week.
Mark Zandi: Yeah, it'd be good to have her back. And Dante, always good to have you on Jobs Friday. Really appreciate the insight and expertise. And with that, dear listener, we're going to call this a podcast. Talk to you next week. Take care now.