INSIDE ECONOMICS

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, my trusted co-host, Cris deRitis. Cris, good to see you.

Cris deRitis:                       Good to see you, Mark.

Mark Zandi:                      Yeah. And we also have Dante, Dante DeAntonio. Dante is a regular on Jobs Friday and today is Jobs Friday. How are you doing Dante?

Dante DeAntonio:           I'm well, thanks for having me.

Mark Zandi:                      Yeah, it's good to have you. This is a little later than we normally record the podcast. It is now 5:34 p.m. Eastern time. I've been traveling, I was in New York today, so we're taping this a little early. So I think we're all probably a bit tired, ready for the weekend. Maybe we'll keep this one a little shorter. I know I always promise that, it never ends up that way, but I think you guys will strangle me if we don't keep it to about an hour or so. But a lot of things to talk about today. Jobs Friday. So any words of wisdom Cris, before we get rolling here? Anything you wanted to bring up? Not that you have to.

Cris deRitis:                       Oh, I'm just looking forward to hearing how you're going to say this is exactly according to script and nothing changed and your odds of recession have actually improved, but let's roll.

Mark Zandi:                      You have pinned me. You nailed me. Oh, that's so funny, and I am drinking because it is late in the day. My glass of Pinot Noir, so forgive me if I take a break every once in a while and do that. Okay, Dante, let's turn to you first. You want to give us your sense of the report? What did it say?

Dante DeAntonio:           Sure. I feel like this is probably the same thing we've said several times in the last six months, but it was really a report of I think mixed messages, right? So I think the top line number-

Mark Zandi:                      Can I stop you for one second?

Dante DeAntonio:           Yeah, you can.

Mark Zandi:                      Has there ever been a report in your lifetime that doesn't have mixed messages? I'm just asking.

Dante DeAntonio:           I would say there's ones that are mostly positive or mostly negative. This one seem more split down the middle.

Mark Zandi:                      Oh, okay. But I don't think there may be in my lifetime, a half a dozen.

Dante DeAntonio:           Now I need to dig one up that's-

Mark Zandi:                      Yeah, where everything is in one direction and says, "This is definitively what's going on, but." Okay, well, that's why it makes it so interesting. Sorry, I'm sorry for interrupting. Go ahead.

Dante DeAntonio:           The headline number 263,000 jobs added is obviously higher than consensus expectations is roughly in line with where job gains have been over the last couple of months. Actually, saw an upward revision to gains last month. So it was actually higher at 284,000 than it was before. By industry, there was some mix there, there was some weakness in transportation and warehousing, some weakness in retail trade.

                                             A lot of that is likely seasonal adjustment issues, a lack of a ramp up in hiring which we can get into the details a bit later on I'm sure. But the weakness, again, for the several times now in the last couple months is on the household survey side. The unemployment rate held steady which is good, but the labor force declined, employment population ratio declined, participation rate declined, employment as reported by the household survey declined.

                                             So it was pretty much almost a purely negative story from the household survey, even though there was some optimism on the actual job gain side and that positive as a negative wage gains actually ticked up in the month which obviously is good news for workers in the short term, but probably not good news in terms of potential for a soft landing longer term. I think that's the main story from the report

Mark Zandi:                      Yeah, a lot to unpack there. So in the survey of businesses, the so-called payroll survey, 263,000 jobs were created in the month. And that was a bit above consensus. Consensus was what? Couple 100K?

Dante DeAntonio:           About 200,000, yeah.

Mark Zandi:                      Yeah, okay. Well, that's within spitting distance for these numbers, right? I don't know. Do you consider that to be a big difference? A meaningful difference?

Dante DeAntonio:           Yeah, particularly. I think the expectation is continued to be that job gains will moderate more quickly than they have to this point and they seem to be holding up better than expected month after month.

Mark Zandi:                      Which I don't get. If you go back to the beginning of the year, average monthly job growth was double this at least. I think it was closer to 600K. So when I say underlying, I mean abstracting from the monthly vagaries of the data to take a three month moving average of the data, something like that, and we're half of what we were at the start of the year.

                                             So it just feels like, it's hard to imagine it would be much ... Actually, I'd be a little nervous if it was much faster than that. Maybe suggesting the economy is going to struggle and go into recession. Just, I don't know, it just feels like we are expecting this thing to happen all of a sudden and it's happening. It feels like it's happening.

Dante DeAntonio:           Yeah, it just feels like we're increasingly in a world where I don't know how this can continue to happen where job growth is 250, 300,000 a month when labor force growth has been extremely weak in recent months. How do you continue to sustain that level of job growth?

Mark Zandi:                      Yeah, but even there, if you take that because the labor force numbers from the payroll survey, excuse me, the household survey and that's a small survey and that goes up and down and all around month to month. I don't read much into the month to month movements, but if you look at year over year on that one, we're creating ... Labor force has been growing 250,000 on average per month, and in the last six months, a pretty solid growth.

                                             So it doesn't feel like, yeah, labor employment's strong, it's slowing, it doesn't feel that much different than labor supply and that that'd be consistent with stable unemployment. The unemployment rate's been stable. I don't think it's changed much. I don't know, what? for six, nine months it's probably not changed very much. And the employment to population ratio which you mentioned for prime age workers, that's no longer rising. If anything, that's declined, right? So that'd be consistent with the idea that you're getting enough labor supply to meet the labor demand, no?

Dante DeAntonio:           Yeah, I think that the problem is just the different story from the two surveys because in the household survey, you've got labor force declining, but you've also got employment declining. So that's where you get the stable unemployment rate and employment to population ratio that's coming down. But if you try to compare the two surveys against each other, that's where you get these things that don't seem to fit together quite right I think.

Mark Zandi:                      Yeah, so I think we talked about this in previous months, but the household employment numbers are, they're softer, they're much softer. I think household employment, employment is measured by the survey of households has effectively gone nowhere since the beginning of the year. Payroll employment, that's the rate. Monthly increase has slowed sharply as we just discussed, but still pretty solid. 263 is still pretty solid.

                                             Do you read anything to that? These surveys will ultimately converge. They're not going to gap out forever. They're measuring the same, they're trying to measure the same thing and that's employment in the economy and they will ultimately come back. Do you have a sense of which is leading the way here or is it the weaker household survey or is it the stronger payroll survey?

Dante DeAntonio:           Yeah, in most cases, I would say look at the payroll survey, ignore the household survey and move on with your day. I think three or four months ago, I saw the divergence and I said, "I'm not really worried about that. Let's wait and see what happens." But now, the difference is pretty stark. You mentioned if you look back over the last eight months, in four of those eight months, household survey employment has declined. The total gain in household survey employment over eight months is 12,000. The total gain, not the average gain.

Mark Zandi:                      Oh, is that right? It's flat as a pancake.

Dante DeAntonio:           And over those same eight months in the payroll survey, you've added just shy of 2.7 million jobs. That's a-

Mark Zandi:                      Is that adjusting for the payroll concept in the household?

Dante DeAntonio:           That's not adjusting for ... If you do adjust for the payroll concept, the gap is I think about 1.8 million in terms of jobs that have been created over the last eight months, either with adjustment or without adjustment, that gap is the biggest that it's been ever in an eight month period, aside from the initial impact of the pandemic when measured.

                                             Yeah, so it's historically large. I agree, it's likely that it'll still start to come back together, but it is getting to the point where it's an unusually large divergence at this point.

Mark Zandi:                      Right. One theory I've heard is that when you're in a turning point for the economy, when things are moving up or down, the household survey does, tends to do a somewhat better job of picking the turn because it is able to capture what's happening with business failures or starts and the payroll survey, the survey of establishments, businesses can't really do that by construction. So that would suggest that the economy is slowing and the payroll surveys is not there yet. It can't capture the fact that businesses are failing or scaling back like the household survey again.

Dante DeAntonio:           Yeah, I've seen that same argument. I don't want to hang my hat. I went back and looked at the pre-great recession period. So if you look at the eight months leading up to the official start of the great recession in December of 2007, the household survey declined in four of the eight months leading up to December of 2007 where the payroll survey essentially didn't decline at all. Job growth and the payroll survey was three times as strong as the household survey in those months leading up to the start of the great recession.

Mark Zandi:                      Yeah, yeah, yeah, but Dante, this time is different.

Dante DeAntonio:           And I wouldn't hang my hat on that history repeating itself here, but there is some evidence to show that-

Mark Zandi:                      Cris is getting so sarcastic over there.

Dante DeAntonio:           That's right. That's right.

Cris deRitis:                       It's the end of the day.

Mark Zandi:                      Yeah, yeah, yeah, yeah, hey, go get a glass of wine buddy. Take an edge off. Yeah. Oh, he's already ... The elbows are already being blown around.

Cris deRitis:                       Oh no, all in good fun.

Mark Zandi:                      Okay. All right, fair enough. So in your synopsis, you didn't bring up wage growth or maybe you-

Dante DeAntonio:           Mentioned it.

Mark Zandi:                      Did he mention wage growth? Did you mention wage growth? Okay, I missed it, sorry.

Dante DeAntonio:           It's all right.

Mark Zandi:                      Okay. And I have one more technical question. Of course, this is average hourly earnings. It comes from the payroll survey of businesses and it can be heavily influenced certainly month to month by mix effects. Meaning, if you've got a lot of job losses in lower paying industries or occupations that could push up the measured wage growth or conversely the opposite 5% is where it's been since, well, really the beginning of the year that's been hanging there and that's high.

                                             That's not consistent with the fed's two and a half percent inflation target. Do you sense of this? Whether this month, anything weird going on with that? Was there mix effects there or do you think that's a real read on what's going on with wage growth?

Dante DeAntonio:           I think you could certainly make the argument. You did have some job losses in retail, which is obviously at the lower end of the pay spectrum. So you could argue that maybe that's a little bit, get a little bit of a boost from mix effects. Although historically when the payroll reference week doesn't include the 15th of the month, you get a little bit of a week read on wage growth, and this was an early reference week.

                                             So if anything you would've thought wage growth would soften a little bit this month just for timing issue, timing reasons, but it went the other direction. So I think mix could be part of it, but I do think it's certainly not a positive trend for where we want to see wage growth heading. If you look at the last three months on an annualized basis, it's up to I think 5.8%.

                                             So that's certainly not the direction we want to be headed. If you look at the three month annualized, that was as soft as 4% mid-year this year. So it's ticked back up in a pretty meaningful way if you believe the number and don't think it's just purely a mix effect going on.

Mark Zandi:                      Yeah, I didn't have a whole lot of time today. I was in New York meeting with clients, but on the train, I did look at the average hourly earnings growth by industry quickly and not comprehensively, and I couldn't find any industry where it actually accelerated. Wage growth continues to moderate across most industries. Not every industry, I'm trying to think ... Construction interestingly enough, construction wage growth has remained very strong, but I didn't notice any acceleration. Did you happen to take a look at that?

Dante DeAntonio:           I did not.

Mark Zandi:                      No? Okay. All right. It gave me the sense that maybe there's some mix effect going on here that might be affecting it. Okay. Take a step back. We're in the weeds here, deep into the weeds. Let's just step out and bring Cris in just a second. In the context of this, the need for the job market to cool, for job growth to slow, for labor market slack to start to develop the market's been very tight and for wage growth to moderate sufficiently so that inflation starts to abate, what do you think about this report?

                                             How does that fit into that discussion debate? Because that's the bottom line here at the current point in time. When you look at it from a 30,000 foot level or go down to a 10,000 foot level, how does this feel to you? How did this report feel to you? Let me ask you this way. I'm a stock investor, I'm a bond investor, you saw what happened, the stock and market and a bond market sold off on this and then came back by the end of the day.

                                             By the end of the day, people said, "Oh, I'm not really sure." Where do you stand mean? Would you have been selling stocks thinking that the Fed would be more aggressive as a result of this report or not?

Dante DeAntonio:           I think it's middle of the road to me. I don't think it moves the needle in either direction. It wasn't overly positive in that this is great news for the Fed, but it also wasn't the world is the sky's falling kind of news either. I think it's the middle of the road. We need to see improvement, but this is just another month along the road to that improvement I think.

Mark Zandi:                      Okay. All right. Very good. All right Cris, you're up. So what do you think? Any gaps in Dante's analysis and what's your perspective?

Cris deRitis:                       No, I think he uncovered it nicely and certainly that the difference between the household and the payroll surveys is something that is interest ... It's troubling perhaps.

Mark Zandi:                      Troubling?

Cris deRitis:                       It gives you some pause. I agree household survey is a small sample. You don't really want to pay a lot of attention to it, but the trend is there, right? That gap has been consistent now for a while. So perhaps we are missing something in the payrolls and the labor market is a bit weaker than what they would suggest. So I worry about a bit of a head fake for the Fed if they're really focusing on that payroll number and not taking into account that it might be misleading, they could make a misstep. I don't think that's going to happen next week, two weeks from now, but something to consider. The wage-

Mark Zandi:                      Can I ask on that? Before you go the wage.

Cris deRitis:                       Yeah, go ahead.

Mark Zandi:                      So are you saying that it feels like the labor market might actually be a little softer than the top line payroll employment game might suggest that the household survey ... Because of the weaker household survey?

Cris deRitis:                       Yeah, if you take it at face value.

Mark Zandi:                      And would you view that as a good thing or a bad thing?

Cris deRitis:                       So if the Fed believed it, if that was reality, right? The problem is we don't know which one is real. If it truly is softening more than what the payroll surveys would suggest, that would give the Fed cover to not be quite as aggressive, right?

Mark Zandi:                      The job market is-

Cris deRitis:                       It adds credence. It adds credence to the soft landing narrative, right?

Mark Zandi:                      Narrative. Okay.

Cris deRitis:                       There's a chance there.

Mark Zandi:                      Okay. Do you see how I got that out of him, Dante? It took a little bit of work, but I got it out, yeah.

Dante DeAntonio:           The old full discussion.

Mark Zandi:                      All good, but then we go to wages, right?

Dante DeAntonio:           Okay.

Mark Zandi:                      Yeah, there you go. Okay, let's go to wages.

Cris deRitis:                       And the wage, you're right. Okay, there might be mixed issues here. So maybe the 0.6% is overstating the case, but okay, you shave it off 0.5, 0.4, that's still pretty hot from the fed's perspective. So that would suggest the labor market is quite tight and the wages are still pushing up. I did take a peak at the Atlanta Fed Wage tracker that's still quite positive, it's not showing ... It actually had a little bit of a tick up. And the labor market continues to be quite strong which moves in the other direction would suggest the Fed has to be even more aggressive here.

Mark Zandi:                      The Atlanta Wage Tracker. Yeah, I'm sorry. The Atlanta Wage tracker just for the listener, that tracks the same worker over through time.

Cris deRitis:                       That's right.

Mark Zandi:                      And therefore controls for mix effects.

Cris deRitis:                       That's right.

Mark Zandi:                      The mix effects we were just talking about. And I think the issue there is it's 12 month moving average or something so you don't pick up near term movements. So it's hard to get turning points there, but it's still, nonetheless.

Cris deRitis:                       Nonetheless.

Mark Zandi:                      Yeah, nonetheless. And you're saying that that remains strong, the growth in that tracker remains strong?

Cris deRitis:                       That's right. Yeah, exactly. We're piecing together, we look at ECI, it has each of these-

Mark Zandi:                      Employment Cost Index, yeah.

Cris deRitis:                       Correct, yeah. Each of these measures has their own issues, but it does suggest that wage growth remains quite strong. Services continue to grow here. Some of those wage pressures may be increasing there. So from that standpoint, I worry about the Fed having to be more aggressive to get inflation down because the wage inflation is creeping up here.

Mark Zandi:                      Yeah, do you think we're just being impatient that we expect things to turn too quickly? It feels like we always do this in economic forecasting that we know something should happen. Everything is suggesting that it should, and therefore, it should happen right now instead of this is going to take time that this all works over a long period of time.

                                             Just take the job growth. At the beginning of the year, everyone, all businesses were rip roaring, hiring as fast as they could, doing everything they could to retain workers. Of course, the Federal Reserve had interest rates at zero. And to turn that ship around to get HR departments to stop hiring, but then start thinking about, "Oh well, even laying off workers, that takes time."

                                             And actually to execute on that takes time, and for that to show up in the data takes time, and we're just expecting too much too fast in terms of the data flow. The 263 a payroll employment gain is about as good as you could expect given the fact that this process only started a few months ago. The switch and businesses from going from hiring to saying, "Okay, I'm not going to hire and I may even begin to lay off." No? Okay.

Cris deRitis:                       Sure. These things do take time. Long variable lags, right? We've been talking about the delays in monetary policy all year. I don't know that and it's right, but I don't know that we have the luxury of time. Markets can move, right? It's the expectations. If the expectation is that things should be moving faster than they are, then in some sense, that is reality, that's the reality that the Fed has to cope with, right?

Mark Zandi:                      Yeah, I'm not so sure we need to move any Fed. All we need to see is inflation moderate. And my sense is that inflation will moderate in the near term in the next few months, simply as the supply shocks of the pandemic and the Russian invasion phase. Energy prices are now flat. They're actually, I don't know if you've noticed, but gasoline prices have come down quite considerably, and on a year over year basis, we're not going to see some real improvements in the inflation statistics because of just flat to down energy prices.

                                             And the supply chains are starting, continue to ease despite what's going on in China and the no COVID policy, and it feels like goods prices are starting to moderate. And we may even see some declines in new vehicle prices here pretty soon. Rank growth is rolled over definitively, and that's going to flow into the measures of the cost of housing services in the inflation in indices by this time next year. So these are all good things that are going to happen with regard to inflation.

                                             Do we really need to see a moderation in wage growth? And this is key for service price inflation, services X housing and energy anytime soon. We're going to see improvements for these other reasons well before. The last thing that's going to happen is the moderation and wage growth and the moderation and service price inflation. These other things are going to happen before that. So maybe we don't need to see it turn that fast.

Cris deRitis:                       I don't see it.

Mark Zandi:                      You don't see it?

Cris deRitis:                       I think if we're not seeing inflation steady-

Mark Zandi:                      Wage growth slowing, regardless of all these other things, the Fed's going to be on the war path.

Cris deRitis:                       Yeah, yeah, so it's my take at this.

Mark Zandi:                      Yeah. No, no, no. Yeah, it may be the case. May very well be the case. Dante, you did say one thing that factually I wanted to check unless I heard it wrong. You said the revisions to the previous employment gains were upwards, I think on net they were down.

Dante DeAntonio:           Oh net. I said last month was up, two months ago was actually-

Mark Zandi:                      Oh, okay.

Dante DeAntonio:           I think two months ago, downward revision was actually bigger. So yeah, it was down on net. Yeah.

Mark Zandi:                      Yeah, so you impress how close, careful, how much detail I soak in here? Yeah, so the small, it was a small net downward.

Dante DeAntonio:           Yeah, not a huge impact.

Cris deRitis:                       It's got to fit with your narrative, right? That's why you're-

Mark Zandi:                      I'm looking at all the data. I am looking at all the data. Okay. Okay. So Cris, same question to you that I asked Dante.

Cris deRitis:                       Yeah.

Mark Zandi:                      10,000 foot, looking down, how do you feel about this report in the context of this desire to see the job growth cool off and the job market to cool off and take some of the pressure off of inflation? Did this report change your thinking around that at all?

Cris deRitis:                       Not really.

Mark Zandi:                      Not really?

Cris deRitis:                       In terms of the near term strategy, right? 50 basis point hike from the Fed, I think that's still in play. I don't think this changes that materially. It is moving, in my opinion here in the wrong direction. So if we continue to see this very robust labor market in terms of job growth and wage growth particularly, then that certainly does change the strategy going forward, but I think this one report alone doesn't really move the needle all that much.

Mark Zandi:                      So if you're a stock investor, a bond investor, you wouldn't have bought or sold today based on this report?

Cris deRitis:                       No, I don't. I think it was-

Mark Zandi:                      You don't buy or sell anyway on anything. You're like, "I take my paycheck, I take my savings, I put it in the bank and it goes where it's supposed to go, and I don't even really look."

Cris deRitis:                       Who says that?

Mark Zandi:                      Oh, okay. Oh yeah, that's right. He's the crypto guy.

Dante DeAntonio:           So he's day trading on the side.

Mark Zandi:                      Day trading on the side.

Dante DeAntonio:           There you go.

Mark Zandi:                      Okay. All right.

Cris deRitis:                       Farmland.

Mark Zandi:                      Okay. Well, I'm in your camp and that is that I don't think this report today signals anything has changed. The labor market is slowing. It needs to slow more to be consistent with inflation that we're all comfortable with in the Fed's inflation target. And if I were king for the day and I could control the economy with a few dials, I would've rather seen instead of 263, probably 163 I think, something like that.

Cris deRitis:                       Yep.

Mark Zandi:                      Fair enough. So I think that's right, but I don't know that based on this, I would jump to the conclusion that the labor market isn't slowing in a consistent way that would be in step with the idea that the economy can avoid it. The economy can avoid much higher interest rates and to quell inflation and avoid an economic downturn.

                                             There were a couple other statistics that I just throw into the mix that I think are important in this discussion around what this all means for inflation and whether the job market's slowing. One is hours worked. I don't know if you noticed, but the number of hours worked per week fell down to 34.4, and that's now come full circle, that jumped during the pandemic.

                                             It's now back down firmly to where it was pre pandemic. And in fact, in the 10 years leading up to the pandemic, it was pretty rock solid, 34.4, 34.5, 34.3, something like this. We're now back to where we were, and it's come down pretty considerably in the last few months. And that's a leading indicator of job growth because businesses tend to cut hours over their workers before they actually layoff workers, particularly in manufacturing. And I noticed that there was a, I think overtime hours were also down in manufacturing, I believe.

                                             Oh, I think I got that right. So that's one thing I'd point out, and I think that does auger or suggest that we're going to see much even slower job growth here, debt ahead. Also, I'd point out that we saw ... Dante, you did mention we lost jobs in retail, I think in transportation distribution. The other sector that lost was temp help. Temp Help is also been pretty, it's not declining a lot, but it's declining.

                                             It's been declining now for, I don't know, three, four, five, six months, and that's also a leading indicator, right? Because generally, businesses will cut their temp help work before they actually cut their own staff and the people that they employ, and so that's starting to come in also. Another indication that we're going to see weaker job growth debt ahead.

                                             So from my perspective, you made fun of me, Cris, but I think it's right. You nailed me. It feels pretty close to the script. Yeah, not exactly what I would want if I were king, but it's pretty close to script. It feels like it's pretty close to script. The labor market is moderating strong, no doubt, but moderating here going forward, and all the indicators are that it will continue to moderate going forward that we'll get ... Well, one thing I do want to say just because I think it's important to that we say it is we're talking about a weakening job market.

                                             We're talking about things like more layoffs, we're talking about less wage growth, we're talking about for the person listening to this, they go, "What the heck are you talking about? How can that be good?"

Cris deRitis:                       Oh, oh no.

Mark Zandi:                      You know what? It's not, that's not what we're saying. What we're saying is that's not sustainable because if you have such strong job growth and start wage growth, that means inflation is going to be a problem. That means the Fed is going to jack up and that means we got a recession down the road and nothing's worse for the American worker than going into recession.

                                             So we need some slowing here so that we avoid a collapse in the economy. So that's important to keep in mind. Right now, the good news is bad news, the bad news is good news. So we're in this weird world that we're in right now. Okay. Anything else on the jobs report you want to point out?

Cris deRitis:                       Well, I was going to challenge you on the counterfactual, right? This is going according to script.

Mark Zandi:                      Yeah.

Cris deRitis:                       What would to happen next month to cause you a concern, right? If we print another 250K, is that?

Dante DeAntonio:           He's getting that now, so he can't change his mind next month, is that the-

Mark Zandi:                      No, 250, I think underlying job growth is 250K. I think month to month I'm not all that worried. Let me put it this way.

Cris deRitis:                       Okay.

Mark Zandi:                      If we get into, say early next year, February, March, April, and we're still at 250K, that's a problem.

Cris deRitis:                       Okay.

Mark Zandi:                      Okay? If we get into February, March, April next year, and we're 150K to 200K, I'd say that's okay. I'll tell you what, I think we're all going to get very nervous once things really slow. Once you blow 100 and you're 50, you're going to say, "Oh, the whole psychology's going to shift here." And we're going to say, "Oh, we're going into recession."

Cris deRitis:                       Exactly.

Mark Zandi:                      So we want it slowing, but we don't want it to go negative, at least not in a consistent way. But anyway, that would ... No monthly number is going to change my mind to a significant degree, but if we get in the next spring and we're still 250K, I'd say that's a problem, particularly in the context of 5% wage growth and 3.7% unemployment. If we get there 250K and labor supplies improved dramatically for whatever reason, then I'm not as worried about it, but you know what I'm saying.

                                             But we're getting close to the moment of truth here on all this. I think we're going to know who's right or wrong on this pretty soon. All right, let's play the game. The statistics game, and I got a lot of good statistics guys. I got way too many, but I got a few in my back pocket here, and the game is we each proffer a statistic. The rest of us tries to figure out what that is.

                                             The best statistic is one that isn't so easy that we get it quickly, not so hard that we never get it, and it's apropos to the topic at hand, the labor market order came out this past week and there's a lot of data that came out this past week. A ton of data, so maybe I'll turn to you first Cris, what's your statistic?

Cris deRitis:                       2.3%.

Mark Zandi:                      I know exactly what that is. You want me to tell you?

Cris deRitis:                       But it's a good one.

Mark Zandi:                      It's a good one. It's a good one's. I'm going to give Dante a chance and I'm going to whisper to Cris. Okay, what is it Dante?

Dante DeAntonio:           I do not know, I'm going to give you this.

Mark Zandi:                      Come on man. You know you got to know the statistics better than me. You're a young guy. Look, you got all that hair. Look at the hair on that head. Damn. I have no hair.

Dante DeAntonio:           I spend the most time doing my hair, so I wasn't-

Mark Zandi:                      How can I know that statistic and you not know that statistic? That doesn't make any sense. Yeah. All right, ready? You want me to tell you and put you out of your misery?

Dante DeAntonio:           Yeah, do it.

Mark Zandi:                      All right. The personal saving rate.

Cris deRitis:                       You got it? Oh, I don't have a bell here.

Mark Zandi:                      Wait, do I got one? Oh, where's mine? My wife keeps moving things around in this room. This is the not elsewhere classified room. If we don't know where ... Did I tell you that before? I probably did. If we don't know where to put whatever it is and we got whatever it is, all kinds of whatever it is, we put it in this room. I'm looking at-

Cris deRitis:                       This is your junk drawer.

Mark Zandi:                      Yeah, I'm looking at dear mom, I hope your valentine day was great. This was 20 years ago for my daughter. It's like, "Okay." But I like looking. No, are you kidding me? There's zero probability. Yeah, I don't know what this is all about. I got a disc drive over here and who uses disc? I don't even think I could use a disc drive, could you? No? If I gave you a disc drive, could you get anything off that disc drive? People out there don't even know what a dis drive is.

Cris deRitis:                       That's what I'm thinking.

Dante DeAntonio:           I'm trying to remember if I've ever used one before.

Mark Zandi:                      That's so funny. Anyway, where was I?

Cris deRitis:                       2.3% savings rate.

Mark Zandi:                      Oh, yeah, yeah. 2.3%. So why'd you pick that, Cris?

Cris deRitis:                       It is very low. It's the second lowest on record, 2005 was a bit lower. And it's just an indication that US consumers, yes, they are continuing to spend, but they are having to use more of their income. They are dipping into their savings. They are going into credit to finance that spending that they are doing. So something certainly to watch 2.3. It isn't sustainable over the long run certainly, but okay. It does indicate some of the weakness out there.

Mark Zandi:                      Dante, this is, I'm going to test Cris. This is a test.

Cris deRitis:                       Oh boy.

Mark Zandi:                      Okay. Cris, what month? Historically had a lower saving rate than 2.3%. Dante, I see Dante's face. He's incredibly impressed.

Cris deRitis:                       It was 2005, April I believe.

Mark Zandi:                      Oh, that's good. I thought it was July.

Cris deRitis:                       Oh.

Mark Zandi:                      Dante, can you check that? Can you check that?

Dante DeAntonio:           I'm going to say Mark's right and just go with it.

Mark Zandi:                      Yeah, just go with it. Just go with it. Yeah. Okay. I'm dually impressed though, that's very good. Yeah. Okay, but Cris, how do you view ... On face value you'd say, "Oh, that's a problem." 2.3 at low saving rate. Do you view it as a problem?

Cris deRitis:                       Not at the moment because that is the saving rate, right? That's how much of income is being set aside going into savings. People have a lot of wealth, a lot of savings still in their back pocket that they're using to support their spending. So excess savings, our calculations is 1.8 trillion. So it's not as though consumers are totally tapped out here.

                                             Some of them are, but in terms of the big picture, it's just an indication that higher prices are stretching those monthly budgets. But, so something to watch. If it continues for a long time, it gets more troublesome because those savings that they do have scrolled away, the wealth they have scrolled away does start to run out, but-

Mark Zandi:                      No, I mean-

Cris deRitis:                       Not an immediate-

Mark Zandi:                      Yeah, it goes to the excess saving. All that saving built up during the pandemic, I think, and by our estimate, the excess saving peaked in September of 2021 at $2.5 trillion, that's 10% of GDP, that's a boatload of excess saving. And as of October, it's down to 1.8 trillion. So it went from 2.5 to 1.8. It's a $700 billion decline.

                                             If the consumer spend that excess saving, it's saving sitting in their checking accounts, that reduces the measured saving rate because the measured saving rate is the difference between current income and current spending. So they can spend more because of they just drew down this asset, their checking account, but still 1.8 trillion, but still a lot of cash.

                                             Now, I agree with you for that cash, that excess saving, that 1.8 trillion is sitting in the bank accounts of high income, middle income households, not in the checking accounts of low income households. Probably the bottom third at this point I would say probably blown through the cash. But for the aggregate economy, painting with a broad brush abstracting from the differences across income groups, that's where the bulk of the spending occurs. So it would suggest that consumers still have fire power here and they can continue to spend in the face of pretty high inflation, least for a considerable period. Would you agree with that?

Cris deRitis:                       Yeah, certainly at the macro level.

Mark Zandi:                      At the macro level, yeah.

Cris deRitis:                       Particularly those middle and in high income. I do worry though that those lower income households are going along with really based on credit, when those bills start to come due after the holidays and the first quarter, if we get that type of slowdown in employment, if inflation is not moderating fast enough, you will see delinquency and default rates creeping up here on credit cards and personal loans.

Mark Zandi:                      Yeah, totally, totally.

Cris deRitis:                       The macro view, maybe that's still not quite an event, but you're definitely going to be feeling it as a broader economy. This is whether we go into recession or not formally, you're definitely going to see some financial pain out there.

Mark Zandi:                      Yeah, that's very much the case. And there in no way do I want to suggest that this isn't very painful, particularly for the high inflation and particularly for low income households. They're getting crushed by this financially, but from a broad macro economic perspective, staying out of consumers in the game, spending an aggregate sufficient to keep us out of recession feels like there's still a fair amount of firepower, financial firepower out there to allow them to keep on spending, and even for the low income households in terms of the credit problems that you described, it doesn't ... The numbers aren't big, right?

Cris deRitis:                       No, it's still relevant.

Mark Zandi:                      If a credit card receivables or unsecure personal loans, they're up what? Couple hundred billion from where they were pre-pandemic? Something like that.

Cris deRitis:                       Yeah, again, we're not at crisis levels here. It's not a red flag event, but definitely there are some sectors that are ... Some segments of the population that are under stress and are going to continue to feel stress for a while here.

Mark Zandi:                      Yeah. All right. Dante, what's your statistic of the week?

Dante DeAntonio:           It is 48.4.

Cris deRitis:                       Oh, is that an ISM?

Dante DeAntonio:           Cris is really diving right in there.

Mark Zandi:                      Yeah, was it the ISM manufacturing?

Cris deRitis:                       No, that was 49, wasn't it?

Mark Zandi:                      I thought it was 49 for, but maybe this is one of the components of the ISM. Yeah, I'd say it's the employment-

Cris deRitis:                       Employment, yeah.

Dante DeAntonio:           You know me too well.

Mark Zandi:                      Yeah. Okay, that's a pretty good one. Yeah, very good. You want to explain?

Dante DeAntonio:           Yeah, so you had brought up some potential future weakness in manufacturing employment, maybe down the road with hours starting to come in. The employment component for the ISM Manufacturing Index has been below 55 out of the last seven months. And historically on a month to month basis is pretty volatile compared to employment. But historically, if you get consistent reading below 50, that's typically consistent with manufacturing employment that's either flat or even declining.

                                             So it would certainly be sending a red flag that manufacturing employment could roll over here at some point in the next few months and actually start to show some declines. It's been moderating like the rest of the job market, but it's held up pretty well up until this point.

Mark Zandi:                      I've been a little surprised we haven't seen more job already, job loss in manufacturing given the tech layoffs. I guess those might not show up in manufacturing. They might show in trade, oh, maybe we're seeing it in the Amazon layoffs and the trade in the transportation and distribution, but I would've thought some tech would've shown up by now, but no, not in that.

                                             Here's the other thing I worry about or wonder about or worry about in the context of we need to see a slowing in the job market to cool off inflation, wage and price pressures is could it be the case that we don't see the job losses we typically do in manufacturing and construction? These are rate sensitive sectors of the economy for idiosyncratic pandemic related reasons?

                                             So for example, in manufacturing, the vehicle industry's been very depressed because of supply chain issues. Now, the supply chain issues are moderating, we're getting more production and we might need to see the layoffs in the vehicle and vehicle related industries that we typically do and therefore, we don't get the manufacturing allows broadly that would help cool off the labor market and in the construction trades.

                                             I think we are starting to see job losses on the residential construction, on the single family residential construction side, but maybe we were not going to see the losses we typically do, and that is the most rate sensitive sector of the economy because workers are going to go over and work on multi-family projects because there's such demand for rental property, and now we've got the infrastructure bill legislation kicking into gear. That was a piece of legislation that bipartisan infrastructure legislation that was passed back, when was that? That was probably about a year ago now, wasn't it?

                                             And I think that money is starting to get out and it's going to really kick into high gear in '23 going into '24, and these are things that are idiosyncratic to the period, this current environment, and we don't see those job losses that we typically do in those right sectors. That's good news is bad news, right? Again, I'm not saying I want to see layoffs, but we got to see layoffs somewhere if the job market is going to cool off to a meaningful degree. Does that resonate what I just said Dante? Cris? Anybody want to respond to that?

Cris deRitis:                       Oh, go ahead.

Dante DeAntonio:           I think there's some reason to think that they hold up better than they have in past cycles. I do think you'll still see employment declines at some point, but they may not decline nearly as strongly as they have in previous cycles.

Cris deRitis:                       Yeah, okay.

Mark Zandi:                      Cris, [inaudible 00:44:03]?

Cris deRitis:                       What are your thoughts on the reshoring? If we're building chip factories and the battery factories, whatnot.

Mark Zandi:                      Yeah, if you look at manufacturing construction put in place, so this is actual construction of manufacturing facilities, it's booming and it's taken off. And it's got to be in part related to the bringing back of supply chains, the reassuring as you said, for reasons of resilience. Companies are very nervous about these long supply chains in the context of the pandemic and all the conflicts with China that are in train here.

                                             So yeah, I think that's true, that's a good point. Something to watch. Okay, that was a good one. I was going to say one other thing. I can't remember. Oh, ISM non-manufacturing, that comes out next week, right?

Dante DeAntonio:           Right.

Mark Zandi:                      Okay, so we'll see what that shows. Okay. You want me to give you my statistic?

Cris deRitis:                       Yeah, lay it on us.

Mark Zandi:                      All right. You ready? You ready?

Cris deRitis:                       Ready.

Mark Zandi:                      Six million. It's a really good one.

Cris deRitis:                       Is it a JOLTS number?

Mark Zandi:                      JOLTS, Job Opening, Labor, Turnover Survey report, six million. Dante, you should know this one too.

Dante DeAntonio:           Hires?

Mark Zandi:                      Hires. Okay baby. He's coming on. He's finally coming on.

Dante DeAntonio:           Oh, is that one a few days ago? I got a really big-

Mark Zandi:                      Yeah, very good.

Dante DeAntonio:           [inaudible 00:45:35] just yesterday that-

Mark Zandi:                      I'm going to do another one though related in a minute, but six million is the number of hires in the month of, I guess it was the month of October. There was this one month lag compared to the jobs report we got today which is for November, and that's exactly equal to the number of hires when? This is a good test.

Dante DeAntonio:           Right before the pandemic.

Mark Zandi:                      Exactly. February of 2020. On the nose, on the nose. So the number of hires has come full circle. It peaked at 6.8 million back in February of this year, and they've come back down to about six million. And so hires have normalized, and I think that's consistent with the idea that the labor market is moderate, is normalizing. It's starting to cool off. Cool off. Okay, here's the other one. 1.4 million.

Cris deRitis:                       Layoffs.

Mark Zandi:                      Very good. Yeah. Yeah, very good. You knew I was going to say that. 1.4. Here's the issue. What was it before the pandemic? Pre-pandemic. So there was 1.4 million layoffs in the month of October, what was it in the months leading up to the pandemic in late 2019, early 2020?

Dante DeAntonio:           Still a little bit higher than that, I assume?

Cris deRitis:                       1.5, 1.6.

Mark Zandi:                      No, 1.9.

Cris deRitis:                       Oh wow.

Mark Zandi:                      1.9. In fact, in February of 2020, if I've forgot it in my mind's eye, so I might not have it exactly right. I think it it two million in February of 2020. Yeah. So that's the difference, that's the key difference between this labor market and the labor market pre-pandemic which was pretty tight. Probably, if we're going to get a cooling off in the labor market, sufficient to forest all, more aggressive fed hikes and ultimately a recession, we need to see a normalization in layoffs that we're still not quite there yet, got a ways to go.

                                             I thought that was pretty interesting. I will say the JOLTS report, the Job Opening, Labor Turnover Survey report, all of the measures in there suggested the labor market is moderating though. Hires were down, layoffs were up a little bit, quits were down. The number of people quitting their jobs is moderating, and the number of unfilled open positions still very high, but coming in.

                                             So everything is moving in the right direction, sticking as I would say to script. Sticking at a script. Maybe not the script, but a script. A script. Okay. So Cris, what do you think this all means for monetary policies? And so just a level set and the probability of recession. So here we are getting close to the end of the podcast. I do want to go back and see if your odds of recession have changed for what you're thinking about this, about any of this has changed.

                                             But just to level set in our current forecast, we have the Federal Reserve raising the funds rate, another half point when they meet, I guess it's next week, quarter point in January when they meet, quarter point in March. And that raises the federal funds rate target, the interest rate they control from just under 4% currently to just under 5% by I think it's March or April of next year.

                                             And then they keep interest rates stable until we go into 2024, and at that point, inflation normalizes and they start, oh geez, there goes my wine glass. Sorry, it's not an expensive wine glass, so no worries. And I had already drunk my wine. So no big deal. No big deal.

Cris deRitis:                       No dry cleaning?

Mark Zandi:                      No dry cleaning. Yeah, don't tell my wife. So that's the path. We go back to the equilibrium funds rate in '24 and '25.

Cris deRitis:                       So we got another hike in there in March?

Mark Zandi:                      Yeah, we put that in. Sorry, I should have said that. Yeah, we did put that in that. Do we have that last month? I don't know that we did. Yeah. So we'll put one more in.

Cris deRitis:                       So you're a little concerned that the inflation doesn't moderate fast enough here?

Mark Zandi:                      Well, it's more that that's market expectations and that's what's embedded, and I think that's market expectations, right?

Cris deRitis:                       Yeah.

Mark Zandi:                      That's what investors are pretty close to what investors are thinking. So that's what's embedded in stock prices and mortgage rates, the value of dollar, that kind of thing. So I think that just to be consistent with market expectations, and I think that's reasonable. So we incorporated that. So does that sound like a reasonable forecast at this point? Are you expecting even more rate increases? Would you expect more rate increases?

Cris deRitis:                       No, I expect that's the case. And also because I expect that after that comes the recession, right? So they won't get a chance to hike further or what they won't need to hike further.

Mark Zandi:                      Do you think they'll get the 5% or not even get there?

Cris deRitis:                       The four and three quarter to five?

Mark Zandi:                      Yeah.

Cris deRitis:                       I think they'll get there.

Mark Zandi:                      Oh good.

Cris deRitis:                       That will be the last straw.

Mark Zandi:                      Yeah, actually, your forecast is pretty consistent with market expectations, isn't it? I think the market investors if you look at futures for fed funds, they have the interest rates coming back in the second half of 23, particularly in the first half of 24. I don't know if they're discounting recession, but they are actually.

Cris deRitis:                       They definitely are, right?

Mark Zandi:                      They definitely are.

Cris deRitis:                       Minus 80 basis points Mark.

Mark Zandi:                      On the two year, 10 year spread.

Cris deRitis:                       And the ten, three.

Mark Zandi:                      And the ten, three. So investors by that inversion with short rates rising above long rates and the expectations that are going to be cutting in the second half of next year, first half of 24, we'd be consistent with the idea that bond investors think a recession is coming.

Cris deRitis:                       Right.

Mark Zandi:                      Yeah, okay. So what is the probability of recession in your mind at this point?

Cris deRitis:                       I'm going to stick with 70. I'm tempted to go to 75, but I want to see a little bit more data.

Mark Zandi:                      And why are you tempted to go to 75?

Cris deRitis:                       The wage data here makes me, and the labor market data we talked about earlier in the perhaps mixed signals, right? That may lead to a Fed policy error.

Mark Zandi:                      I see. Okay. But you're sticking to 70 right now?

Cris deRitis:                       Yeah.

Mark Zandi:                      Okay.

Cris deRitis:                       I'm giving you benefit of the doubt there.

Mark Zandi:                      Okay. All right. It's so interesting, Dante, I can't recall, were you on a month ago for the last jobs number?

Dante DeAntonio:           Two months ago, yeah.

Mark Zandi:                      Two months ago. So what was your probability of recession two months ago?

Dante DeAntonio:           I think it was 50, it's either 50 or 55.

Mark Zandi:                      Okay. And what is it now?

Dante DeAntonio:           I would say it's 50 now. I would say it's probably unchanged from two months ago. My mood hasn't really changed since then.

Mark Zandi:                      Oh, but it sounded like if anything, you've become a little more optimistic. No? No. On the margin?

Dante DeAntonio:           I'm neutral. Yeah. Maybe be slightly more optimistic on the margin.

Mark Zandi:                      But you said 50, you're at 50%?

Dante DeAntonio:           Yeah.

Mark Zandi:                      Did you hear that Cris?

Cris deRitis:                       Yeah.

Mark Zandi:                      Does that surprise you?

Cris deRitis:                       It does. It really does.

Dante DeAntonio:           Mark has brainwashed me.

Mark Zandi:                      He's gone to the dark side.

Cris deRitis:                       I thought I was the dark side.

Mark Zandi:                      You are the dark side. Your dark side. You're my dark side, and I'm your dark side. Dante's definitely gone to the dark side. I'm not sure which dark side he's gone.

Dante DeAntonio:           Is there a light side? Is there a good side?

Mark Zandi:                      It's all dark. It's all dark.

Cris deRitis:                       It's all dark.

Mark Zandi:                      That is interesting.

Cris deRitis:                       If you're sticking with 50.

Mark Zandi:                      Okay. Dante, you know how when people do a forecast? A GDP forecast for a calendar year 2023, and then sometimes they show an up arrow and a down arrow? Meaning, the risks to my forecast is up or down. So take your 50%, is your arrow up or is your arrow down? Yeah, Cris's arrow is down. No, no, it's up.

Cris deRitis:                       Go up.

Mark Zandi:                      Sorry.

Cris deRitis:                       Definitely up.

Mark Zandi:                      Definitely up. On the probability of recession, is your arrow up or down?

Dante DeAntonio:           I would say I'm at 50, but my arrow is up. I think there's a bigger chance that I raise those odds in the next three months than it is that I bring them down.

Mark Zandi:                      Okay, interesting. Okay. So I'm at 50% probability recession, and we're talking about recession in the next, it's through the end of 2023?

Cris deRitis:                       Yeah.

Mark Zandi:                      The recession will start an NBER, National Bureau of Economic Research Defined Recession, will start between now and the end of 2023. I might still have 50%. I haven't changed, but my arrow is down. My arrow is down. I'm feeling better about this. Yeah, I really am. Did you see the inflation statistics this week? The core-

Cris deRitis:                       Pinot Noir does that.

Mark Zandi:                      Huh?

Cris deRitis:                       Pinot Noir.

Mark Zandi:                      It's the Pinot Noir?

Cris deRitis:                       Yeah. Your little aggressive wine.

Mark Zandi:                      Oh, it's the Pinot Noir talking. Yeah, maybe you're right. Probably should add a whiskey, then it would-

Cris deRitis:                       Inflation statistics.

Mark Zandi:                      And then it would've gone down to 45%. And the gin and tonic.

Cris deRitis:                       I'm off gin and tonic. It came from gin and tonic. Done. I'm done with that.

Mark Zandi:                      Okay. All right. Well, I think we know where we stand. And as I said, I think we're getting closer and closer to the moment of truth here. I think we'll figure this out. Any other thing we want to talk about before we call it a podcast? I promised that we were going to keep this to about an hour. I think we're pretty close to time. Any other issues you want to bring up? Dante? Anything we missed?

Dante DeAntonio:           No, I would just say you said we need to be patient with the job market. I think I would prefer to see some actual moderation here a little bit more quickly in the next couple months to make me happy, so.

Mark Zandi:                      It's moderating. What are you talking about? You're saying faster moderation?

Dante DeAntonio:           The last four months, 292, 269, 284, 263, it doesn't feel like a whole lot of moderation in the last four months. That just feels like we're stuck there at 270 or whatever that average is, that just feels like-

Mark Zandi:                      He's got a point. He's got a point. He's young, he's impatient.

Dante DeAntonio:           And the most was 537, that was not a-

Mark Zandi:                      What was it at the beginning of the year, my friend?

Dante DeAntonio:           Well, January, it's 504.

Mark Zandi:                      There you go.

Dante DeAntonio:           July was 537 again, so.

Mark Zandi:                      There you go. Oh okay. Okay, I think I want to start, we've tried this in the past. Let's try it again. I'd like to solicit to our listeners. If you have questions that you'd like us to answer, something that's really bugging you about the economy obviously. Fire away and send us an email. We're all both on ... Are you on Twitter Dante? I can't remember.

Dante DeAntonio:           No.

Mark Zandi:                      No? Okay. I guess fewer people are on Twitter these days, but if you're still on Twitter, send a DM and ask a question and we will address that on the air on our podcast, and I think other listeners would value it. So if you've got a question you would like to ask, please fire away and we'll take it up in future podcasts. Okay, with that, we're going to call it a wrap. Thanks everyone. Take care now.