With Marisa out on assignment, Dante joins Mark and Cris to discuss the latest U.S. employment report. After several volatile months due to hurricanes and labor strikes, the job market found its footing in November, with payroll growth reported across most industries. The team considers the report's implications for monetary policy and the long-run interest rate outlook. With all of the policy unknowns, they conclude that the only certainty is uncertainty.
With Marisa out on assignment, Dante joins Mark and Cris to discuss the latest U.S. employment report. After several volatile months due to hurricanes and labor strikes, the job market found its footing in November, with payroll growth reported across most industries. The team considers the report's implications for monetary policy and the long-run interest rate outlook. With all of the policy unknowns, they conclude that the only certainty is uncertainty.
Guest: Dante DeAntonio, Senior Director of Economic Research, Moody's Analytics
Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics
Follow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by one of my trusty co-hosts, Cris deRitis. Hi Cris.
Cris deRitis: Old Faithful. I'm here. Good to see you, Mark.
Mark Zandi: Have you ever missed a podcast?
Cris deRitis: I think I missed one on vacation. I usually dial in on vacation, but I think I did miss one or two.
Mark Zandi: One or two, okay. I've not missed any podcasts, I'm just saying.
Cris deRitis: Yeah, yeah. We rearranged the schedule.
Mark Zandi: Dirty little secret.
Cris deRitis: There you go.
Mark Zandi: Yeah. But we've been doing this podcast now for, is it coming up on five years? Could that possibly be right? In the spring, it'll be five years, I think.
Cris deRitis: I don't think we started ... Didn't we start in '21? It was during the pandemic era, but-
Mark Zandi: Right.
Cris deRitis: I don't think it was.
Mark Zandi: Well, we don't have Sarah to ask-
Cris deRitis: Yeah. It's either four or five. Well, what number is this? Maybe Franco knows.
Mark Zandi: Yeah, maybe Franco knows. Anyway. Well, let's put it this way-
Cris deRitis: A long time.
Mark Zandi: A long time. It's a long time. I used to have more hair. Yeah. But it's good to have you. And we've got Dante, Dr. D'Antonio.
Dante DeAntonio: Hi, Mark. I noticed Cris didn't comment on the less hair problem.
Mark Zandi: I know. Did you notice that? He kind of hurdled.
Cris deRitis: Just let it hang.
Mark Zandi: I heard a little stifled laugh. That's what I heard.
Cris deRitis: No, no, no.
Dante DeAntonio: He just muted himself quick so you couldn't hear it.
Cris deRitis: I've got more gray hair.
Mark Zandi: Well, I'd say you look distinguished. You see how that's done, Cris?
Cris deRitis: Nice. Nice.
Mark Zandi: Exactly.
Cris deRitis: Thank you.
Mark Zandi: How are you, Dante?
Dante DeAntonio: I'm doing well, thanks.
Mark Zandi: Yeah? Your family been able to navigate through all the colds and all the things going on?
Dante DeAntonio: Knock on wood, it's been an okay start to the late fall here so far. So we'll see.
Mark Zandi: I've been pretty lucky. My wife got pretty sick with flu-like symptoms and I somehow navigated through it without catching it. Now, let me knock on wood. So I'm sure I'm going to get nailed here pretty soon, but good to have you on.
Its Jobs Friday. We got the report for the BLS, Bureau of Labor Statistics Report for the month of November. And before we dive into that, any other chitchat you guys want to bring up? Where's Marisa, by the way? That's our other co-host. It seems like she has a lot of vacations. Is there something going on that I don't know about? No?
Cris deRitis: Well, you should know about it.
Mark Zandi: I should?
Cris deRitis: As her manager.
Mark Zandi: I guess I should know that, yeah. Maybe I just approve whatever comes across my transom here. No, no, she's a hard worker.
Cris deRitis: Absolutely. Well-deserved. Well-deserved.
Mark Zandi: Absolutely.
Cris deRitis: I'm sure she's doing some track economic research on her travels.
Mark Zandi: Wherever she is on the globe, in the globe. But she needs a vacation after dealing with me on a regular basis, that's for sure. I wear people out. But anyway.
Cris deRitis: No, you don't. No, you don't.
Dante DeAntonio: There you go, Cris-
Cris deRitis: He's learning. He learns. You see Dante, he learned. He said something nice.
Dante DeAntonio: Took him a little while. He was a little bit slow to get there, but he got it.
Mark Zandi: It was a little slow. Practice that.
Cris deRitis: All right.
Mark Zandi: Please.
Cris deRitis: Of course not.
Mark Zandi: Of course not. Okay. Well, let's dive right into it. Dante, you want to give us the rundown on the November jobs numbers?
Dante DeAntonio: Sure. The headline for November is a return to normal, I think, after the mess that we had in October with strikes and hurricanes. So we got headline job growth at 227,000 in November. Private sector growth just below 200,000. Positive revisions to the prior months as well. Brought the three-month average up pretty drastically. It had fallen to just north of 100,000 last month and now it's back up to 173, which I think is roughly in line with trend job growth. I think the underlying trends somewhere in the 150,000, 175,000 neighborhood. So we're sort of more consistent with that again.
On an industry basis, we got more broad-based growth, again after the mess in October. The same industries are leading the way has been the case over the last year or two. Healthcare, leisure and hospitality, the public sector. To a lesser degree construction had a little bit of a weak month here in November. Manufacturing bounced back, although not very strongly. If you subtract the returning striking workers, manufacturing would've been negative again. It was only up 22,000 and we got more than 30,000 workers coming back from strike, so not a great month for manufacturing.
Still some weakness at the industry level. Retail was down big. Information was flat. Temp help is basically flat still, which is weighing on professional business services. So I would say the industry story hasn't really changed a whole lot over the last couple of months. The same industries that have been leading the way are leading the way again. On the earnings front, another strong month for average hourly-
Mark Zandi: Can I ask you, maybe mentioned it but I missed it, what happened with government?
Dante DeAntonio: It was up again, another 33,000. Which it's been sort of consistently 30-40,000 jobs a month in the public sector.
Mark Zandi: Right. And it's been in the news recently, but federal government employment, that's not where the job growth is coming from. It's state and local?
Dante DeAntonio: Yeah. By the base of employment state and local government is obviously much larger and that's where most of the monthly job gains come from as well is state and local government.
Mark Zandi: Well, and also federal government employment hasn't changed in 50-60 years, right? It's like three million people working federal, but there's I guess outsourcing potentially that might be affecting the numbers, but the actual number of federal government employees, that hasn't changed in decades.
Dante DeAntonio: Right. State and local government is much more closely tied to populations since you've got education and public services and everything being run by state and local governments. So they've been trending higher over the long term.
Mark Zandi: Okay. So the only real weakness was across industry, broad industry was retail. That's where we saw-
Dante DeAntonio: Yeah, retail was down 28,000. Kind of surprising. Big decline.
Cris deRitis: Yeah. It is surprising, right?
Dante DeAntonio: And some of that is likely, I didn't look at the seasonals, but obviously retail's usually ramping up this time of year, so it's likely just that the ramp up in November was a little bit smaller, I'm assuming on an unadjusted basis payrolls were still up in retail.
Mark Zandi: There's this little weird kind of the number of days in Christmas plan season are shorter.
Dante DeAntonio: Absolutely.
Mark Zandi: So I think that messed with the seasonals and therefore I'm not sure I'd read too much into it.
Dante DeAntonio: Yeah, agreed. Yeah.
Mark Zandi: Okay. Oh, you were going to average hourly earnings, the wage measure in the report?
Dante DeAntonio: Yeah, it's another strong month up 0.4%, which was the same as October. So on a monthly basis, a little bit stronger than it had been in recent months. The year-over-year measure is still at 4%, which is where it was last month. It's up a little bit from its low. If you go back prior to October, it was at 3.8% for a couple of months. So I mean it's up a little bit, but I don't think it's anything to be concerned about at this point.
Weekly hours, again, sort of recovering a little bit from the weirdness in October. You had a slight tick up in average weekly hours and the aggregate measure of overall hours also ticked up a little bit, sort of reversing the declines from October. I think the harder part to reconcile here is what happened in the household survey. So the household survey was weak, again, weak in October for obvious reasons, but weak again in November. Declines in household survey employment, declines in the labor force, another uptick in the number of unemployed workers pushed the unemployment rate a little bit higher to 4.2%. Participation rates down again in November. So just a little bit hard to square the continued weakness in the household survey in November, given the rebound and the payroll survey.
Mark Zandi: I haven't had a chance to look at the report. So the unemployment rate notched a little higher, 4.1 to 4.2, at the same time that the participation rate notched a little lower, 62.7 to 62.5. Do I have that right?
Dante DeAntonio: So 62.7, two months ago it dipped a 10th last month-
Mark Zandi: Oh, I see. Another 10th this month.
Dante DeAntonio: ... and this month it's down to 62 5. Yeah.
Mark Zandi: Usually when participation is declining, that helps bring down unemployment, you just have fewer people in the labor force. Does that mean that household employment declined?
Dante DeAntonio: There was a big decline in household employment.
Mark Zandi: Big decline.
Dante DeAntonio: A little over 350,000 decline.
Mark Zandi: Oh, okay. And on a payroll basis, obviously they're measuring different things. If you take the household survey and put it on the same basis as the payroll survey, was it down? Do you know what that number was?
Dante DeAntonio: It was not. It was a more positive story. It was actually plus a little over a hundred thousand.
Mark Zandi: I probably took your stat. Probably took your stat.
Dante DeAntonio: It was in the running, but yeah, so it wipes out the decline in November if you adjust to the payroll survey.
Mark Zandi: Okay, so that mitigates any negative message in the number?
Dante DeAntonio: I think so, yeah. I mean, I'm not really reading into any of the weakness of the household survey. Just one because volatile all the time, and two, because you've got this difference in the adjusted measure as well.
Mark Zandi: Right, right.
Cris deRitis: Was there any issue with the survey response rate? I didn't get a chance to look.
Dante DeAntonio: So I didn't look at the household survey responding. The payroll survey response rates bounced back. They were actually quite high for the first print in November. It's back above 67%, which is actually on the high side recently for the first print response rates. Actually for October, I think we had talked about last month, the response rate for the first print was very, very low, obviously given all the issues with hurricanes, and that fully rebounded for the second print. For the first revision, the response rate is back to what it normally looks like. So they got much more data in at this point.
Cris deRitis: Great.
Mark Zandi: Good. And I guess the other macro data point I look at in the report is weekly hours, average weekly hours, any change there?
Dante DeAntonio: So it had ticked down by a 10th in October and it ticked back up by a 10th, so it's back at 34.3. I mean, so it's basically stable.
Mark Zandi: Okay. All right. So take a step back, look at the entire picture of the labor market. High do you characterize it?
Dante DeAntonio: I mean, I think it's good. I think this just reconfirms that the labor market hasn't really changed. October obviously left us sort of wondering if something had changed or if it was just those one-off effects and I think this sort of reconfirms that it was just those one-off effects and nothing has really changed in terms of the health of the labor market.
Mark Zandi: Right, okay. Cris, any different perspective or same perspective?
Cris deRitis: No, I'd agree with that overall. I think analysts are calling out the 4% wage growth, average hourly earnings. Is that the start of a inflationary spiral or not? Or any concerns there?
Mark Zandi: Who's doing that? Who's calling that out?
Cris deRitis: I heard it on a business news show this morning.
Mark Zandi: You listen to it really? Credible person on this business news show?
Cris deRitis: Given that inflation isn't all the way back down to 2%. Yeah, the strength of the wage in-
Mark Zandi: Because you're kind referring to the fact that most economists two, three years ago, if you ask them what's the ideal rate of wage growth, they'd say three and a half because that would be 2% inflation plus 1.5% productivity growth. So if you get three and a half percent, that's no inflationary. There's no pressure on corporate profit margins and therefore no pressure on businesses to raise prices more quickly. Now we're sitting at four. So is that a problem? That's what you're- 4.
Cris deRitis: Right. That's the conjecture that given that overall inflation has not fully recovered, is this a risk that we re-accelerate in terms of inflation, yet another factor that could lead to inflation taken off again?
Mark Zandi: Yeah, how would you respond to that?
Cris deRitis: I don't think so because I'm a productivity bull, right?
Mark Zandi: Oh, you were setting up Dante, is that what you were doing. Oh, I see.
Cris deRitis: It's a question for Dante.
Mark Zandi: That was over my head.
Dante DeAntonio: You can take a shot at me, Cris.
Mark Zandi: Yeah, I get it. Okay.
Dante DeAntonio: Lining it up.
Mark Zandi: Yeah, because you think underlying productivity growth now is probably what, closer to two than one and a half, therefore 2% inflation plus 2% productivity growth is 4%. That'd be consistent with what we're getting. That's not inflationary.
Cris deRitis: Yeah.
Mark Zandi: Dante, what do you think?
Dante DeAntonio: Yeah, I mean, I can't argue sort of backward looking, right? I mean, over the last four or five years, productivity growth has averaged closer to 2% than 1.5%. So I don't think wage growth today is a problem. I'm a little more skeptical that can we sustain that 4% wage growth moving forward? If productivity growth does slow a little bit, then it becomes more problematic. But as of today, I'm not worried about wage growth because productivity growth has come in a bit stronger.
Mark Zandi: Okay, so you're good with the 4% at the moment, no big deal.
Dante DeAntonio: Yeah.
Mark Zandi: Okay. Yeah. Okay. So broadly you feel pretty good about this, Cris? Any blemishes in the report that you can see that consequence?
Cris deRitis: There was Black unemployment that jumped up 0.7%.
Mark Zandi: Oh, did it? .07?
Cris deRitis: Yeah, but it's from the more volatile portion of the survey, right? Household survey tends to be, and it's a smaller demographic, so I don't know. That's also why I asked kind of about the survey response rate. So certainly something to watch, but I don't know that we should get overly excited at this moment.
Mark Zandi: Well, I guess the other problem with the household survey, in addition to, it's such a small survey, I think what 60,000 households each month, and there are what? I want to say 125 million households across the country. So that's a pretty small sample, and response rates are low. You've got the other issue that the household survey numbers like number of employed or labor force are benchmarked to census estimate population estimates that don't incorporate, at least in a meaningful way, the surge in immigration and now the more recent deceleration in immigration that we're observing. So it gets increasingly hard to interpret certainly the levels in the household employment survey. I mean, maybe the unemployment rate, which is a ratio, one to another, maybe no big deal.
Cris deRitis: Should be okay.
Mark Zandi: Should be okay, but okay.
Cris deRitis: But sampling's an issue, right?
Mark Zandi: What's that?
Cris deRitis: But sampling definitely is an issue.
Mark Zandi: Definitely an issue. Yeah, definitely an issue. Okay. Well I'd say picture perfect, right? I mean, I probably used that description now more than once over the last few years, but right down the strike zone. I mean, oh, did you guys mention the job revisions to previous months? Did you mention that Dante?
Dante DeAntonio: Yeah, I didn't give a specific number, but they were positive, which is sort of expected October to get at least bumped a little bit up and September also got revised higher again.
Mark Zandi: So we added some jobs in the revisions. Yeah, I thought it's underlying job growth, meaning abstracting from the vagaries of the data. And as we've been talking about, there's a lot of vagaries, Boeing strike and storms and response rates and seasonals and all that stuff. It feels like it's around 150K to me per month, 150,000 per month, in that ballpark. And that's enough jobs to keep consumers in the game spending, keeping unemployment low at 4% or close to, which is full employment, keep wage growth strong, sturdy at 4%, which means real wage growth of almost 2%, which means the economy continues to move forward, but it's not so many jobs that it causes unemployment decline, causes wage pressures to develop, causes inflationary pressures to take off again.
So it feels like it's like exactly where you would want it to be. And we've been there for a while. I mean, the unemployment rate, the 4% ish unemployment rate, I was just looking at a quick chart, it's been there for three years. Three years. I mean, I'd say soak it in, right? Soak this in. You don't realize how unusual this because you're too young, you don't know. Dante definitely doesn't know, right, Cris? He has no idea.
Cris deRitis: Yeah, yeah.
Mark Zandi: He thinks this is like common. This happens all the time. No, no, this is very unusual, atypical, increasingly unprecedented, I would say. Is it unprecedented now that I say that? We're getting an unprecedented territory. I think you have to go back into the sixties maybe if you want-
Cris deRitis: Like the fifties or something. Yeah.
Mark Zandi: Well, I think the fifties were a pretty volatile decade. You had a lot of recessions in the fifties. Korean War, strike. That's when the steel strike meant something back in the fifties. I think. We should look.
Cris deRitis: I thought the unemployment rate was, it might've jumped a bit, but I thought it was still pretty low.
Mark Zandi: Pretty low. Oh, you may be right. You may. Because everyone was off at war in Korea, abstracting from that.
Cris deRitis: Dante will know. He's our appointment historian.
Mark Zandi: No, Dante's probably meant historian's hiding over there now because doesn't know the answer. He should know the answer to this.
Dante DeAntonio: No, I remember we talked about the unemployment rate it was at or below 4% for I think about 24 months. Obviously it's gone a little above that lately, and I think that was the longest stretch that it had been at or below 4% since I think the sixties-
Cris deRitis: Sixties.
Dante DeAntonio: ... if I remember correctly. So we had been on a pretty good run.
Mark Zandi: Yeah, I guess we should broaden out and say how long had the economy been at full employment? That's a squishy concept, but reasonably estimated. I would bet this period is about, it's pretty damn close to being the longest, if not the longest. We should check.
Cris deRitis: I'll take a look.
Mark Zandi: That's a good tweet or Bluesky. Did I tell you guys I'm on Bluesky?
Cris deRitis: You did. How's it going?
Mark Zandi: Slower going than Twitter, but I think it has legs. You got some really interesting folks. Paul Krugman is I think moved over entirely to Bluesky. I don't think he's doing Twitter anymore. I could be mistaken, but I think that's the case. I'm already taxed out with this whole Bluesky Twitter thing X thing, because right now I'm putting different tweets or posts, I should say, on each. So I'm doing double duty at the moment, but I can't keep that up forever. So we'll have to see how that goes. Anyway, back to the labor market. I think it's, come on already.
Cris deRitis: According to script?
Mark Zandi: Yeah.
Cris deRitis: Okay. We've got all the-
Mark Zandi: Let me just say just to put a pin in it or is that the right phrase? Put a pin in it. Yeah. You know what I'm saying? Yeah. Put a pin in it. President Trump, incoming President Trump is inheriting a fabulous economy. There's no ambiguity here. This isn't a bad economy. This isn't even just a good economy. This is a fabulous economy. So let's just put a pin in it. Anyone disagree with that statement? In aggregate, clearly there are differences across groups within the economy. No doubt about it. High income households are doing a lot better than low income. Some industries are doing a lot better than other industries. Some regions of the country are doing better than other regions of countries. It's not great across the board, but in its totality, in aggregate, I'm hard-pressed to say there's been a better economy. This is a fabulous economy. Any disagreement with that statement, Dante?
Dante DeAntonio: No, I think it's hard to argue. Top line growth is obviously stronger than we would've expected. And like you said, we've been at full employment now for the better part of three years, and that's a pretty impressive run.
Mark Zandi: Right. Cris, any pushback on that?
Cris deRitis: No. Well, I guess you'd still have the folks who are comparing prices back to 2020 and whatnot.
Mark Zandi: Yeah. Okay. But objectively speaking.
Cris deRitis: But if it's a snapshot view.
Mark Zandi: Yeah, exactly.
Cris deRitis: Snapshot today of how things are performing, that's very strong.
Mark Zandi: Very strong. Okay. All right. Oh, of course a lot of other labor market data came out. We got the job opening labor turnover survey data a few days ago. We got unemployment insurance claims, we got challenger layoff announcements. I'm probably missing something. Dante, anything in those other releases, economic releases, data reports on the labor market that would suggest anything different than what we saw today?
Dante DeAntonio: No, I don't think so. I mean, challenger, jobless claims, jolts on the layoff side of things, all sort of consistent lead low. The jolt state I think is a little bit murky because it's for the full month of October, which we know obviously there were issues there with hurricanes, so you had a downtick in the hiring rate again. But the biggest movement in the hiring rate was in the south region and was in leisure and hospitality. So I believe that most of that movement was probably hurricane related. So aside from some of those movements that I think will likely reverse next month, I don't think there was really anything there to suggest a different story than what we've seen in the employment report today.
Cris deRitis: Big uptick in openings, right? That was-
Dante DeAntonio: Yeah. Uptick in openings, downtick in hiring. The quits rate picked back up again too, which I think some people would read obviously is a positive, that maybe workers are feeling a little bit better about outside prospects. Lately we had been on a pretty long downward trajectory for the quits rate. So if that holds up over the next couple months, I think that could be a positive for some increase in activity in the labor market.
Mark Zandi: Yeah. Talk about response rates though, right? In the job opening labor return survey response rates have been even worse and have fallen even more than for the payroll survey or the household. I think. I say that, but I think that's the case.
Dante DeAntonio: Yeah, they've always been quite low, and I didn't look for this month, but I would assume for October they were probably even lower than normal given everything that was going on. Yeah.
Mark Zandi: Yeah. Just to go about the point being that it's important not to get caught up in the monthly ups and downs and wiggles in the data. I mean, I think it's still very useful if you take a step back and look at the broader trends here. And the broader trends are that the number of openings continues to moderate, quits remain very low, hiring, that has softened, it's okay, it's consistent with pre-pandemic labor market trends but they've softened.
I think the one constant, and this is across everything, there are no layoffs. Layoffs remain very, very low.
Dante DeAntonio: Yeah.
Mark Zandi: Okay. Okay, good. So I have been zooming the whole morning. I have not looked at markets, what's going on in the equity market, the bond market, what investors are thinking about the Fed meeting here coming up? Is the fed meeting next week? Is it next week? But it must be next-
Dante DeAntonio: It's two weeks. It's the-
Mark Zandi: Two weeks.
Dante DeAntonio: ... 18th.
Mark Zandi: Oh, 18th, yeah. In two weeks with the probability of the Fed's going to cut rates because there's been widespread expectation that they would cut rates again. So Cris, have you been following the markets? What's going on there?
Cris deRitis: Yeah, so expectations are that the Fed will cut 25 basis points when they meet. The probability this morning is around 90%.
Mark Zandi: 90?
Cris deRitis: Yeah.
Mark Zandi: 9-0? Oh, okay.
Cris deRitis: So it's been a majority for a while, but it's even ticked up higher over the last week or so. So I'm pretty confident... At least markets are pretty confident that the Fed is going to make that move. Stock market, bond market pretty tame in terms of a reaction.
Mark Zandi: Flat.
Cris deRitis: I think stock market up a little a bit, bonds or ten-year treasury yields, I think plus or minus one two basis points. So not a huge reaction to this report.
Mark Zandi: Okay. Okay. So the investors almost fully anticipate a quarter point cut in the federal funds rate target when the Fed meets on December 18th, taking the funds rate from four-and-three-quarters to four-and-a-half, and of course it peaked at five-and-a-half percent earlier this year. And any expectations about what happens early next year? Do you have any sense of that?
Cris deRitis: I think a little more spread out, a little bit more uncertain, but I think March seems to be markets are coalescing-
Mark Zandi: Another rate cut.
Cris deRitis: ... around a next rate cut in March.
Mark Zandi: The one thing about the Fed that is increasingly an open question in my mind is what's going on in markets? Asset markets, financial markets meaning stock, stock market, the corporate bond market, what's going on in the crypto market? Gold. And then you go into real estate, commercial real estate values are down, but housing values continue to power higher and they're up a lot. I think 50, 60% from the pandemic. Stock prices have doubled I think since the pandemic. Of course Bitcoin's at 100k plus. Gold is close to, I think it's at a record high, last I looked, 27, $2,800 an ounce. So if you're sitting at the Federal Reserve and you're watching what's going on with asset markets, that would argue for maybe pausing here, right? Even though rates is seemingly still high, you got a lot going on with regard to asset prices.
Cris deRitis: Yeah, that's right. Condition's pretty loose, right?
Mark Zandi: Well, I guess that's the question, right? Because financial conditions also include the value of the dollar. The value of dollar is up, that works in the opposite direction than higher stock prices. Mortgage rates are pretty close to 7%. That's pretty high. Bank lending standards, which also go to financial conditions. They're tight. They're relatively tight. I mean, it got really tightened up after the last year's banking crisis, and I don't think banks have eased up since then. If anything, at least if you look at the senior loan officer survey from the Fed, it feels like they continue to tighten. So if you take the net of all these different financial measures and ask how financial conditions changed, I guess you would still argue they've eased, I guess you would say.
Cris deRitis: I look at the bond spread.
Mark Zandi: The bond spread?
Cris deRitis: Yeah.
Mark Zandi: The corporate bond spread.
Cris deRitis: Corporate bond spread, right? It's pretty tight.
Mark Zandi: Right.
Cris deRitis: So the valuations that you mentioned, right, those certainly would be of concern.
Mark Zandi: So you're saying the financial conditions have eased to a degree where maybe, I don't want to put words in your mouth, but maybe this is a time... If the Fed cuts in December and maybe they kind of stop and just kind of wait and take a look around?
Cris deRitis: I don't think so. I would think so. I would even say December is not as clear cut as what the market might suggest. You could certainly make a case that you could pause here. Labor market's still pretty robust. Inflation again, still not quite where you want but in the right direction. And with the financial markets, I think that would be a rising concern. I think they will take the cut, but I think they will pause and certainly take a closer look at things next year.
Mark Zandi: Right. What do you think, Dante?
Dante DeAntonio: Yeah, I mean, don't try not to read too much into the one-day swing in expectations, but I was surprised that expectations for a cut swung as dramatically as they did today after the employment report, if anything, to me, it solidified that the wheels aren't falling off the labor market. If there was any sort of concern after October, this should have mitigated any of those concerns. If anything, job growth is back to where it was. If anything, wage growth maybe is creeping in as a concern, even if we're not concerned about it.
So to me, if anything that would've made it less likely that the Fed cuts in December are not more likely. I still think they do cut in December, but I'm a little bit confused by the market reaction to the employment report this morning. And maybe that all reverses by the end of the day or by next week. And yes, it could all just be a temporary shift.
Cris deRitis: That's true too.
Mark Zandi: Right. Yeah, I'll have to say, I'm not sure. I mean, I do think we're at 4.75% on the funds rate target, it still feels like it's above the equilibrium rate and that means that monetary policy, the Fed is still restraining growth, policy is restrictive. Not a lot restrictive, but a little restrictive. If you told me the equilibrium rate was 4%, I'd say that feels about right to me. But I don't say that with confidence because we're seeing the job market's really strong and then financial conditions have eased, I don't know if they're easy, given what I just said about the dollar and the mortgage rate and bank lending standards, but they're definitely easier than they were not too long ago, given the run-up in equity prices and the tightening and corporate credit spreads and the crypto prices and everything else.
So I think you certainly should be starting to think about, maybe I should pause, take a little steam out of these markets, because right now the markets are anticipating further rate cuts. So if the Fed came out, at the December meeting, let's say they cut rates and they signal that they're going to go on pause here for a little bit, I suspect we would see these markets sell off to some degree. I don't know if it would be a big correction, but there would be some correction, right? Because markets are anticipating some further in easing in policy in the not too distant future in 2025. And if they don't get that, then presumably we would see stock prices down, credit spreads gap out a bit here.
But yeah, it's not clear in my mind at this point what's the most appropriate policy response, but I guess the most appropriate policy response is when you're confused, you kind of do nothing. I think they got to follow through on the December rate cut and then they see how things play out here a little bit before they start cutting rates some further. Of course, the other complicating factor in all of this is economic policy under President Trump, which creates, regardless of what you think about the policy before the policy actually occurs, we're talking about tariffs, we're talking about deportations, we're talking about tax cuts that could be unfunded tax cuts and add to deficit in debt, regardless of how you think about those things, what I think we can say with certainty is that it's very uncertain. We don't know what these policies are going to be and exactly the timing of those policies. So if that's the case, that seems to argue, doesn't it? That the Fed would more likely to sit on its hands for a while, just pause and take a look around and see how this all plays out.
What do you think, Cris? Does that sound right?
Cris deRitis: They're clearly not going to be disinflationary, right?
Mark Zandi: Yeah. There's no way that all that stuff is disinflationary, right?
Cris deRitis: So it's a question of how inflationary they are or maybe they're not inflationary at all. But yeah, so I agree with you, that would suggest you should wait and see what actually transpires before making any moves here.
Mark Zandi: So we've actually changed our baseline forecast. So if you go back a month ago, we had the Fed cutting rates in December, a quarter point, and then a quarter point each quarter going forward until the funds rate got down to 3%, which is our estimate of the neutral rate, the equilibrium rate, the R star in the long run, sometime in early spring, 2026, something like that. Where now we've got a December rate cut, we also have a March rate cut, although I say that was much less confidence, and then nothing, no change in monetary policy until September. And then we're assuming that there's enough evidence that things are moving in the right direction. There will be changes in economic policy, but they won't be earth-shattering changes and that'll allow the Fed to start normalizing rates. And we get back to that 3% equilibrium by the end of 2026. So instead of spring 2026 or year-end 2026, something like that. Does that sound like a reasonably good forecast, Cris, in the context of everything we just discussed?
Cris deRitis: It does. You still think 3% the-
Mark Zandi: Equilibrium rate long run?
Cris deRitis: Yeah.
Mark Zandi: I got to be humble here.
Cris deRitis: Absolutely.
Mark Zandi: I'm not sure, it feels right to me, that's our forecast. But I have to admit, I don't feel like I have a strong anchor to explain why that feels right to me. I mean, before the pandemic hit, I think the general consensus, and we were consistent with that, was a 2% funds rate target, and now we're saying three. And it feels like directionally, that's right. One reason that I have talked about in the past, and I think it's very important, is that US households and businesses were able to, and did a very good job of locking in the record low interest rates that prevailed when the economy shut down during the pandemic. Remember, mortgage rates got down to sub 3% fixed mortgage rates, and you got households refinancing their mortgages and got mortgages in the threes.
That's creating other problems now with interest rate lock and home sales and everything else. But it does insulate households from the run-up in interest rates. So if you go look at people's interest expense in aggregate, in aggregate, differences across income groups, whether you have credit card debt or not, so forth and so on. But in aggregate, debt payments as a share of income are rock solid, stable, and they're low. We've got data back to 1980. Now it's Fed in our data back to 1980 and it's low by the standards of that long period of history. And corporations the same way. Surprisingly, the Bureau of Economic Analysis publishes data showing the share of corporate non-financial, corporate cash flow that's going to interest expense, that is very low. I think it's at a record low. And we've got data back to World War II. I don't think I'm making that up. I think that that's in my mind's eye, and it has not risen at all.
So it's not only that households have locked in, but businesses have locked in. And so that's what makes the economy less rate sensitive. So this romping rates has not had the same impact that it would typically have, and one reason why the yield curve hasn't worked as a predictor of recession, and therefore ergo, that would argue for a higher equilibrium rate, at least for a while until liabilities adjust in a significant way. But that's going to take a while because households have revived into 30-year mortgages. As we can see, they're not moving. They're just not moving. And businesses they locked in too. I mean, a lot of businesses took on very long-term. I remember back in the day, I think some of the tech companies were issuing 50, 100-year debt. It was like free money. I could borrow it 50 basis points. So they locked in forever the lower interest rates.
The only entity that did not lock in, the US government, because of the debt limit battle, they had to issue all these bonds all at once. Back in 2023, the bond market choked, and so they had to start issuing short-term debt. And so the maturity of the debt got shorter, and now we're getting reamed as taxpayers because of the interest expenses rising on the federal government's debt. It's now ballooning over a trillion dollars I think at this point. I don't know, that was a soliloquy. What do you think, Cris? Does that resonate with you?
Cris deRitis: Absolutely. I always make that point during the debt ceiling battles that it's not costless and there's a big cost that we're paying now, right?
Mark Zandi: But my point about the logic behind why the equilibrium rate is higher, right?
Cris deRitis: Yep. I'm on board.
Mark Zandi: Now whether it's two and a half or three or three and a half, I don't say that with confidence, but directionally I feel pretty good about it. About a higher equilibrium rate.
Cris deRitis: Yeah, I'd agree with you.
Mark Zandi: Agree. Okay.
Cris deRitis: On a higher productivity.
Mark Zandi: A higher productivity? Yes. What do you think, Dante?
Dante DeAntonio: Do you think the risks are balanced around that 3% or do you think the risk is more one direction than the other? I mean, the dot plot from the Fed seems to suggest that they think the risk is to the upside, right? That the equilibrium rate might be above 3%. It seems like that's the direction they're trending. I'm curious if you think the same thing?
Mark Zandi: Well, it depends on how you frame it. So if you say in the long run, cutting through the business cycle, what is the equilibrium rate and how confident are you? I'd say 3%, and the distribution of risks are equal, higher or lower. If you're saying the equilibrium rate at the end of 2026, which is our forecast, 3%, what's the balance of risks? I say higher rather than lower, because we're well above 3%. So I think that's just where we are. But in the long run through the business cycle, I think I could easily argue three and a half or two and a half at this point in the long run. I know you got to book it. You're going to leave, right Dante? Where are you going?
Dante DeAntonio: I do. I have a client presentation [inaudible 00:39:06].
Mark Zandi: Oh, those clients. We got clients, right?
Dante DeAntonio: Never stops, right?
Cris deRitis: He's always working.
Mark Zandi: He's always working. Yeah. Well, I think we're going to keep this a short podcast without Dante, it just doesn't work on Jobs Friday, right Chris?
Cris deRitis: That's right. That's right.
Mark Zandi: And without Marissa to boot, it doesn't work. So we're running out of time because you have an 11 A.M. et a webinar with a good client. Okay. Any parting words, Dante?
Dante DeAntonio: No, I think it was a good month for the labor market. Good to see things return to normal after some uneasiness in October. So I'm happy moving into the end of the year here.
Mark Zandi: Well Happy Holidays.
Cris deRitis: What's your forecast for next month?
Dante DeAntonio: It's a little early for that, don't you think? 150 is an early forecast, just to throughout a trend job growth assumption.
Cris deRitis: All right, so good month.
Dante DeAntonio: Yeah.
Mark Zandi: Well, Happy Holidays. We won't talk to you until the other side of the holidays. I hope you have a great holidays and may everyone stay well in your household. And Cris, any parting words?
Cris deRitis: I'll see you next week.
Mark Zandi: See you next week? Because we will make our official holiday words at that point in time. But nothing else to say here? You're good?
Cris deRitis: I think we're good.
Mark Zandi: Okay. All right. Dear listener, this is a short one, hopefully a sweet one, and we'll talk to you next week. Take care now.