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. Of course, my co-host, Cris deRitis. Hey, Cris.

Cris deRitis:                      Hey, Mark. How have you been?

Mark Zandi:                     I'm good, I'm good. The week went by pretty uneventfully, so all good. You?

Cris deRitis:                      Yeah, same here.

Mark Zandi:                     Okay, very good. We've got Dante, Dante DeAntonio. Of course, Dante is a regular on Jobs Friday. This is August the 4th. Friday, August the 4th, and we got the employment report for July. It's good to have you, Dante.

Dante DeAntonio:          Thanks, Mark. Happy Friday.

Mark Zandi:                     Yeah. You're still at the beach. I see.

Dante DeAntonio:          Yup, getting ready to head home after two weeks of relaxation.

Mark Zandi:                     I'm sorry to hear that. Yeah. Where do you go when you go to the beach?

Dante DeAntonio:          Ocean City, New Jersey.

Mark Zandi:                     Oh, that's right, Ocean City. I haven't been to Ocean City in many decades probably. Yeah. Probably hasn't changed in decades.

Dante DeAntonio:          No, not a whole lot.

Mark Zandi:                     Yeah. Nice spot to be in.

Cris deRitis:                      Prices have come down.

Mark Zandi:                     Yeah, they have. Have you noticed, have you looked?

Dante DeAntonio:          They're still pretty expensive, but they've come down a little bit.

Mark Zandi:                     Yeah, I think it's Ocean County, New Jersey. It's a metropolitan area, I think.

Dante DeAntonio:          I believe so. Yeah.

Mark Zandi:                     I believe it is. Yeah. I think it's down more than 10% from the peak in Ocean. Of course, it was probably up 50, 60% during the pandemic.

Cris deRitis:                      Yeah. Yeah, I think so.

Mark Zandi:                     Yeah. So, prices are coming in a little bit. Okay, the jobs numbers. I've got a view, as you can imagine. I'm smiling. That might give you a hint. Cris is crying. That might give you a hint.

Cris deRitis:                      I am very happy that we created 187,000 jobs.

Mark Zandi:                     True, true. Well, we'll discuss what that means for your forecast in a bit here. But before we go down that path, Dante, you want to give us the rundown? Just give us a sense of the numbers and what your view is of what it means.

Dante DeAntonio:          Sure. I dare call it a near perfect employment report given the current world that we're in.

Mark Zandi:                     Near perfect.

Dante DeAntonio:          As Cris mentioned, we added 187,000 jobs, which is basically in line with where we were last month after revisions. It's a definitive slowdown over the last 3 months, 6 months, 12 months, whatever period you want to compare it to. Job growth is definitely slowing. On a three-month moving average basis, we're still over 200K, but it's definitely moving south pretty quickly and it seems like we're likely to be south of that here in the second half of the year. Across industries, I would say the breadth of job creation is narrowing a little bit. We had a few more industries where you had small losses. There weren't any glaring weaknesses in the report, but you had a small loss in manufacturing, small decline in transportation and warehousing.

                                           A relatively big decline in temporary services, which has been a big negative here and likely a sign that things are going to continue to slow and weaken over the next couple of months. On the positive side, healthcare continues to just churn out jobs at a pretty brisk pace. We added just over 87,000 jobs this month, which is the strongest it's been in about a year. Construction, holding up well in the face of whatever headwinds might exist in the housing market, adding almost 20,000 jobs. Public sector payrolls are still positive. They've come in a little bit and they're not quite as strong as they've been in recent months, but still adding jobs in the public sector. Leisure and hospitality is weak again. That had been the main driver of growth early in the recovery.

                                           That has definitively pulled back, slowed off. There haven't been any job losses, but the gains have slowed to almost nothing at this point. Yeah, I think if there's one thing that people will stick and look at as a weakness here, it's wage growth again. It came in at 0.4% month over month, though the year-over-year change is still basically stuck at 4.4%, which is where it's been basically since the beginning of the year. So, it's not reaccelerating, but it's also not coming in rapidly as we might hope. On the household survey side, I guess you could call it a negative, that the unemployment rate fell in this environment. It ticked down to 3.5%. I'm not sure that I read a whole lot into it. It fell for the right reasons, at least the labor force is still growing.

                                           It's just that household survey employment was a little bit strong again, so I don't think there's anything too negative there. All of the participation measures, employment population ratios were all either flat or up slightly, which is again a positive sign that workers are still coming back to the labor force. So, all in all, it's another positive report just like it was last month. I think it's hard to find too much negative in the numbers that we got.

Mark Zandi:                     Great. Yeah. So, the only blemish that you pointed to was wage growth, the growth in average hourly earnings, which seemed a little stuck here year over year around 4.4%.

Dante DeAntonio:          That's right.

Mark Zandi:                     Just to give people context, what do you think it should be? I mean, if it was ideal, what would it be?

Dante DeAntonio:          Yeah, I mean I think there's some debate. I mean, if we've long said 3.5%, if you assume 2% inflation and you assume long run productivity growth at 1.5%, that would say we can sustain 3.5% wage growth. I think there's obviously some wiggle room there. Do we actually think 2% is the inflation target? Do we think the Fed's comfortable with something a little bit higher than that? Do we think productivity might be a little bit stronger than 1.5%? I don't want to get Cris too excited. So, if you think there's any wiggle room on inflation and productivity, maybe 4% wage growth is sustainable, maybe something slightly above that. So, I think there's not a definitive that says we have to get back to 3.5%, but we probably need to get a little bit closer than we are now.

Mark Zandi:                     Yeah, splitting hairs just a little bit, but I want to do that. You say 2% inflation plus 1.5% productivity growth gets you to 3.5% and that would be consistent with the Fed's target. Should we be using 2% the core PCE or should we be using CPI, the consumer price index, which would be 2.5% at 1.5% for productivity growth, which gets you to 4? If that's the number, is that really different from 4.4%? We know there's so many measurement issues here with regard to this particular wage series. Do you have a view on that?

Dante DeAntonio:          I wouldn't argue against it. I mean, I think 3.5% is the lower bound of where we possibly need to be. I think if anything-

Mark Zandi:                     The lower bound. The lower bound.

Dante DeAntonio:          Right? I think we can sustain wage growth above that in all likelihood. I think that's definitively as low as we would need to get if we can probably sustain something slightly higher than that.

Mark Zandi:                     Right. Cris, what do you think about what I just said? I mean this feels very in the weeds, inside baseball economics, but what do you think? Because everyone says 3.5% and I'm wondering exactly why 3.5%?

Cris deRitis:                      Well, I think it comes down to which series you're talking about as well, right? Because the average hourly earnings as well we know has its own issues in terms of measurement. So, is 4.4 really the growth rate here? ECI, other measures might be a little bit higher, but if it was four, if we were under four, I think the Fed would be comfortable with that. I don't think, to your point, that they're-

Dante DeAntonio:          3.5% is this soft bogey. If it's below four and not accelerating, then-

Cris deRitis:                      Yeah, I think so. I think if we're anchoring towards a number, it's four. Then underneath that, then the other factor is, "Okay, let's take a closer look at the productivity," which is very hard to measure at the moment. I don't know if we'll get into that.

Mark Zandi:                     Yeah, we will. Yeah, I'd like to do that.

Cris deRitis:                      And then the wages, there are lots of factors here.

Mark Zandi:                     Yeah, but you're saying if we're got a three handle on whether it's 3.9 or 3.5, good enough.

Cris deRitis:                      You're going to use the Wall Street lingo here?

Mark Zandi:                     Yeah, I guess so. Oh yeah, right. We are Wall Street, my friend, aren't we?

Cris deRitis:                      No, I thought we were suburban Philadelphia.

Mark Zandi:                     No, but we're Moody's. We're Wall Street. We define Wall Street. We are Wall Street, I think.

Cris deRitis:                      We're Wall Street adjacent at least.

Mark Zandi:                     Okay. We're Wall Street adjacent. I like that. I like that. So, Dante, going back to you, so bottom line, you felt pretty good about this number, this report?

Dante DeAntonio:          I feel good about it because I think I discount the negative of wage growth probably more than others do. So, I don't really see anything wrong. The unemployment rate, we expect it to move up a little bit here. I'm not worried that it ticked down instead of up just because the labor force is still growing and I think that's the most important thing. We've got a labor force that's growing, we've got job growth that's slowing. That should eventually get us to an unemployment rate that's ticking a little bit higher and taking a little bit of the pressure off the labor market, but it feels like we're in a pretty good spot all around.

Mark Zandi:                     Yeah. Okay. Cris, I meant to ask just factually, because I don't think I looked. Government employment, because that's been increasing strongly here recently. Did that continue in July?

Cris deRitis:                      It was up 15,000. The average in the second quarter was 40,000. So, it's still up, but definitely slower than it was.

Mark Zandi:                     Right, in July. I think that goes to the fact that state, local, federal government couldn't compete with the private sector back a year ago when wage growth was as strong as it was, but now that it's moderating, government's back in the game and they're starting to hire.

Cris deRitis:                      Yeah, I would agree.

Mark Zandi:                     Okay. Cris, what's your take on the report?

Cris deRitis:                      Yeah, good report.

Mark Zandi:                     Near perfect report?

Cris deRitis:                      Indicating moderation.

Dante DeAntonio:          I have a sense that might be in the title of this podcast, near perfect.

Mark Zandi:                     Was it near perfect?

Cris deRitis:                      Near perfect. There are some knits and a bit of it is in the eye-

Mark Zandi:                     You're perfect. Knits could also be in the title somehow.

Dante DeAntonio:          We'll just keep that into mind. Write that down, Franco.

Mark Zandi:                     We're already in the titling session here. I'm on a roll here with the title, so go ahead.

Cris deRitis:                      I don't think our listeners realize the pain and suffering we go through to come up with a title each week.

Mark Zandi:                     That's right. They don't know. I hope they appreciate the titles of these podcasts, because goodness, there's a lot of sweat and blood that goes into those titles. Oh, geez. Anyway, go ahead. Go ahead.

Cris deRitis:                      Overall good report. Again, there may be some knits, but some of those could be really in the eye of the beholder. You can spin that in some different ways. I saw that part-time workers for non-economic reasons is actually up from last year. So, is that people voluntarily choosing to work less, take a part-time job, or is it people who are forced to because they don't have childcare? I guess that would be for economic reasons, but how much of this though is truly the choice versus the offering of the labor market itself? Wages are higher, so maybe I don't need to work as much. I don't know. You can find some of these-

Mark Zandi:                     Dante, I don't know about you, but that was his knit? He's really stretching [inaudible] knit. I don't know what I would call that.

Cris deRitis:                      All right. So, multiple job holders is up. People working both full-time and part-time or two part-time jobs is up versus a year ago. How do you interpret that? Is that economic stress?

Mark Zandi:                     Significantly, I didn't see that.

Cris deRitis:                      It's up half a million.

Mark Zandi:                     Oh, it is. Okay. It's not one month jump. It's a trend.

Cris deRitis:                      It seems to be a trend. Yeah.

Mark Zandi:                     Okay. Dual drop holders.

Cris deRitis:                      It's still not a large share of the total labor market though. So, you can't really say, "Oh, this is..." Does that point to some underlying stress maybe in certain households? Maybe. So, something to watch, not something that is maybe macroeconomic in nature, but again, you can find little pockets here where depending on what your view is could color your outlook. Maybe you could say, "Well, because the labor market's so strong, there's all these opportunities, people are taking advantage and working two jobs, because their wages are way up." So making a hay while the sun is shiny. So, how do you square the circle here?

Mark Zandi:                     Any other knits? Those are two knits.

Cris deRitis:                      You go into some of the demographics. Sure, but you can find things.

Mark Zandi:                     You mean the unemployment rate for different minority groups for example.

Cris deRitis:                      Different minority groups or different age or education group, but you have to be really careful there, because there's a lot of month-to-month volatility. So, I didn't spot anything that really shouted out, "Hey, this is a real issue here."

Mark Zandi:                     Yeah. Broadly speaking, is it consistent with the economy threading the needle here? Slowing sufficiently, it'll allow wage and price pressures to abate, get back to the Fed's target, but at the same time avoiding a recession. Do you feel like it is consistent with that outlook?

Cris deRitis:                      I think it's on that glide path. The question is, again, we go back to wages, is that's stubborn. If it had been coming in a little bit more, then maybe we'd be a little more convinced perhaps that that was indeed the path. But if we stick here, then the Fed may have to come in more aggressively and that certainly could slow things down in a more aggressive or a more severe way.

Mark Zandi:                     Let me ask you another question. So, the unemployment rate 3.5% has been more or less 3.5% now for almost a year and a half? Maybe not quite, but pretty darn close. Pretty amazing stability, low and stable, 3.6, 3.5. Did we ever get to 3.4? I'm not sure, but we did one month okay. So, people look at that, they might think, "Oh, that's a problem that indicates that the labor market's too tight or beyond full employment."

                                           So two questions. Do you think that 3.5% rate is consistent with full employment or being beyond full employment? Are there other indicators that we should be looking at to gauge whether the labor market is easing up or not? Maybe the unemployment rate obviously isn't the only thing we should be looking at. What else should we looking at and what are they saying about the tightness of the labor market? This is to you, Cris.

Cris deRitis:                      Oh, to me.

Mark Zandi:                     Sorry.

Cris deRitis:                      No problem. No problem.

Mark Zandi:                     We can send it to Dante.

Cris deRitis:                      Well, you can send it to Dante after.

Mark Zandi:                     Okay, go ahead. Fair enough.

Cris deRitis:                      He can correct my errors. So, I would say the mere fact that we continue to pull people into the labor market, continue to create all these jobs, to me suggests that if we are full employment, we're not certainly well beyond full employment, because we keep bringing people back in or taking them off the sidelines. Is it 3.5 versus 3.8? I don't know, maybe. You could argue what the specific number is in there, but I don't think that we are well beyond which would be the cause for concern from an inflationary standpoint. I think that's reflected even in those wage statistics. Yeah, they're not falling as quickly as we'd like, but they're not accelerating either.

Mark Zandi:                     So 3.5% is consistent with full employment. It doesn't feel like we need 4% unemployment or 4.5% unemployment, which by the way, if you look at the reserves forecast they produce every quarter, their long run unemployment rate projection is... I think it's over four. It's like 4.1, 4.2, I think. So, they're saying effectively that's the full employment-unemployment rate. That's the rate that would be consistent with stable wage and price growth at Target. But it feels like you're saying, "Well, 3.5% feels like it could be the number."

Cris deRitis:                      It feels a little bit low to me, but that may be just anchoring bias, right? But again, it seems as though below four is sustainable.

Mark Zandi:                     Is sustainable. Right. Okay. Dante, what do you think?

Dante DeAntonio:          Yeah, I agree. I don't think there's any evidence that we're well beyond full employment at 3.5%. Like Cris said, wage growth isn't accelerating. It's still slowing, maybe not quite as quickly as we'd like, but if you look at something like the employment cost index, it is coming in a little bit. Even though average hourly earnings have been stuck for the last six or seven months, there is evidence that other wage measures are slowing a bit, which seems counterintuitive. If we're beyond full employment, we are still drawing in 150,000, 200,000, 250,000 workers into labor force every month. It seems like with regularity-

Mark Zandi:                     By the way, I looked at it and I'm not taking anyone's statistics, but over the past year, I think the labor force has grown over 3 million. So, divide by 12, that's a lot of people entering into the labor force. Hard to argue you're at full employment if you're pulling in that kind of labor force, right?

Dante DeAntonio:          Yeah, I think you could argue that we could see wage growth moderate faster if unemployment crept up closer to four, but I don't think we necessarily need to see that happen in order to get back to a steady state here where we're long run path.

Mark Zandi:                     What other measures are you looking at to gauge how tight the labor market is, whether we're at or beyond full employment? I mean unemployment rate is the top headline statistic, but what others do you look at?

Dante DeAntonio:          Is that to me?

Mark Zandi:                     Yeah. Oh, sorry, Dante. Yeah. I'm looking at you, Dante. You didn't know that.

Dante DeAntonio:          I didn't know. I mean, if you look at any layoffs, it's surprising how well things have fit together. I mean we saw this uptick in layoffs. They've come in, but they've come in with job growth still slowing, which seems like an unlikely outcome, but it's because hiring has also slowed. Everything seems to be just gradually pulling back. If we were in this overheated labor market, you'd imagine there was a bigger fight for workers and bidding up of wages and it just doesn't seem like in any of the measures that that's happening.

                                           It seems like we're drawing in enough workers to satisfy needs and things are coming back into normal. I think it just took a little bit longer after the pandemic for all of that to happen than we maybe initially thought, but it feels like everything is coming back into a long run sustainable path. If you look at quits returning to normal, hiring slowing at the same time that layoffs are easing, it just feels like everything is fitting into a nice stable pattern.

Mark Zandi:                     Okay. Well, I think near perfect is a good description. It's not perfect, right? Because wage growth is still elevated. Even by my effort to get the target of, we're still above any target that you might have, consistent with a 2% inflation number that the Fed's focused on. So, I don't think it's perfect, but it is near perfect. Job growth is strong, but it is steadily moderating, moving in the right direction. It's growing less than the growth in the labor force. Labor force is growing more strongly. It feels like the labor market is slowly but surely easing up despite the 3.5% unemployment rate.

                                           I think you can see that in a number of statistics, some of which were in this report, some in the JOLTS survey, the Job Openings and Labor Turnover Survey report we got earlier in the week. That's lagged one month. The data we got today for employment was July. The JOLTS is for June, but provides a lot of insight into the underlying dynamics. You mentioned hiring. I think that's the way businesses are responding to the weakening in demand for their goods and services. They're saying, "I'm not going to lay off workers. I don't want to do that because it's going to be hard for me to find new workers and retain the workers I have. So, I don't want to lay off, but I can pull back on my hiring and be less aggressive in my hiring."

                                           So the hiring rate, the number of hires as a percent of the labor force, I think it's back pretty close to even lower than what it was in the pre-pandemic period in the tight labor market before then. The other thing that appears to be going on, and this is interesting, is they're cutting back on hours. That's the one thing you didn't mention. I don't think. Hours worked per week declined in the month and they're now below where they were pre-pandemic as well. It feels like that's the other way businesses are responding to the weakening in demand. Again, not laying off workers, but allowing the hours work per worker to start to come in. Another good indicator of an easing in the labor market is quits, the number of people quitting.

                                           This goes to the JOLTS, the Job Openings and Labor Turnover Survey. Quits have come back down. I think the quit rate, again quits as a percent of the labor force, that's back consistent with where it was pre-pandemic. Still maybe a little bit elevated but only a little bit. That's really key to wage growth, right? Because it's when people switch jobs that they tend to get these bigger pay increases. That also adds to weaker productivity growth, because as people quit and move around, ultimately I think it raises productivity, but at least initially because people are transitioning to new jobs and trying to figure out and getting up the learning curve, that's going to reduce productivity growth and keep up our pressure on inflation. But the lower quit rate is I think very positive.

                                           Another indicator that things are easing up. So, it feels like businesses are responding to the weakening in demand for their goods and services, but they're doing it in a way that doesn't entail layoffs. If you don't get layoffs, I think I've said this a few times before in these podcasts, hard to see a recession, right? Because I think you need those layoffs to really spook people, consumers, have them pull back on their spending. Ultimately, that's what you need for an economic downturn. If consumers keep on spending, doing their part, you're not going to have a recession because they're such a big piece of the pie. Does that all make sense, Cris? Did I say anything that you would disagree with there or push back on?

Cris deRitis:                      No, again, the trends look favorable. One other statistic I can throw out, the temp help hiring was down this month as well. You might view that again as another indicator.

Mark Zandi:                     I think Dante mentioned that. Yeah, right. Another indicator, right. Dante, any pushback on what I just said there?

Dante DeAntonio:          No, I think all of that makes sense. I mean the hours point is a good one. If you look at the index of aggregate weekly hours, it was down again this month and it's been down a few times in the last four or five months. Even though we've been adding jobs at a steady pace, some of that is being offset by those reductions in hours.

Mark Zandi:                     Now I've got a question that is again, pretty deep into the weeds and you may not know the answer to or have a sense of it, but I'm going to ask anyway and then I'm going to turn it back to you and see if you've got any questions that you want to pose to the group that you're saying, "This just bothers me. Can someone help me figure it out?", if you've got any of those questions. My question goes to the labor force and the strength of the labor force in the context of a stable labor force participation rate. So, if I look at the participation rate, the percent of the labor force that's out there looking for work or working, it's flat as a pancake, 62.6%.

                                           It's down from its pre-pandemic 63.3, but that I think is what you would've expected to happen with or without a pandemic, just given the aging out of the baby boom generation. You'd see a decline in participation rate. It's roughly where we thought the participation rate would be. If you go back and look at our forecast for this time prior to the pandemic, I think it was exactly 62.6%. So, it's stick in the script, but yet we've seen this big pickup in labor force, which means, doesn't it, that the growth in working age population is strong? I think that's the simple arithmetic. Correct me if I'm wrong, and if I'm right, what's going on there? What could be explaining that? Why are we seeing more working age population growth? Dante, I'll turn it to you, because you look at these.

                                           First of all, is that a reasonable question to ask? I mean, is that perplexing? I know you probably didn't notice that, but now that I pointed out, do you find that a perplexing development?

Dante DeAntonio:          Yeah, I mean I think there's two possible explanations I think off the top of my head. The one you made I think is fair, that you've got stronger than expected growth in the actual working age population. I think you still have some offsetting effect of weaker participation for non-prime age, so 55 and over workers, but you've still got modest increases in participation for prime age workers. They're at 20, 25-year highs in most cases. So, I think some of that, you've got the top line participation that's been holding steady for six months or so. Some of that's been an offsetting there where participation among older workers has stayed weak, but you've gotten this uptick in participation amongst prime age workers.

                                           So, I don't know that the increase in population that's driving it or just an increase in participation amongst those younger workers. I think the prime participation rate, it actually was down a little bit this month, but it's a couple 10s above, plus pre-pandemic. If you look at the prime employment to population ratio, that's the highest that it's been since the early 2000s. I think some of it's an offsetting effect where you've gotten this really strong participation amongst prime age workers that I don't know that we're necessarily expecting to see that hitting new highs here at this point.

Mark Zandi:                     Yeah. The other interesting thing I noticed in looking at the growth in working age population, you can look at it in terms of native born versus foreign born. You go back a few months ago, I'd say 6 months, 9, 12 months ago, you saw a really substantive increase in foreign-born workers in the labor force. That has leveled off, and more recently in the last few months, it's native born, which is interesting. Yeah, any comment there? It is just an observation.

Dante DeAntonio:          Yeah, I would agree. I don't know that I have a good explanation for why it's happening.

Mark Zandi:                     Yeah. Okay. Go ahead, Cris.

Cris deRitis:                      I'd throw out just to be a little cautious with the data itself again. Measurement differences, let's call them. I think even in the census, we suddenly discovered there were more younger folks than we actually estimated prior. So, just be cautious, of course, when you're looking at this data.

Mark Zandi:                     Generally, that's what happens when I have a question I can't answer. The answer is it's not really happening. It's data. It's a data problem. The data ultimately gets revised and you go, "Okay, now it makes sense." Now it makes sense.

Cris deRitis:                      Even in the employment, I don't know if Dante mentioned it, but there were some revisions in the past two months of employment, downward revision, so consistent with some of the observations we've made in previous podcasts that the labor market just looked too strong. I think we're buying back some of that now. So, still strong, but maybe not quite as strong in terms of employment growth as we thought a couple months ago or we saw a couple months ago.

Mark Zandi:                     Right, just to reiterate something we've said in previous podcasts around the jobs numbers, we've got these big benchmark revisions coming. Once a year, these data, the payroll data that we're referring to, the survey of businesses gets so-called benchmark to actual employment accounts based on unemployment insurance records. They do this once a year just because it requires a lot of computing resources and they don't do it every month.

                                           So, it feels like when we get those benchmark revisions, we might get some further downward revision to the employment growth we've been observing. So, employment growth is slowing, but it may have even slowed more than we think it has once we get all those revisions in. We're going to get a read on that, aren't we, Dante, here pretty soon?

Dante DeAntonio:          The preliminary estimate of the benchmark comes out later this month. So, by the time we get the report next month, we'll have that data in hand to be able to talk.

Mark Zandi:                     Okay. Really curious to see what that says. Hopefully, it doesn't change the picture. Oh, we're in recession. That would be bad. No, no, no, it's not going to do that, but anyway. Okay. We were focused obviously on the job market, labor market this week, because it got a lot of labor market data. The other data point that came out was around productivity growth and I want to talk about that, but I want to come back to it. Let's play the statistics game and then we'll come back and talk about productivity. So, the statistics game is we each come up with a number, a statistic. The rest of the group tries to figure it out through questions, deductive reasoning, clues.

                                           The best statistic is one that is not so easy. We get it immediately, not so hard that we never get it. It's apropos hopefully to the topic at hand. It doesn't have to be. It could be a recent statistic as well, but obviously, the job numbers are top of mind. So, with that, let me turn to you, Dante, first. What's your statistic?

Dante DeAntonio:          Let's go with 4.1%.

Mark Zandi:                     In the jobs numbers today?

Dante DeAntonio:          It is not in the jobs numbers today.

Cris deRitis:                      In the JOLTS report?

Dante DeAntonio:          Not in the JOLTS, no.

Mark Zandi:                     Okay. Now he's digging deep. In the productivity numbers?

Dante DeAntonio:          It's not in the productivity numbers. No.

Mark Zandi:                     Is it a labor market statistic?

Dante DeAntonio:          No, it's not directly labor market related. No.

Mark Zandi:                     Oh, okay. Head fake.

Cris deRitis:                      Yeah, threw us off the track here.

Mark Zandi:                     Yeah. Dante, I think labor market. Yeah, absolutely.

Dante DeAntonio:          I'm mixing it up.

Cris deRitis:                      Nicely done. Okay.

Mark Zandi:                     Thank you. Thank you, Dante. Is it an inflation statistic?

Dante DeAntonio:          It's not inflation, no.

Mark Zandi:                     Oh, geez, Louise.

Cris deRitis:                      Is it government statistic? We got to go back to basics here.

Dante DeAntonio:          It's not a government statistic.

Mark Zandi:                     Oh, my gosh.

Dante DeAntonio:          It's a Moody's Analytics statistic.

Mark Zandi:                     Oh, I want to say CMBS delinquency rate, but it sounds that. It can't be that, right?

Cris deRitis:                      Is it from the survey of business?

Dante DeAntonio:          No. It's a number we just rolled out this week.

Mark Zandi:                     Oh, I know what it is. I know what it is. I know what it is.

Cris deRitis:                      You've used it against me before.

Mark Zandi:                     It's the tracking estimate for GDP in the third quarter.

Dante DeAntonio:          That's right. We just rolled out the initial estimate for third quarter. GDP is 4.1% annualized, and that's actually in line with... I think the Atlanta Feds GDP tracker was at 3.9% in their initial estimate. So, either roughly in alignment, it's early. Obviously, it's not based on a ton of data.

Mark Zandi:                     Explain what this tracker is. What is it?

Dante DeAntonio:          So, we take incoming hard data that would eventually flow into the estimate of third quarter GDP, and we use that to do a real-time estimate or projection of what we think third quarter GDP would be. So, as we move through the third quarter, we get more and more data. We update that tracking estimate. So, the initial estimates don't tend to be super accurate because we're not basing it on a lot of information. They tend to get more accurate over time as more of that source information comes in, but again, it's a real time tracking estimate of what we expect output to be in the current quarter.

                                           I thought it was interesting. Obviously, we had a couple of high profile pullbacks on recession calls. It feels like if you're getting anywhere close to 4% annualized growth, I think the talk of recession anytime this year or probably even early next year is unwarranted at this point, it feels like. So, I think we'll probably see more people going back on those recession calls here in the near future.

Mark Zandi:                     Although if we get 4.1%, then you can't sustain that.

Cris deRitis:                      The hammer's coming out.

Dante DeAntonio:          But if you get 4.1% with inflation still coming in and the job market's still slowing, does that cause the same reaction, I guess, is my thought?

Cris deRitis:                      Productivity then is taking off.

Dante DeAntonio:          That could mean that productivity is providing a bigger lift than it has recently.

Mark Zandi:                     But the reality is this is early days. We don't have many hard data as you say. So, this is based on very little.

Dante DeAntonio:          Yeah, I am not expecting 4% growth in the third quarter, but I think it certainly is a positive sign that growth is going to maybe pick up a little bit from where it was in the first half of the year.

Mark Zandi:                     Yeah, in the third quarter. We got vehicle sales for July. We got the ISM surveys for July, the supply management numbers. I guess it also depends on the jumping off point from Q2 for a lot of this data. Is that basically the data that you have now for that tracking estimate?

Dante DeAntonio:          Right. The initial estimate comes after we get vehicle sales. That's the first big data point that we get logged in. The jumping off from the previous quarter obviously matters, and the trend estimates for the other factors for vehicle sales is the key to when that starts for the next quarter.

Mark Zandi:                     But your point is a good one. I mean, you had a lot of forecasters, not us. I'd just point out, not us, but other forecasters are really saying, "About this point in time, we'd see some real weakening in the economy, maybe not a recession in Q3, maybe not negative numbers, but certainly not strong numbers." We'd be starting to see some real weakening here and we're not seeing it at all. If anything, just still early days, but if anything, just the opposite of strengthening. Yeah. Okay.

Cris deRitis:                      There was one forecasting outfit out there that said 100%. Do you remember that?

Mark Zandi:                     I do. I don't want to embarrass them by saying.

Cris deRitis:                      We won't call them out, but just to say.

Mark Zandi:                     Yeah, of course. I always hesitate to-

Cris deRitis:                      Please don't go there.

Mark Zandi:                     I told you so. That was you who said, "I told you so."

Cris deRitis:                      No, I was not saying I told you so, but that was a pretty bold-

Mark Zandi:                     100%. Well, yeah, they're trying to obviously make a statement. Yeah. But anyway, I did notice Bank of America who I respect a lot. They had a recession call for a long time and they decided to roll that back. Anyway, okay. That was a good one. That was a really good one. A little difficult because our minds were somewhere else, but nonetheless. Cris, what's your statistic?

Cris deRitis:                      23,697.

Dante DeAntonio:          That's too easy.

Mark Zandi:                     It's too easy.

Dante DeAntonio:          Yeah. It's job cut announcements from The Challenger Report.

Cris deRitis:                      Yes.

Mark Zandi:                     Oh, my God.

Dante DeAntonio:          There aren't that many data there that specific, the individual number.

Mark Zandi:                     Boy, that's embarrassing actually. Cris, are you embarrassed that was so easy?

Cris deRitis:                      Yeah, no, I knew it was easy, but relevant. Actually, I wouldn't have gotten it. My mind immediately went to construction employment or something. I think it was up 19,000 or something, right?

Mark Zandi:                     Yeah. Those are always around numbers.

Cris deRitis:                      Was manufacturing up or down?

Dante DeAntonio:          Down 2,000. Yeah.

Mark Zandi:                     Yeah, 2,000, which is pretty amazing that given all this, it's only down 2000, but okay. Cris?

Cris deRitis:                      Very low level of layoffs. It's actually down 8.2% from a year ago. That's the first year-over-year decline this year. So, it just again, points to the fact that job cut announcements are very low. Businesses seem to be focusing more on maybe pulling back some of their job openings rather than actual layoffs at this point.

Mark Zandi:                     Yeah, I mean, it's just incredible. I mean, just how low those layoffs are. We saw pickup earlier in the year because of the tech. I think we mentioned that, but since really the last couple of three months, it's really come off again.

Cris deRitis:                      That's right. I think it was over 1,000 back in January or February of this year.

Mark Zandi:                     Amazons and [inaudible].

Cris deRitis:                      There was some fear there, which justified some of those recession calls perhaps.

Mark Zandi:                     You've heard my explanation for the low layoffs, the labor hoarding argument. Businesses just don't want to lay off because they know their number one problem looking through whatever it is that we're experiencing now is going to be finding and retaining workers. Do you buy into that?

Cris deRitis:                      I think you asked this last week.

Mark Zandi:                     Did I?

Cris deRitis:                      I buy into it.

Mark Zandi:                     Oh, I think I did. It was a couple of weeks ago. I asked you when it was mano a mano.

Cris deRitis:                      I buy somewhat into it, but I can't be the only factor. There must be demand for goods and services. So, they're willing to accept lower productivity perhaps, but they can't have a big part of their labor force just doing nothing. So, they'll hoard to some extent, but there are some limits there. I see the hiring is still being organic. They're seeing the demand for goods and services. They're still fulfilling.

Mark Zandi:                     Okay.

Dante DeAntonio:          To your earlier point, I think you've seen some of the adjustment on the hours front, right? I mean, you're still hiring, but you've seen average hours come down. Cris's point about part-time for non-economic, you've seen maybe some adjustment there where firms are saying, "Okay, we're not going to lay workers off, but hours are being cut back a little bit." People are being forced part-time, maybe a little bit more than they were. So, I think to your point about labor hoarding, they're trying to find ways to keep workers on the payroll by putting them to work a little bit less maybe.

Mark Zandi:                     Yeah. Okay. Good one. Okay, so my statistic is 1.5%, 1.5%.

Cris deRitis:                      In today's JOLTS report?

Mark Zandi:                     Nope.

Cris deRitis:                      It's labor market related from the JOLTS.

Mark Zandi:                     Nope.

Cris deRitis:                      Came out this week?

Mark Zandi:                     Yup.

Cris deRitis:                      Government statistic?

Mark Zandi:                     Government statistic. BLS, Bureau of Labor Statistics, I'm just saying.

Dante DeAntonio:          Is it productivity related?

Mark Zandi:                     Yes, it is productivity related.

Dante DeAntonio:          Is that the decrease in hours worked in the productivity?

Mark Zandi:                     I don't know the number. That was the number I had in mind, but it sounds like a big decline.

Cris deRitis:                      Is that the average output per hour over the last 12 months? So close.

Mark Zandi:                     You've got the spirit of it. Yeah. It's the average annual growth, non-farm business productivity just before the pandemic hit.

Cris deRitis:                      Well, that's what I meant.

Mark Zandi:                     I know, that's what I was going to say. You've got the spirit of it. You've got the spirit of it. That's almost exactly equal to the productivity growth in the prior three plus years. So, since the pandemic hit in 2020, 2021 Q1 till now and calculate productivity growth and then compare that to the same three-year plus period prior to that, that was also 1.5% productivity growth. So, despite it all, despite the ups, downs, all arounds, the economy is still generating productivity gains that are 1.5%, which is back consistent to what we were saying earlier about underlying productivity growth and the wage growth. You need to be consistent with the 2% target. You have to assume a 1.5% productivity growth numbers.

                                           I found that quite interesting, very encouraging. In the context of all those quits, remember I mentioned all those quits? I think at least initially, that's going to depress productivity growth, but it feels like we might be getting to the other side of the learning curve and people are going to start kicking into gear. Because of all the quitting and people shuffling around, getting jobs that they're more happy with, they're more consistent with their skills and their preferences, we could see some pretty significant productivity gains here because we got more happy workers than we have had historically because of those quits.

Cris deRitis:                      That's interesting, but there was a Wall Street Journal article that came out this week making the rounds and indicating that newly hired workers, new labor market entrants were showing lower productivity. The businesses were really struggling to train folks. They attributed it to remote work certainly, as well as just the pandemic itself and decline in education during the pandemic. So, maybe it's industry specific, right? I think this article focused more on restaurants, retail, how do you register?

Mark Zandi:                     That's interesting.

Dante DeAntonio:          How do you manage your schedule and whatnot?

Mark Zandi:                     Well, typically when you have a tight labor market, productivity growth does start-

Dante DeAntonio:          Decline.

Mark Zandi:                     ... to decline. Because you start hiring workers that are of lesser skilled, less experienced, have other issues, and productivity does start to suffer. But it doesn't feel like that's the case here. I mean, it feels like we're holding our own, at least if you buy into the data. We saw a big increase in the first quarter jumping up and down on all around quarter to quarter. But if you abstract from that, it feels like we're still hanging tough, which I find encouraging.

Cris deRitis:                      So you're still-

Mark Zandi:                     Bullish.

Cris deRitis:                      ... optimistic for the future, productivity gains.

Mark Zandi:                     Yeah. In our baseline forecast, the most likely forecast in the middle of the distribution, which no recession. Just to repeat, no recession. We've never had a recession. We're assuming 1.5% productivity growth going forward, which is pedestrian in the grand scheme of things. Meaning if you look at productivity growth between the World War II and the financial crisis, it was almost 2% on the nose. Between the financial crisis and the pandemic, that whole entire period, it was 1%. In a few years, right before the pandemic, it got back up to 1.5 and that's where we've been since the pandemic.

                                           So, it feels like we were at two, we went to one, we're now at one and a half. That's what I'm assuming, because I just don't know really. There's so many crosscurrents here. Those things we were just talking about are crosscurrents, and that's not even bringing in things like artificial intelligence and AI and the strong investment spending that's going on right now among businesses. How's that all going to play out? But we're punting on that at least so far, which I think it's hard to do otherwise, I mean, I think at this point, right?

Cris deRitis:                      Yeah. Dante, still negative?

Dante DeAntonio:          Yeah, I would say I'm still bearish. I don't think productivity growth is going back to 1%, but I am not sure that we get to 1.5% over the next couple of years. I think maybe it's a little bit weaker than that. I'm still a little bit pessimistic, I guess.

Mark Zandi:                     Cris, I forgot. This is the ying and the yang of the productivity debate. Dante's the yang, meaning negative, and Cris is the yang, the positive. Is that right?

Cris deRitis:                      That's right.

Mark Zandi:                     So if we have the 1.5%, I'm splitting the differences between the ying and the yang, what would you say, Cris, would be more likely? Something closer to two, back up to two over the next few years, maybe five years?

Cris deRitis:                      One in three quarter.

Mark Zandi:                     One in three quarters. Yeah. Dante, you'd say one and a quarter?

Dante DeAntonio:          Yeah, I think that's roughly where I'm at.

Mark Zandi:                     Okay, so I'm going to say 1.5. It's 1.5. That's how we do the forecast. So, that's 1.5%.

Cris deRitis:                      Reasonable. Reasonable, right? Reasonable.

Mark Zandi:                     The Goldman Sachs came out with a study on AI and they were arguing that it's a game changer, that it's like electricity or the internet in terms of what it means for productivity. So, it's going to add 1.5% per annum to growth. So, we're now 1.5, we're going to get another 1.5. We're going to therefore be at three over the 5, 10 years, something like that.

Dante DeAntonio:          Was that the study that's $7 trillion to GDP or something like that?

Mark Zandi:                     Yeah, global GDP. Yeah. Right. Hard to put that-

Cris deRitis:                      Do you have information to make that case though, do you think?

Mark Zandi:                     I don't know. I don't know. I don't think so, but yeah, we'll see.

Cris deRitis:                      AI specifically. Yeah, when we're talking productivity growth, it could come from anywhere.

Mark Zandi:                     A lot of different sources, right?

Cris deRitis:                      They're saying AI.

Mark Zandi:                     Generative AI. Yeah, exactly. Yeah, interesting. Okay. I think this is going to be a shorter podcast, which isn't hard to do because our recent ones have been very long, but let's end like we have been, because I just want to get Cris's probability of recession over the next 12 months. I'm just waiting. I'm waiting, Dante, because he's stuck at 50% probability over the next 12 months. Cris, any change there?

Cris deRitis:                      I'm not a hedgehog.

Mark Zandi:                     What are you then? Geez, it feels like a hedgehog.

Cris deRitis:                      Fox. New data.

Mark Zandi:                     Yeah, that's no fox.

Cris deRitis:                      I'm revising it down to 45.

Dante DeAntonio:          Oh, look at that.

Mark Zandi:                     Oh, my gosh. That is a watershed moment, right?

Cris deRitis:                      I might even go lower, but last week's podcast with the government shutdown discussion spooked me.

Mark Zandi:                     Yeah, it made me a little nervous too. So, a 45% probability, National Bureau of Economic Research defined recession will start between now and this time next year, 45%.

Cris deRitis:                      Twelve months. Yeah.

Mark Zandi:                     Wow. Okay. Because you were 50 last week and your peak was 65?

Cris deRitis:                      Yeah, 65%.

Mark Zandi:                     Well, the employment report must have moved you in that direction. Was that the thing that pushed you over the line?

Cris deRitis:                      Yeah, this and the layoffs. Yeah. Okay.

Mark Zandi:                     Okay. Very good. That's a watershed moment. Dante, where are you?

Dante DeAntonio:          I think last month, I was at 40%, which down a bit from a few months ago. I think I've probably spent too much time with you recently. I would lower that probably to one third now.

Mark Zandi:                     Oh, okay.

Dante DeAntonio:          Call it at 35%. I'm going to split the difference and call it one third to make it easy.

Mark Zandi:                     I have influence.

Dante DeAntonio:          You have. Yeah.

Mark Zandi:                     Because Dante and I were traveling together out west visiting clients, and he heard my talk a number of times.

Cris deRitis:                      Brainwashing.

Mark Zandi:                     Yeah. All right. Well, okay, one third probability of recession over the next 12 months. I'm with you. I'd say one third probability of recession over the next 12 months. Still elevated, meaning until inflation is back to target, hard to get overly excited and economy is going to be vulnerable here. It is going to be soft. Anything that goes off the rails, even a little bit, it's going to be a problem. That potential for a looming government shutdown does make me nervous.

Cris deRitis:                      So what was the price of gas at Wawa this morning?

Mark Zandi:                     I didn't go into-

Cris deRitis:                      Oh, you didn't go?

Mark Zandi:                     Yeah. I actually was thinking about driving the car to get some Wawa coffee, but I couldn't. Oh, because the employment report was coming out and I was busy and I had a lot of other stuff going on, writing a piece for CNN, that stuff. Do you know, Dante? Oh, you're at shore.

Dante DeAntonio:          Yeah, I don't even know it was down here, 360.

Cris deRitis:                      You bring that up for good reason because oil prices are going back up. Yesterday, I saw $3.96.

Mark Zandi:                     Ooh, really?

Cris deRitis:                      In Westchester.

Mark Zandi:                     In Westchester. Wow, okay. Yeah, that does worry me as well, right? That's another good reason to be a little nervous here. I do think if we stay below $4 a gallon, we're okay. If we go over $4, then I get a little nervous. If we get to $4.50+, I think ugh.

Cris deRitis:                      Yeah. Plus food prices, I think. Yeah, that's the other terrible thing.

Mark Zandi:                     Electricity prices are coming in, so that should help offset some of the other, but still, yeah, I agree with you. Yeah.

Cris deRitis:                      But that sentiment is really tied to gas prices for sure.

Mark Zandi:                     Yeah, absolutely. Okay. Anything else guys you want to bring up before we call this a podcast? Now, are we going to get Marissa back next week, Cris? She's been AWOL quite a bit here.

Cris deRitis:                      Next week, she should be back.

Mark Zandi:                     Okay. She should be back. Okay. All right. Dante, thanks so much. With that, dear listener, we're going to call this a podcast. Take care now. Bye-bye.