Dante joins Cris and Mark to digest the September jobs report. The outsized job gain during the month was surprising, but after Dante's masterful dissection of the data, the group agrees there is a lot to like in the report. After the stats game, the discussion turns to the recent surge in long-term interest rates and how big a threat it poses to the economy.
Dante joins Cris and Mark to digest the September jobs report. The outsized job gain during the month was surprising, but after Dante’s masterful dissection of the data, the group agrees there is a lot to like in the report. After the stats game, they discussion turns to the recent surge in long-term interest rates and how big a threat it poses to the economy.
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. Of course, Cris deRitis. Hey, Cris.
Cris deRitis: Hi, Mark.
Mark Zandi: How's it going?
Cris deRitis: It's been a bit of an emotional rollercoaster this week.
Mark Zandi: It has? Anything in particular?
Cris deRitis: Shut down avoided. I was ready to mark down my recession odds and then the speaker gets ousted, I have to raise them back up. You got oil prices going to the mood and then falling to the earth, not to mention the 10. We got everything moving around.
Mark Zandi: A lot of volatility out there. A lot of stuff going on.
Cris deRitis: A lot of volatility.
Mark Zandi: Good. Well, we'll take a pulse of your general view in just a minute because we want to introduce our other colleague, Dante DeAntonio.
Dante DeAntonio: Hi, Mark.
Mark Zandi: Dante is a regular here on Inside Economics on Jobs Friday, and indeed it's Jobs Friday. This is morning of Friday, October 6th. How are you doing, Dante?
Dante DeAntonio: I'm doing well, thanks.
Mark Zandi: Yeah?
Dante DeAntonio: Yeah.
Mark Zandi: Okay, good, because you're going to do the heavy lifting here.
Dante DeAntonio: I'll do my best.
Mark Zandi: I've been following jobs reports for many years, let's say now decades, a few decades, and it always feels like once, twice a year we get what I would call an out of bounds jobs report, something that's way outside expectations. And this one, fortunately it was on the upside, I guess. 336,000 jobs created during the month, but this felt kind of out bounds. Give us the rundown. What was your sense of the numbers and what it means?
Dante DeAntonio: Sure. I'm going to give you the straight rundown first, then we can talk about why I may have some buyback on some of what's in the report.
Mark Zandi: Okay. That'd be great. That's called expertise, right?
Dante DeAntonio: There you go.
Mark Zandi: You're going to provide your insight into, "Here's the numbers, but hey, let me tell you what the real numbers are." That's what you're saying?
Dante DeAntonio: That's what I'm saying. Yep.
Mark Zandi: Okay. Okay. Fire away. Fire away.
Dante DeAntonio: So we got a total gain of 336,000 jobs in September, 263,000 of that came in the private sector. We also had substantial revisions in an upward direction for the last two months, which is unusual given what we've seen recently. Total revisions to July and August were 119,000, so it's a pretty big shift. If you looked at the three month moving average of gains last month before revisions, it was about 150K. Now with a new month of data and those revisions, that three month average is up to 266,000, which seems like a pretty big swing in expectations about where the labor market is going. Obviously there's a big jump in government payrolls, up 73,000 this month. Also some big revisions there, which we can get into a little bit later. Across other private industries, there wasn't a whole lot of notes.
You have small gains in construction and manufacturing, transportation and warehousing moved back positive after the shuttering of Yellow Corp had a hit last month. Healthcare continues to be the biggest steady driver of growth in the private sector. Leisure and hospitality maybe was the one quirk there, where growth jumped back up to almost 100,000 after averaging only about 40,000 in recent months. So it was the biggest increase in leisure and hospitality since January, a little bit unusual. In terms of hours worked, average weekly hours were flat, didn't change from last month. Average hourly earnings was probably an upside surprise in the sense that it was a little bit weaker than expectations.
It came in at 0.2% for the second month in a row, which is obviously good news in the Fed's view of wage growth to moderate further. The household survey was uneventful, I would say. There just wasn't a whole lot going on. You had small gains in the labor force and in employment as measured by the household survey, which left you with the unemployment rate unchanged at 3.8%. Again, that's maybe positive news after we had expected that to come back down a bit when it jumped in August. Household survey, just not a whole lot going on. Participation was flat, employment population ratio was flat. There just wasn't a whole lot of change there relative to the big surprise on the payroll side.
Mark Zandi: So good, bad, bad, good? What do you think?
Dante DeAntonio: I think it's hard. I think this whole good is bad right now framing makes this seem bad. I think at the outset, this is a stronger report than we expected, which is probably bad news for the Fed in hoping that they'll-
Mark Zandi: Meaning the Fed would be more likely to raise rates, and if they raise rates, more likely to do the economy in at some point in the future? That's the thinking?
Dante DeAntonio: But I think there's enough here to think that hopefully the Fed will see through that headline 336 gain and realize that this isn't really quite as strong of a report as it might seem on its face.
Mark Zandi: Right, right. And should they read through it? 336,000, to my earlier point, is that one of these just one-off, wacko numbers that are not consistent with other stuff and it's more noise than signal, as they say?
Dante DeAntonio: Yeah. I think there's a couple of pretty significant quirks in the numbers, both in the revisions to the past two months, which were big, and in the current months. So the revisions to the prior two months I mentioned were up 119,000. If you look at revisions to private payrolls over the last two months, they were actually down 12,000, so that revision is almost entirely driven by government. Government payrolls revised higher by 131,000 in July and August.
Mark Zandi: Do you know what's going on there? I didn't know that. That's interesting.
Dante DeAntonio: I think most of it is in state and local government. My guess is a lot of it's around seasonal adjustment issues. That time of year is problematic always in terms of state and local government education payrolls, and so my guess is there's still some issues there in sorting out what's a post pandemic trend versus should we expect to go back to what happened in 2019? So I think there's just a lot of noise in the data still and not a lot of data that's clean that isn't hugely impacted by the pandemic. And so I think there's just some uncertainty around government payrolls at this point.
Mark Zandi: Just to make sure I have this right, you're saying we had these upward revisions to payroll employment growth in the previous couple months, and that was all in government. Excluding government, private sector payroll rolls actually got revised down again consistent with the downward revisions we had been getting.
Dante DeAntonio: Yeah. It was a very small downward revision. It was only 12,000.
Mark Zandi: Still.
Dante DeAntonio: If you look at the industry level, there were some industries that were up, there were some that were down, but they were all pretty minor and the net result was it was down a bit in private payables.
Mark Zandi: And it's not like state and local governments just discovered they had tens of thousands of more employees, you're saying it probably is related to measurement. Seasonal adjustment would come to mind. You don't know for sure, but that feels kind of sort of what's going on here.
Dante DeAntonio: Yeah. I started to look into it a little bit before we got on, and if you look at the sort of the unadjusted movements in state and local governments in July and August, it's hard. They've shifted, obviously, over time. There was big differences in 2020 and 2021 for obvious reasons, and now 2022 and 2023, it's a question of it looks different than it did in 2019 and is that a real difference that seasonal adjustments should be accounting for or is it still we're working our way back to some pre-pandemic trend in the unadjusted data? And so I think there's not a lot of information for the BLS to go off of at this point to figure out what's the right seasonal adjustment factor in some of these industries that move a lot month to month, and so I think there's just still a bit more uncertainty than we're used to.
Mark Zandi: Now, one of the reasons I think that we've been getting these revisions to previous months, and they've been consistently down pretty large. Downward revisions, I think one month, July got revised down a 100K or something like that. Our thought was that it goes to response rates that the response rate. So this is a survey of businesses, the payroll survey, and businesses are responding at a lower rate at least initially, and they ultimately respond a month or two later and thus the revisions, but initially they're low. Do you have a sense here, was the response rate low again?
Dante DeAntonio: It was, and if you look across the last three months, it's been particularly bad. So if you go back to July, the response rate for the first release of data was the lowest that it had been since 2008. In August, the actual response rate was below 60%, and it was the worst since the early 2000s, I think 2002. And then again here in September, the response rate was better. It was up to 68% roughly, but that's still the lowest for a first release of September data since the mid-2000s. Response rates are pretty bad across the board right now. They do get better on the second and third release of data, but that first print that we get is more tenuous, I think now than it used to be given those low response rates.
Mark Zandi: Right. Interesting. Any other technical measurement issues you want to call out?
Dante DeAntonio: Yeah. I would say the other thing, I mentioned the leisure hospitality jump in September. That again, if you look at the unadjusted versus the adjusted data, I think you could argue that there again, there's a big seasonal movement that happens in September all the time. There's actually a big decline in the unadjusted leisure and hospitality payrolls in September as you get the shift from summer into fall, and the size of that decline has moved around a lot here since 2019, if you look at the early pandemic and the now. And I think again, it's a question of what's the right seasonal adjustment factor?
Is the data we're seeing now a true representation of what it is or is it we're still adjusting back to some normal? So I think again, that boost that we saw in leisure and hospitality could be in part driven by that uncertainty in the seasonal adjustment process. If leisure and hospitality was something closer to what it's been in recent months, private payroll growth is close to 200K again as opposed to 260, then obviously well off that headline, 336. So I think there's reason to think that certainly if you're just looking at the headline, it's almost certainly overstating the case here for the month.
Mark Zandi: Okay. Bottom line, job growth, the job market is strong, no debate, but probably not nearly as strong as the top line, 336K in the upward revisions the previous months would suggest.
Dante DeAntonio: I would agree. Yeah.
Mark Zandi: You would agree with that. Okay. All right. Cris, any holes in Dante's rundown you want to fill in and what's your interpretation of the numbers?
Cris deRitis: No, I think you got it. And my interpretation is similar that directionally, sure, things are strong, but I do fear that there's some measurement error in this number. I'm not taking it at face value and I don't expect the Fed will either.
Mark Zandi: Right. Okay. So you're strong, not as strong as the headline number would suggest.
Cris deRitis: Right. Do you take the wage number at face? That's pretty good.
Mark Zandi: I got to be careful that I don't spin everything positively, but I kind of spin it positively. I want to see jobs. We like jobs, and the other interesting thing about the report, correct me if I'm wrong, Dante, that you didn't mention, very broad based job creation. A lot of jobs, you're right, in government, healthcare, leisure and hospitality. But it felt like, I was looking through the BLS has this nice table where it shows employment change by month, by industry, there was a lot of industries that were up. I don't know, there's a diffusion index that captures that. I hope I'm not taking anyone's stat for the game, but is my sense of the number correct. Was it broad based?
Dante DeAntonio: It certainly was, and the diffusion index was up a bit relative to where it's been in recent months. And I think if you look at major industries, the only decline was in information, which again is the actors strike issue probably still playing out there. But if you look at major industries, there was still growth almost everywhere. It wasn't huge amounts of growth, but I think in terms of looking for pockets of weakness or places where payrolls are actually declining, it's still hard to find those, which is a good sign.
Mark Zandi: So I look at that and I see strength. In some respects, it's not surprising we would see strength. This kind of job gain, but the just ended third quarter, that was a pretty strong quarter. I'd say a really strong quarter for the economy. You do these tracking estimates for real GDP growth in the quarter based on the data flow that's coming in, the monthly data, where are we? We're at 3.7, last I looked, or something like that. 3.7%. That's annualized GDP growth and just for context, the economy's underlying potential growth rate is probably around 2. That's almost double the underlying potential growth rate, so it's not surprising you'd get a solid job number. And also, the other data in the job market feel pretty good. UI, initial claims from unemployment insurance remain around just over 200,000 per week, which is very low, so layoffs remain low.
And the JOLTS numbers we got, job opening, labor return survey data, we'll talk about that some more, but that looked pretty good. So not surprising that we would get strength. And here's the other thing that I think is really important and comes out when looking at the household survey. So you got the survey of businesses, the payroll survey, and now you've got the survey of households that's the basis for labor force and unemployment. The supply side of the labor market remains very strong, even stronger than the demand side that we just talked about. Labor force growth is really very good. Year-over-year I was looking, 2%. That's double what I think we think we would get, even more than double given demographic trends and the aging of the baby boom generation out of the workforce. And that goes to labor force participation, that goes to immigrant workers coming into the workforce.
And if you look at the average monthly change in labor force, it's 275,000 per month over the past year. And that goes to the stable unemployment rate, which is somewhere rock solid between 3.5 and 4%, at least a year and a half, probably coming up on two years. I need to take a closer look, but that's pretty amazing. That's very strong, healthy labor supply. So we're getting all this labor demand, but we're also getting a lot of this labor supply and unemployment's stable. Other measures of labor market, slack, all our strong labor market but stable, nothing suggesting overheating. And then on top of that, you get as Cris said, the average hourly earnings. That's the measure of wage growth in the report and that was pretty good. It came in I think what, two tenths of a percent increase, you said on the month?
Dante DeAntonio: Yep.
Mark Zandi: Year-over-year of what, 4.2, something like that year-over-year?
Dante DeAntonio: 4.2. It's 4.15.
Mark Zandi: Every economist has it in their mind, 3.5% is the right kind of number for wage growth to get inflation back to target. That's 2% inflation and then you add in 1.5% of underlying productivity growth. But I never really understood why it's 3.5, by the way. It feels like it should be 4. 2.5% CPI inflation plus 1.5% productivity growth gets you to 4. You know what I'm saying? But I'm splitting hairs, but that's the point. We're within statistical spitting distance. I like that term, statistical spitting distance. Right? You know what I mean?
Dante DeAntonio: Technical term.
Mark Zandi: Yeah. Statistical spinning distance of target. So I look at the report, at first blush you go, "Oh, this is going to be a bad day. Bond yields are going to rise," and I want to come back and talk about bond yields because that seems to be biggest threat to the economy and the most immediate threat to the economy. And stock prices would be down, but you look at the internals of the report, I just feel a lot better as I look deeper, and now I even feel better listening to you and hearing some of the technical factors. So I came away thinking, but again, I tend to spin things positively. I got to be careful about that, but it felt like this could be spun positively. It sounds like even you, Cris, feel the same way.
Cris deRitis: Yes, yes. Again, you look at it at face value, assuming the data is right, there's very few blemishes here, if any. Right?
Mark Zandi: Exactly. Right. Okay. Anything more on the employment report before we move on? And we are going to keep this a relatively short podcast because the podcasts we've been having, I don't know if listeners , I'm sure they've noticed this, but they've been very long, like an hour and a half long. It's like movie long kind of podcast. Been getting a lot of good feedback, but nonetheless, they're pretty long, so we'll keep this one relatively short. But anything else on the job numbers that you want to call out?
Cris deRitis: I guess you alluded to the JOLTS and the job openings were up a lot as well, so this would be consistent, a strong labor demand in the openings report translating this strong payroll growth here. But I also look at that JOLTS number and I'm suspicious of the validity there as well, given.
Dante DeAntonio: I was going to say, that's another one where the big jump was almost entirely in a single industry, which always makes me a little bit apprehensive.
Mark Zandi: Oh, I didn't know that, Dante. Dante is like a wealth of information. I love to have you on. So what was that?
Dante DeAntonio: Openings were up roughly 700K over the month, but about 500,000 of that was in professional business services, which have not been particularly strong in terms of job growth recently. So I think that would be the biggest increase ever in a single month for job openings in that industry, which just feels unlikely.
Cris deRitis: It feels strange.
Mark Zandi: Isn't that where temp help is too? Isn't that temp help? And that's been declining.
Cris deRitis: That is where temp help is.
Dante DeAntonio: It seems like a weird fit.
Cris deRitis: The job survey response rate there is even lower.
Dante DeAntonio: It's very bad.
Mark Zandi: But other than that pop in job openings, which now feels, given what you just said, even less real, other elements of the JOLTS felt pretty good. If you're looking at a strong job market that's throttling back, strong low layoffs, I view that as a very positive thing because I just don't see how you get a recession without layoffs. I just don't see it. Consumers are going to keep spending until they're spooked, and the only thing that really spooks people is that they start losing their job. And then from a wage inflation perspective, the quit rate is all the way back into pre-pandemic. It is consistent with the average hourly earnings, the slower wage, the moderating wage growth that we've been observing, so that all felt pretty good. Hiring rates, that's back to pre pandemic, that felt pretty good. So I thought that the JOLTS was pretty good report altogether as well.
I did mean to ask on the JOLTS while we're on the topic, the job openings, I've kind of been making this argument that it doesn't really cost businesses anything to keep open job positions. Historically, the cost might've been greater because if you have an open position and you start advertising, you'd have to pay the local newspaper for help wanted ads, and they were expensive back in the day before online help wanted. But now there's really very little cost to keeping an open position, and if you're a cautious business person who's been through a lot of labor shortages over the years, pre-pandemic, during the pandemic, post-pandemic, you have an incentive to keep those positions open, even though you might be slow walking the hiring. So I kind of downplay the informational value in the open positions. Dante, would you concur with that perspective?
Dante DeAntonio: I think certainly in the noise of the data and I think just in the level today relative to 2020, I think there's reason to believe that we shouldn't make too much out of the fact that openings are higher than they were three years ago, four years ago. And certainly, the month-to-month volatility I think is probably largely driven by low response rates. If you look at the openings from JOLTS compared to Indeed publishes a measure of job openings as well, they trend mostly the same, it's just that the JOLTS data is just all over the place.
It jumps 500K and then falls 600K, so it's just very noisy relative to the Indeed measure. But they both have been trending down, which I think makes sense. And they're both generally moving in the same way, but they're still higher than they were pre-pandemic, which again, I don't know that I'd read much into that for the argument that you make. It's just not that expensive to keep positions open, and firms might just be hedging their bets a little more than they used to in terms of leaving positions out there.
Mark Zandi: What do you think, Cris? Do you feel the same way as I do about the job openings numbers?
Cris deRitis: Yeah, that's right. It's maybe directionally helpful, but there's some measurement there as well, measurement issues.
Mark Zandi: Hey, one other measurement technical issue, just to get it out there, strikes. We've been having a lot of strike action, seemingly. UAW, the actors writer strike, hospital, Kaiser Permanente. Did that have any impact on the numbers today, Dante?
Dante DeAntonio: So no impact today because the actors strike was already ongoing last month, and so the adjustment was essentially the same, so the net effect for September would be nothing. And then the UAW and the Kaiser Permanente strikes were too recent. They didn't encompass the full reference period in September, so those won't. If they continue, they could end up showing up and impacting the October data, but there was no effect on this report from strike activity.
Mark Zandi: Okay. Very good. Okay, let's play the stats game. The game is we each put forward is statistic, the rest of the group tries to figure that out with questions, deductive reasoning, clues. The best stat is one that's not so easy that we get it immediately, one that's not so hard, we never get it. Bonus if it's apropos to the conversation at hand. Dante, you want to go first?
Dante DeAntonio: Sure. Let's go with 3.4%.
Mark Zandi: Okay. In the jobs report?
Dante DeAntonio: In the jobs report, yep.
Mark Zandi: Household survey?
Dante DeAntonio: Not household survey.
Mark Zandi: Okay. That means it's the payroll-
Cris deRitis: Payroll survey.
Mark Zandi: Is it related to wage growth?
Dante DeAntonio: It is, yes.
Mark Zandi: Oh, wow. Oh, I know what it is. Cris, you're going to bow to me.
Cris deRitis: Please, please.
Mark Zandi: You're going to have to bow to me. It's the three month annualized change in average hour earnings.
Dante DeAntonio: I served it. It's one of your favorite. You love it.
Mark Zandi: Oh, you're saying that was an easy one.
Dante DeAntonio: For you, because it's in your wheelhouse. It's one that you think about. You've used it before, I think.
Mark Zandi: In my wheelhouse?
Dante DeAntonio: In your wheelhouse.
Mark Zandi: Oh my gosh.
Cris deRitis: That was well done. That was well done.
Mark Zandi: Oh, thank you.
Dante DeAntonio: Great job.
Mark Zandi: That's what I wanted to hear.
Dante DeAntonio: Just wanted to pat on the back. There you go.
Mark Zandi: [inaudible 00:25:13]
Cris deRitis: I was in year over year growth rates, totally in the wrong place and you went right to the wages.
Mark Zandi: Well, and that's a really good statistic, right?
Cris deRitis: Yeah.
Mark Zandi: You want to explain, Dante, why? That's very encouraging, actually.
Dante DeAntonio: Yeah. We talked about the year-over-year growth rate is still 4.2%, but if you look recently, August and September month-over-month growth was only 0.2%. Back in July, it was slightly higher. It was 0.4, but I think it was actually a little under that unrounded. So if you take that three month annualized rate, it's down below 3.5%. And we talked a little about should we trust the wage number in light of everything we just talked about with the report, and I think there's a couple of things. One, the wage number for August actually didn't really move much, and two, we talked about all the issues with government, but the wage numbers that we're referencing here are for total private payrolls.
So any issues that are happening in government aren't going to necessarily affect the wage measure that we're looking at, so I think there's more reason to think that this is a number that we can rely on a little bit more heavily. And obviously that 3.4%, you said maybe we shouldn't be worried about 3.5% being the target that we need to get to, but certainly this is signaling that we're moving in the right direction, that wage growth is likely to come under 4% year-over-year here pretty quickly. Maybe get to 3.5%, maybe not, but I think it's going to be in that range that we're talking about where the Fed is going to feel more comfortable with wage growth here pretty quickly if things continue.
Mark Zandi: And of course, the wrap against average early earnings, the wage measure in today's numbers is that it can be influenced by the mix of job growth across industry, across occupation, so you have to be careful in using it. But having said that, the best measure or at least the one that we feel is best, the employment cost index, ECI, that's quarterly. That'll come out what, a couple of weeks from now? Two, three weeks from now. That also has been moderating too. I think it's 4 to 4.5%-ish. In fact, I think in Q2 in that quarter analyzed, it was 4%, I believe.
Dante DeAntonio: It's definitely come in. You probably remember the exact number better than I do, but it's definitely been showing us a similar trend, we just don't get the update as frequently. And certainly the mix, we had a big jump in leisure and hospitality, payrolls. Those tend to be lower paying, so there's some reason to think that maybe that's weighing a little bit on it, but we got a good number last month as well when leisure and hospitality growth was pretty sluggish. So certainly there are issues there, but I think it's still a fairly good measure of what's going on.
Mark Zandi: And so bottom line, your sense is we're within statistical spitting distance of where we need to be on wage growth to make everyone comfortable that the Fed can hit its inflation target of 2%.
Dante DeAntonio: Yeah. That's the way I read it. Again, if you're thinking about how the Fed's reacting to this report, I think it gives another notch to say hopefully they don't overreact to that top line number.
Mark Zandi: Okay. Got it. Good statistic. Cris, you want to go?
Cris deRitis: Sure. 411,000.
Mark Zandi: It was in the jobs report?
Cris deRitis: Nope.
Mark Zandi: Oh, geez. Now I'm totally-
Dante DeAntonio: It labor market related?
Mark Zandi: So disoriented now.
Cris deRitis: That was my plan. It is labor market related.
Dante DeAntonio: Is it from the JOLTS?
Cris deRitis: It is not from the JOLTS.
Mark Zandi: And is it from UI, from the unemployment insurance? No.
Cris deRitis: No.
Mark Zandi: Okay. Is it a report that came out this week?
Cris deRitis: Yes. It comes out continuously, so it's summarized.
Mark Zandi: And you said it's labor market oriented?
Cris deRitis: Yes.
Mark Zandi: No, it's not labor market oriented.
Cris deRitis: It is labor market oriented.
Mark Zandi: It is labor market.
Cris deRitis: It's from the BLS data.
Mark Zandi: Oh, it's real time? It's continually coming out.
Cris deRitis: Well, as events transpire.
Dante DeAntonio: That should be something related to strikes.
Cris deRitis: Yes, yes. You're there. You're there.
Mark Zandi: 411,000? That sounds like a lot of strikers. Could that possibly be right? It is up to 411,000?
Cris deRitis: It's the number of people involved in a labor action, involved in strikes this year, year-to-date.
Mark Zandi: Oh, year-to-date. Okay. Year-to-date.
Cris deRitis: Exactly. Not at once.
Mark Zandi: That makes sense. Oh, that's interesting. And I guess it's up quite a bit from where we've been historically.
Cris deRitis: It's up a lot from certainly where we were in the last few years. It's about three times the average over the last decade, so it's a lot. But at the same time, we had in 2018, 2019, those were also big years for strikes. We were also in these 400,000 range.
Mark Zandi: Oh, is that right?
Cris deRitis: Yeah. And if you go back to the '90s, we were in this range as well. So I think there's a lot of strike activity going on. Certainly it's having an impact, but I think the anomaly might not be so much that it's higher now, the anomaly might've been that it was just so low over the last decade. Like all things we're seeing, there may be a reset in our baseline as we talk about the 10 year or other rates as well. So I just wanted to call it out. Now, there's a lot of talk about labor actions. I don't see them as being the real driver of some of the statistics we're seeing in the economy when it comes to wages and whatnot, so it's still a relatively small share.
Mark Zandi: That makes sense to me. It would be surprising if we didn't see more labor market action. The labor market is strong, and so the power dynamic between workers and their employers is more balanced than it has been in a long time, so not too surprising. And actually, the actions have been less disruptive than I had thought. A good example is the UAW strike, at least so far. Obviously that's still ongoing, but when it first started, the fear was it would be that there'd be broad based strikes, shut down all activity of the big three automakers, and we're not even close to that. We had a macro meeting this morning and Mike Brisson, our auto analyst, was saying I think it's 17,000 workers that are now out at the UAW, and they have 145,000 all in, so it's still very modest by that standard. Yeah. Okay.
Cris deRitis: Yeah. It'll be interesting to see how these actions play out. Is this the better strategy for both sides, more of limited versus the nuclear option, you just go all out? We'll see. But you're right. The other strikes this year, with some exceptions of course, they seem to have been resolved in fairly short order.
Mark Zandi: Well, I lost a little bit of track. The actors writers strike, it's been settled, right?
Cris deRitis: The writers strike has been settled.
Mark Zandi: The writers has, but not the actors. Right. Okay. All right. You ready for mine?
Cris deRitis: Yeah.
Mark Zandi: 80.8.
Cris deRitis: Some participation rate.
Mark Zandi: It's not a participation rate.
Dante DeAntonio: That employment population ratio.
Mark Zandi: It is indeed.
Dante DeAntonio: Prime.
Mark Zandi: Prime. Too easy. I knew it was going to be. Damn.
Dante DeAntonio: It was down a little bit?
Mark Zandi: Yeah. It ticked down and it's no higher than it was from the beginning of the year. So it's kind of where you would think it should be by looking at history consistent with a full employment economy, but no higher than that, no lower than that. It feels really good and it's very, very stable since the beginning of the year, along with the unemployment rate. So another indication just consistent with the idea that the labor market's strong but not overly strong, not blowing past full employment and kind of where you'd want it to be. It's like a really good labor market. Feels very good. And I like looking at the prime age, that's 25 to 54, because that's kind of the teeth of the labor market right there.
Okay. I do want to talk a little bit about something you brought up, Cris, earlier at the start, your emotions getting swung around here by all kinds of things going on. And one thing that's moving around a lot is long-term interest rates. In fact, at the beginning of the day when the numbers came out, bond yields really took off. I think they were up at some point 15 basis points, 0.15 percentage points. That's a big move in the long-term interest rates. Do you have any sense of where we are right now? And also in that context, has there been any change in market expectations for a Fed move, another rate hike at the next meeting in November?
Cris deRitis: Yes. Real time as of 11:30 on a Friday here, we're at 4.78 on the 10 year. So you're right, they shot up-
Mark Zandi: Oh, boy. They've come back in.
Cris deRitis: They've come back in. They're still up about six basis points from yesterday. And then on the Fed, I did notice this morning that the odds of a hike in November or December have gone up based on the CME Fed Watch tool, somewhat. The majority, about 69, 70% is still calling for a pause, but it's about a 10% increase in the part of the market that believes there will be a 25 basis point hike.
Mark Zandi: Well, while you're looking at your screen, what about stocks? Because there was a lot of red early on after the release.
Cris deRitis: Yeah. What was it? It's turned green.
Mark Zandi: Turned green. Oh, okay.
Cris deRitis: A little bit. It's not screaming green, but it was down, but now they're back up a bit.
Mark Zandi: Okay. So markets are kind of digesting it the same way we are, it sounds like.
Cris deRitis: Yeah, I think so. They're looking through.
Mark Zandi: They're looking through it and saying, "Okay, there's stuff going on here." And I'm looking at the wage growth, and that feels like that's what we need to get inflation back in the bottle and keep the Fed at bay. Okay. Well, that's good.
Cris deRitis: If you want oil too, oil's flat.
Mark Zandi: Oh yeah. Oil's down too, flat.
Cris deRitis: Flat. It's $82.
Mark Zandi: And of course, that's down like $10 a barrel in the last week or something the last few days, which is good news.
Cris deRitis: Right.
Mark Zandi: Okay. So let's talk about the run-up in interest rates. And by the way, six basis points, that's still a lot, but this bond market's been moving six basis points every 30 minutes, it feels like. It's highly volatile.
Cris deRitis: Yes.
Mark Zandi: So the 10 year treasury yield is what, 4.8%, something like that? Probably, if it's up six basis points. And that's up what, over 100 basis points, more than a percentage point over the past couple, three months, I would think. We were kind in the mid to high threes back at spring, summer, now we're up let's say 100 basis points, maybe a little bit over that. How worried are you about that, Cris, in terms of what it means for economic growth for the economy? How big a threat is that to the economy?
Cris deRitis: I think it certainly will weigh on consumers and businesses. The most obvious channel, the one I've been getting asked the most about this week, is the mortgage market. Spreads on mortgages have been averaging around 300 basis points, so this puts us on track for something close to 8% mortgage, assuming the 10 year does rise to about 5% here. And that's a big movement. That continues to eliminate the population that can actually afford a mortgage or reduce the population that can actually afford a mortgage at the prevailing rate, given the level of house prices.
And it's not just the existing home sales that we're seeing, it's increasingly more the new home sales that are taking on some of this decline, and that goes right to builders and GDP and jobs potentially. So I don't think it's a crisis moment yet, but certainly if we continue down this path, it's going to continue to impact that sector and then more broadly. The higher borrowing costs are going to impinge on the ability of businesses to hire, to expand as well. So I think it's going to slow things. Again, it seems as though there's enough dry powder here to offset some of the effects so it doesn't push us right into recession, but it certainly slows things down.
Mark Zandi: I am hard pressed though to get overly worried about it. You pointed to the one sector of the economy that's the most rate sensitive sector of the economy, single-family housing, and you look at single-family housing and it feels like it's navigating this pretty gracefully. Home sales are down a lot because of all the interest rate locks, so the fixed mortgage rate closing in on eight, the average coupon in an existing mortgage, if you look at all the mortgages out there that people have, it's 3.5%. So people, there's a strong economic incentive not to move because I've got the 3.5% mortgage. If I sell my home to go buy another home, get another mortgage, I'm going from 3.5 to 8, my monthly payment's just going to be unaffordable, so I'm not moving. So home sales are in the deep freeze, but they were in the deep freeze back at 7%, so I'm not sure. In terms of economic impact, that's relatively modest. And then you look at home-
Cris deRitis: That's on the supply side, right?
Mark Zandi: On the supply side.
Cris deRitis: Yeah, yeah. I wasn't going to move at a 6.5% mortgage, I'm not going to move at 7.5, I'm not going to move at 8. But on the demand side, the affordability side, those renters who potentially could have come in to purchase homes, they increasingly are just set to the sidelines. They're really locked out of the market.
Mark Zandi: Oh, sure.
Cris deRitis: They can't afford it.
Mark Zandi: I'm not arguing that it's good. It's bad. It weighs on home ownership, but I don't know that as a near-term threat to the economy, it's that big a deal. The big deal would be if you saw a big decline in single-family housing construction, and as you pointed out, we have not seen that yet because builders have responded to the increase in interest rates and weakening and affordability by, I think this is right, effectively cutting their price on the home. One way of doing that is buying down the mortgage. So buying down meaning either the home builder will cover a point or two of the mortgage rate increase for a year or two to keep the effective cost down, the effective price down to make this more affordable for you. And that's helped to keep new home sales up reasonably so and kept single-family housing construction from caving. And that would be I think probably the biggest, most significant channel through which interest rates would affect the housing market, which would affect the economy. Is that fair?
Cris deRitis: Yeah. I guess we could debate how much more room they have to give in terms of the incentives but so far-
Mark Zandi: So far, they've [inaudible 00:41:38] to the economy. And can you actually go back to the jobs report, look at construction employment. Obviously a lot of different things going on there, but the weakening in single-family home building hasn't been even enough to offset the job growth in the other parts of construction. Part of that's fiscal policy, part of that's multifamily, and you're still getting positive construction employment growth, and that's the most rate sensitive sector of the economy
Cris deRitis: So far.
Mark Zandi: So far. So far, you're right. But I guess if that's the most significant channel through which higher long-term rates are going to affect the economy in the near term, it doesn't feel like it's that big a deal if it's 4% or 4.5% or even 5% on the 10 year yield. No?
Cris deRitis: Well, I guess we've made this point in the past on its own, sure. We might be able to digest if the labor market stays relatively robust, but we've got some other headwinds here potentially as well.
Mark Zandi: I do worry about the higher rates in the context of the second thing you said, but this is more down the road. It's not in your face. And that is now rates are higher, so any debtor, whether you be a business person or a household commercial real estate owner with a loan that's coming due, it's maturing, and now you've got to re-up your mortgage or your loan and it's going to be at a much higher interest rate, probably under more onerous terms because the banks have tightened down, given what happened back in March.
That raises the risk that the business or the household or the property owner can't manage the higher interest payments and therefore defaults. And that hasn't happened yet, but it feels like if rates stay high for too long and more debt starts to roll over, you could see that happen. And that's to me the real concern, but that's not a concern for the fourth quarter or the first quarter. That might be a concern over the next couple of years, depending on how high rates remain and how long they remain there. Is that fair?
Cris deRitis: That's right. So for the existing borrower, that's true then. But the constraint is on the new borrowing, of course. Any new activity, I need to borrow to start a new business or expand my business, I'm going to face this higher rate. So it certainly could restrict additional spending or investment activity.
Mark Zandi: But it feels like this is a corrosive, not a cliff. It doesn't feel like this is a stake, a dagger in the heart of the economy. It's one of those things that it's just like a weight on the economy. At some point, the economy breaks underneath, but it's not one of those things that does us in. It's not a catalyst for recession, I guess is what I'm saying.
Cris deRitis: On its own, right. I'd agree with that. You need to combine it with something else.
Mark Zandi: Dante, you've heard the conversation around long-term rates. Anything you want to weigh in here on or say? I've got one more thing I want to say, but before I say it, I want to just pass it over to you.
Dante DeAntonio: No, I would agree. I don't think it is not a signal of a cliff event coming, I think it's that headwind and it's a question of how long can we run against that headwind, and does that eventually cause us to stop moving forward? Is that eventually enough to cause the economy to roll over or does something else happen at the same time that adds to that headwind? So I agree, it's not this singular event that's going to cause everything to fall apart, but it adds pressure and eventually over time, that could cause problems.
Mark Zandi: Right. Okay. And obviously, it raises the cost of capital and business investment gets hurt, and it's not good. I'm not arguing it's not a headwind, but it doesn't feel like a headwind that can blow us over here in the near term. Here's the other thing, and that is if you look at the reasons why long-term rates have risen, I think we've talked about this before on the podcast, the framework I use is I decompose the 10 year yield into three parts. Part one is inflation expectations. What do bond investors think inflation is going to be in the future? They need to be compensated for that. Two, what do they think the Fed's going to be doing? That goes to short-term interest rates, particularly after inflation. Expected, real short-term interest rates.
And three, the so-called term premium, which is the difference, the amount of yield, interest rate an investor in a long-term bond needs to compensate for taking a risk compared to investing in a short-term bond, given all the things that can affect interest rates between here and in the long run. And if you look in the recent run-up in long-term rates, none of it is related to inflation expectations. That's been stable as a rock, to the Fed's credit, right where you'd expect it to be, right where you'd want it to be. The run-up in rates is largely around the Fed in real short-term interest rates and the so-called term premium, and I feel less worried about that than if it were inflation expectations because one reason yields are up is because bond investors say growth is going to be stronger, therefore the Fed's got to keep rates higher for longer. So it's almost like saying rates are up because the strong, therefore it's less likely that higher rates is the thing that's going to do the economy in.
Am I making any sense at all? Do you see what I'm saying? If it was inflation expectations, you'd go, "Oh my gosh, that's a problem. The Fed's got to go on the war path, jack up interest rates even more, and we're going. This is going to push us into recession." But if it's not inflation expectations, I feel less worried about it. And here's the other thing. On the term premium, that's a melange of stuff. It's hard to disentangle all the things that are driving that term premium. I'm sure some of it is concern about the fiscal situation, our budget deficits, and that came to the fore after the debt limit debacle earlier this year because the treasury had to issue a lot of debt to catch up. And that conflated with the Fed's quantitative tightening, meaning they're allowing the treasury securities and mortgage securities on their balance sheet to run off. That kind of adds to the supply.
All those things are part of it, but it's also just speculation in the bond market. The bond market is a market. It's a financial market like the stock market and it's affected by, infected by momentum players, speculators, technical factors, short sellers, all kinds of wacko, weirdo things going on that are not fundamental that can drive a market for a while, but they can't drive it forever, for very long because the fundamentals will ultimately prevail. And I suspect a lot of this run-up in yield is those momentum players like the Bill Ackmans of the world that are tweeting about this, or the Larry Fink or Jamie Dimon talking about long-term rates fans the speculation and the momentum players in that market. So I worry less about that. So I guess my point is I'm less concerned about the run-up in interest rates because of the reasons why interest rates have risen. Okay, I'll stop. I went on a bit of a rant, Cris, does that resonate at all?
Cris deRitis: It does, it does. I guess one point I would kind of push back a little bit on is just the inflation expectations. You're right, they are anchored, and the run-up in volatility that we had has seemed to dissipated, but they are higher than they were prior to the pandemic. So that would suggest that this is a new-old regime of some sort.
Mark Zandi: No, rates are going to be higher now. I would say they're normal. That's just normalization, right?
Cris deRitis: That's right. Well, I guess-
Mark Zandi: The weird thing was before, right?
Cris deRitis: Exactly. Back to my earlier point, right? So I think you agree there, that we're not going back to 2, 3% as the normal. That's not happening.
Mark Zandi: Yeah. No, no, no, no, no. Right. In fact, I would argue that 2, 3% was the one thing-
Cris deRitis: Abnormal.
Mark Zandi: ... abnormal. It was unhealthy. When people said, "is the economy back to full swing after the financial crisis?" I would always say, "I would argue no," because inflation had not normalized and interest rates had not normalized, but now they feel like they've normalized.
Cris deRitis: Yeah.
Mark Zandi: And here's the other thing, and you can attest to this, Cris. We have had, in our outlook for long-term interest rates, a 4% 10 year treasury yield. That's been the stake in the ground in our forecast. And if you go back pre-pandemic, we had that forecast and of course back then rates were a lot lower, and we came under consistently withering criticism from clients and others saying, "What are you talking about? We're never going to get back to 4%." But we had the 4% and right now we're 4.8, which is higher than four. But going back, I think this is going to be the title of our podcast. It's within statistical spitting distance of 4%, given that the bond market moves 10 basis points in an hour, right? Am I wrong?
Dante DeAntonio: Well, the ten year was 4.1 just like, a month ago. The beginning of September, it was basically at 4.1. so you're talking about a huge movement in a month, and so you'd expect some of that could easily come back off just as quickly.
Mark Zandi: Yeah. So I certainly don't get hair on fire. I'm not even sure how worried I should be at a 4.8. If it goes to 5 and above and stays there, then that's going to be a problem ultimately. But if 4.8 goes down to 4.5, 4.25 over the next few months, I am not sure. Big deal. Agreed? Roughly so, no?
Cris deRitis: I guess it's the speed and duration, right? We can adjust to anything, pretty much.
Mark Zandi: I can't adjust to anything. Everything's got to be exactly the same for me. I got to get my Wawa coffee every morning. If I don't have my Wawa coffee, I got a problem, so nothing's got to change. Nothing can change.
Cris deRitis: Fair enough.
Mark Zandi: I can't adjust to anything. But anyway, I get your point. I get your point. I get your point. Now, Dante, he can adjust to anything. That guy-
Cris deRitis: He's dynamic.
Mark Zandi: Nothing bothers that guy, I'm telling you.
Dante DeAntonio: Even keel. That's what I shoot for.
Mark Zandi: I know. I got to meet your wife. She must be bouncing off the walls.
Dante DeAntonio: She's not as even-keeled as I am, that is true.
Mark Zandi: Really? Oh, that's scary. Scary. What about your kids? They're the guy. They're bouncing off the walls, I'm sure.
Dante DeAntonio: Well, yeah. I think age has more of a role in that than their actual personality, but yeah.
Mark Zandi: Okay. All right. Okay, very good. Hey, one last thing, Cris. Oil prices. That's the thing that had been really making us nervous. Are you less nervous now that oil prices are down or not, it's just too early to feel good about that? Because oil, I think it was just last week we were talking about this, oil was $90, $95 and it felt like it was going to $100. Now it's $80, $85 and at our macro meeting, again, we were talking to Cris Lafakis and Juan Pablo. Oh, Juan Pablo wasn't there. Chris Lafakis, and he's saying he thinks this is real, that we're going to be in the 80s. Does that make you feel better?
Cris deRitis: If it's true, it makes me feel better. I'm still nervous though. That market is subject to all sorts of movements.
Mark Zandi: I know, I know. But I'll take it, right?
Cris deRitis: Absolutely, I'll take it. If we could stay in this range, I think we can manage. If we could keep the ten year in this range, I think we can manage it.
Mark Zandi: Well, the other good point he made that it hadn't resonated with me until he was telling me this a few days ago, gasoline prices have actually remained. Even though oil prices have gone up, gas prices have not. And that goes to the fact that we're in a seasonally weak period of gas demand, less driving. And the so-called crack spread, the spread between what refiners charge for the refined product and the crude, is very, very wide and probably going to come in, and that's going to keep gas prices down, gasoline, diesel, jet fuel, cheaper relative to oil. At least for the next few months that's going to be the case, and that's also very positive.
Cris deRitis: I think I saw a statistic that we were actually using less oil or less gasoline today than we were back in 2019.
Mark Zandi: I think that's definitely true. Oil consumption here in the US is about 1 million barrels a day less than what it was pre-pandemic, so moving in the right direction. Okay. Let's end with the probabilities of recession. I don't think I've done this, well, since you were last on, Dante. What is your probability of recession? Let me tweak it a little bit now, because we're now in October. What is the probability that a recession will start at some point between now and the end of 2024, so on the other side of the presidential election?
Dante DeAntonio: I don't think it changes my expectation. I think a month ago I was at a third, and I would certainly nothing today has changed that, and I don't think things have settled enough over the last couple weeks that I would still say a third.
Mark Zandi: Okay. And Cris?
Cris deRitis: I'm going to stick with 45% chance. It's just too many things moving around, shut down still on the table here. A lot to worry about.
Mark Zandi: Now, I'm still at one third. Just to be clear, I was at 30% in the coming year, and then if you add in that one additional quarter end of next year, so just probabilistically one third. Okay. Very good. Anything else, guys, before we call it a podcast? I think this one turned out to be at least an hour or so. No matter what we do, it's going to be at least an hour.
Dante DeAntonio: Can't keep it under.
Mark Zandi: Can't keep it under an hour. But anything else you want to bring up?
Cris deRitis: I look forward to having Marissa back.
Mark Zandi: Yeah. I can't wait to hear about her trip to Japan. That'll be really interesting. Hopefully she's having a good time. Dante, anything?
Dante DeAntonio: Nope. I'm good. It was a pleasure being here.
Mark Zandi: Thanks for coming. Really appreciate it. And I'm going to be on the road hopefully next couple, three weeks, really for the next month or so. I'm going on the Asian, European, Middle Eastern tour, but I'm dedicate. No matter where, no matter when, I do the podcast. I haven't missed this podcast for two and a half years plus, and I don't plan to miss it anytime in the near future. It's one of the funnest things we do every week. So with that, dear listener, we're going to call this a podcast. Take care now, everyone.