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Moody's Talks - Inside Economics
Workers, Wages, and Wallyball
Mark, Ryan, and Cris dissect the October U.S. employment report and what it says about the state of the economy, wage growth, and inflation. We knew there were Hunger Games and Squid Games. Now add the Zandi Games.
Full episode transcript here.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics. It's Jobs Friday, a big day for us here at Moody's. And I've got my two trusted colleagues joining me today, Ryan Sweet. Ryan's the Director of Real Time Economics. Hi, Ryan.
Ryan Sweet: Hey, Mark. How are you?
Mark Zandi: We're counting on you, Ryan, because hopefully you've had enough time to dig down into the bowels of this report, and you're going to give us a lot of insight here. I've been scrambling a little bit. I haven't had a chance to really dig deep, but ...
Ryan Sweet: You're in trouble then. [crosstalk 00:00:50].
Mark Zandi: I know. I know.
Ryan Sweet: You're in trouble.
Mark Zandi: The thing about the jobs number report is that there's so many numbers.
Ryan Sweet: Oh, yes. Yeah, it's unbelievable.
Mark Zandi: Yeah, I can't keep them all straight. There's so much.
Ryan Sweet: I'll give you the biggest number of the week. Seven.
Mark Zandi: Are we going to come back to that or should I ...
Ryan Sweet: No, it's just my oldest son turned seven this week. That was the most important number for me.
Mark Zandi: Well, that is important. That is really important, really -
Cris deRitis: It's a milestone.
Mark Zandi: You have a son that's seven years old? Wow.
Ryan Sweet: Seven. Time flies.
Mark Zandi: Yeah. Is he going to be a Boston Red Sox player at some point?
Ryan Sweet: He's really into baseball and wears his Red Sox hat proudly.
Mark Zandi: Just like his Dad.
Ryan Sweet: Yep.
Mark Zandi: Very good. Well, congratulations on that. And also Cris deRitis. Cris is the Deputy Chief Economist. Hi, Chris.
Cris deRitis: Hey, Mark. How are you?
Mark Zandi: And you're wearing red today. Red.
Cris deRitis: Just to get on your nerves. I know it annoys you, so ...
Mark Zandi: You are in my mind, my friend. Ryan, have you noticed this? Every podcast he's got a different look. I never change. I either have a sweatshirt on or a white collared shirt. That's it. Those are my two choices. Today is my white collared shirt day.
Ryan Sweet: He just likes to throw his curve balls.
Mark Zandi: I know. Look at that.
Cris deRitis: Well, you mentioned it so often that now it's in my head. I got to think about it.
Mark Zandi: Yeah. You know what? You look like you should be Formula One driver today. I'm not kidding. Doesn't he?
Ryan Sweet: Yeah, he does.
Mark Zandi: There's a Ferrari outside his door there.
Ryan Sweet: The funny thing is he doesn't dress differently outside of ... I ran into Cris at the Y because our kids had swim lessons and it looked like he was going to be on the podcast any minute.
Cris deRitis: I'm consistent.
Mark Zandi: Is that right? He looked that good?
Cris deRitis: I'll take the Formula One as a compliment.
Mark Zandi: I wish I could do that. Definitely a compliment. That's a big deal. Yeah.
Cris deRitis: Oh, yeah.
Mark Zandi: You definitely could be a Ferrari driver. Right, Ryan?
Ryan Sweet: Definitely. Definitely.
Cris deRitis: Well, they're not doing so good this year.
Mark Zandi: Are you drinking your barista coffee there? You got your little ... No, I don't see the coffee.
Cris deRitis: No, I already did. I already -
Mark Zandi: Well, Ryan, I do see the cow bells. The cows bells are good. Yeah.
Ryan Sweet: Yeah. Yeah, they're there.
Mark Zandi: All right. Well, this is Jobs Friday. This is actually one of my favorite days, well, of the month. I was going to say of the year, but that would be really stretching it. But we'll say month, our favorite day of the month. And today this was a great jobs number, wasn't it? A really good jobs number.
Ryan Sweet: It was.
Cris deRitis: Yeah.
Mark Zandi: So, maybe we should start, Ryan, with you just giving us the basic rundown, and then we'll go into a bit of our statistics game, which I'm sure is going to be centered around the jobs numbers. And you're going to give us some number deep into the bowels that we're never going to [crosstalk 00:03:49].
Ryan Sweet: Not that deep. Not that deep.
Mark Zandi: Not that deep? Okay. Fair enough.
Ryan Sweet: It did stand out to me though.
Mark Zandi: Oh, it did? Okay. All right. So, give us the run down here on the numbers.
Ryan Sweet: Well, first, everyone was concerned that we had got this sharp deceleration in job growth. And if you look at the revisions for the last two months, they were up revised higher by a net 200,000. So, deceleration still occurred, but it was less significant than what was previously thought. All that concern about, "We're descending into a recession," we can table that talk for now. We created -
Mark Zandi: For now?
Ryan Sweet: Well, forever.
Mark Zandi: Put a stake in the heart of that idea.
Ryan Sweet: For at least the next couple years.
Mark Zandi: Okay. But this talk that we were hearing from the corners of, I don't know where, that we were in a recession. Come on. That was nonsense.
Ryan Sweet: I was being polite. I'll let you -
Mark Zandi: Very good. All right.
Ryan Sweet: You can put the stake in that.
Mark Zandi: Move forward, move forward.
Ryan Sweet: All right. We created more than 500,000 jobs. Private, if you strip out government, we created a little bit more than 600,000 jobs on net. Unemployment rate came down, more people came into labor force. The number of people that were out of labor force for own illness, that's all COVID related, declined. So, the Delta variant's grip on the labor market loosened in October. And so far, if you look at jobless claims, if you look at other high frequency measures, the home based data, November should just be as good as October from an employment perspective. So, we're back off and running when it comes to the labor market.
Mark Zandi: Okay. A lot to unpack there. But before we do, Cris, any other color you want to add in terms of report, the job numbers, anything you would say?
Cris deRitis: Yeah, it was just solid all around. And the revisions caught my eye as well. So, that was my backup number, but that was really impressive that 117,000, 118,000 more jobs in August and September than originally thought. Just go to show, you can't just rely on that first print and call it a day, right?
Ryan Sweet: Exactly. [crosstalk 00:06:01].
Mark Zandi: Let's talk about those revisions first. Just to level set here, bottom line, this was a really good report.
Ryan Sweet: Absolutely. Absolutely
Cris deRitis: Very good.
Mark Zandi: And it suggests, like we've been saying on these podcasts now for several weeks or maybe last several months, that the economy's performance is tethered to the pandemic. Delta came in July, August, September, really nailed the economy. September was pretty a tough month for jobs. I think August, in our monthly GDP number, was actually negative for August GDP.
Mark Zandi: But now that the Delta wave is winding down, and it definitively is winding down if you look at infections, the economy's revenue right back up, and that's the overarching message here in this jobs number. Everyone agree with that?
Ryan Sweet: Yes.
Mark Zandi: Yeah. Okay. All right. Fine. And it's not just the important data, [crosstalk 00:06:58]. Okay. We can come back to that. Yeah. But that's a good point. I guess you're right, infection seem to be leveling off at a high level here, 70K, 75K per day. So, we got to watch that. And in Europe, they're going back up again, so we need to watch that.
Cris deRitis: Yeah. Germany just set another record high. So, the winter is going to be something to watch out for.
Ryan Sweet: Yeah. Okay.
Mark Zandi: All right. On the revisions, correct me if I'm wrong, but I've noticed that there's been consistent upward revisions for a while now, at least for four or five, six months, maybe even longer. Do I have that right? Ryan?
Ryan Sweet: No, that's correct. And there is a bias in the revisions when you're coming out of a recession. So, early on in a recovery, revisions typically are biased higher and positive.
Mark Zandi: But bias, I don't think that's the right word. Is that right? Bias -
Ryan Sweet: All right. No. You're right. That's not the correct word. They have a tendency to be revised higher. Typically, the first print underestimates the amount of job growth that occurred early in a recovery. And now with the pandemic, with so many people changing jobs, that revision is just now on steroids.
Mark Zandi: Right.
Cris deRitis: And the seasonals are worse this time around.
Ryan Sweet: Correct.
Cris deRitis: That's my impression at least.
Mark Zandi: So what does that mean? The seasonals are worst.
Cris deRitis: The seasonal adjustments are all over the map because of the pandemic. The pandemic had such a different trajectory in terms of the recession and recovery period that it's not clear what the seasonal adjustment should be at the moment. At least that's my interpretation. There's a lot of noise in the seasonals because you had all sort of things going on. You had even Tax returns being delayed, you had all sorts of things that could throw off seasonal adjustments.
Ryan Sweet: Yeah. Wait until in November with the early holiday shopping, retailers are already revving up, FedEx, UPS, they're hiring, Amazon, well ahead of time, ahead of normal. So, you're going to get a big boost to employment in November.
Mark Zandi: Let's just go back to the revisions for a second. And then we'll come back to the seasonals. There's so many different ways we can go here. This is going to be a particularly tough podcast.
Mark Zandi: But back to the revisions to finish off that conversation. One reason why, as you say, Ryan, coming out of recessions into recoveries, the Bureau of Labor Statistics tends to underestimate job creation, at least initially in its first survey, first print, so-called first print, is that it doesn't pick up job creation that might be occurring at smaller companies, businesses, maybe even new companies that are forming. And we know that business formation so far this year in 2021 has been extraordinary.
Mark Zandi: If you look at the applications for tax identification numbers by businesses... If I go start a new company and I got to pay taxes, I got to get a so-called EIN, which is an acronym for tax identification number. And those have just gone skyward since the beginning of the year. Am I right about that? I think I am.
Ryan Sweet: Yeah. You're spot on. Yep.
Mark Zandi: Yeah. And so that would be consistent with these upward revisions. We're getting all this business formation, a lot of activity ongoing at smaller businesses and the BLS just catches up, the survey catches up as more businesses report in. Is that the idea behind the revisions?
Ryan Sweet: Yeah. Correct. That's after recession, that's normal. This time, it's a little bit different. We have that issue as well, but on top of it, if you look at the number of people that are quitting their jobs, it's astronomical. When people are quitting their jobs, the BLS has a hard time catching all this labor market churn. So, I think that's another reason why we're seeing such large, upward revisions.
Mark Zandi: Also, we get this so-called benchmark revision once a year, when the Bureau of Labor Statistics goes back and takes the data based on the survey, this monthly survey, which is an incomplete survey, right? I think the survey captures, what, 30 million businesses that employ about 30 million people? Do I have that roughly right? Something like that. And then they come back once a year and they benchmark their estimates based on that survey to actual employment counts based on unemployment insurance records, which is a complete census of all the jobs out there.
Ryan Sweet: Correct.
Mark Zandi: And they do that with the January report that's released in early February. I've got that right?
Ryan Sweet: Correct.
Mark Zandi: For the nation.
Ryan Sweet: The Annual Benchmark Revisions.
Mark Zandi: And historically, have come out in the fall and said, "This is what we think the revision's going to be," for that benchmark revision.
Ryan Sweet: August. They come out in August.
Mark Zandi: Did we see that this year? I missed it somehow or forgot about it. I don't know. Do we see it?
Ryan Sweet: Forgot about it.
Mark Zandi: We got to go back and take a look. I wonder what those revisions were going to be? Because I expect them to be [crosstalk 00:12:02].
Ryan Sweet: That's for last year.
Mark Zandi: Yeah. Yeah, true. That would be March of 2021, right?
Ryan Sweet: Yeah, I think they were small. Yeah. I don't think they were enormous.
Mark Zandi: Okay. Because the economy really hadn't gotten going. The benchmark was March of 2021.
Ryan Sweet: This August, the benchmark will be interesting. If I had to guess, it's going to be revised [crosstalk 00:12:22].
Mark Zandi: Wait, wait, wait, wait. No, the benchmark was as of March of 2021.
Ryan Sweet: I'm sorry. They released [crosstalk 00:12:28].
Mark Zandi: And they released their estimate of March, 2021 in August.
Ryan Sweet: Correct.
Mark Zandi: And you're saying it was pretty small and that's probably because ... Okay, got it. Boy. Lot of nitty gritty there.
Ryan Sweet: Yeah. We went down a rabbit hole real fast.
Mark Zandi: Well, that's okay. The bottom line is the numbers are good and they're actually probably even better than they are saying because we're in this period when we get these big upper revisions in the data, which is all very encouraging. So, that's very good.
Mark Zandi: Let's go back to the seasonal adjustment and the point you're making there, and I think you did an admirable job, is that the pandemic really messed up the historical data because you had this massive blow to the economy back March, April, May of 2020, things come roaring back temporarily, then they settle back in and then the Delta wave. And so all the normal, seasonal patterns in the labor market just got completely scrambled.
Mark Zandi: So, when the Bureau of Labor Statistics goes back and tries to tease out what those seasonal patterns are, it's difficult to do. And one complication that may be affecting the data now is that the retailers and transportation companies, the FedExes of the world, the UPSs of the world, may be hiring sooner than normal for the holidays season because they're fearful they're not going to get the people they need. Is that the point you're making? I didn't notice, did we see a big jump in jobs in transportation?
Ryan Sweet: Retail's up.
Cris deRitis: Retail is up, yes.
Ryan Sweet: The boost is going to come in November.
Mark Zandi: Okay. So, with this month, we're going to get much bigger number you're saying than typical?
Ryan Sweet: Correct. Mm-hmm (affirmative).
Mark Zandi: Because of the seasonals. And then I guess December is going to be the flip of that, right?
Ryan Sweet: Yeah. It's going to be awful.
Mark Zandi: And January of next year when we're just going to see a lot more ... Well, I guess that's more difficult. [crosstalk 00:14:27].
Ryan Sweet: It should be normal. You get the normal layoffs that occur January, February.
Mark Zandi: All right. Okay. We're getting really deep into the monthly data, vagaries of the data. But the point is that this number today might have been a little juiced by favorable seasonals, is what you're saying? At least when it comes to retail.
Ryan Sweet: Chris and I have been going back and forth and stressing the importance of looking at the non-seasonally adjusted data so that you can pick out these quirks, what we're talking about. I just checked: non-seasonally adjusted, private employment in October was up 1.9 million.
Mark Zandi: Really?
Cris deRitis: Wow.
Ryan Sweet: That is more than... what is that? More than double what's your typical October. So, you can take all these little nuances that we're talking about out and it's still a blowout number. It's still really, really good.
Mark Zandi: Okay. Okay. Very good. Excellent. Okay. Any other things that we want to look or listen to in the report just to give them a sense of the numbers? I mean, I guess we should come back to this when we get deeper into what's going on in the labor market, because that's the big topic of the day.
Mark Zandi: Obviously, the jobs number is the statistic we're going to focus on. Although there were other statistics that came out this week that we could talk about, but that seems to be dominating the conversation. And then we're going to go in the big topic, into deeper labor market issues.
Mark Zandi: The one statistic that I found a bit disappointing was labor force participation, which held steady. Unemployment decline from 4.8 to 4.6, all good. But the labor force participation rate held steady at 61.6. And that's where it's been. Labor force participation really hasn't moved for over a year now, really. Some months up a little bit, some months down, but not really. I found that a little disappointing. Agree?
Ryan Sweet: Yeah, I would agree.
Cris deRitis: Yeah, certainly.
Mark Zandi: Great. So, we got to come back and unpack that one too and think about what's driving that and whether... I guess the question that's starting to open up here is, are we going to see it rise? Is there something more fundamental going on that's keeping participation down? I've got a view on that. I'm sure you do, but we'll come back to that.
Ryan Sweet: Okay.
Mark Zandi: And of course, the average hourly earnings, they were strong again. So, year over year, average hourly earnings, the measure of wage growth in this report, the Bureau of Labor Statistics report, was 4.9, I think, right?
Ryan Sweet: Yep, that's right.
Mark Zandi: Year over year. Yeah. That's very strong. That's very strong. Of course, it's affected by the mix of jobs and occupations, but in this case [crosstalk 00:17:04] across the board.
Cris deRitis: Even ECI, the other indicators are all -
Mark Zandi: So, I don't know.
Ryan Sweet: Yeah, there's another number that came out this week that -
Mark Zandi: The employment cost index, which is a better measure, right? That was strong too. I guess that's the other point to make about the number today is the job gains were broad based across all private sector industries: construction, manufacturing, mining, transportation, retail, leisure, hospitality, healthcare. I didn't notice any weak ... What about motor vehicles? Was that down or up? Did you notice?
Ryan Sweet: Well, are we going to play the game?
Mark Zandi: Oh, okay. We'll play that game. Okay.
Ryan Sweet: We're going to go through all the numbers.
Mark Zandi: I think the one thing you should explain to the listener though, is we did see a decline in government jobs and all in education. So, what's going on there? Why did we see that decline? It was sizeable, it was down 70K, 75K in the month.
Ryan Sweet: Right. It was down.
Mark Zandi: Do you know [crosstalk 00:17:56]?
Ryan Sweet: Yeah. I thought it was going to be down less than that, but again -
Mark Zandi: Is that seasonals too?
Cris deRitis: Seasonals. Yeah.
Ryan Sweet: We pulled hiring. We were ramping up for the new school year... We had last year basically the teachers, faculty were off last year, bus drivers. They ramped up hiring earlier than normal to get ready for the new school year. It typically starts in late August, September. And then for the last couple months we've seen declines in employment mostly because of seasonal adjustment.
Mark Zandi: Yeah. Okay.
Cris deRitis: The cumulatives are still down though, cumulative change from February of 2020?
Ryan Sweet: Yes. Yeah. That's a good point.
Cris deRitis: So still, there is some weakness there.
Mark Zandi: [crosstalk 00:18:34] down quite a bit. So, there's some room there. How do you interpret that? That we should get some [crosstalk 00:18:38] to get that back.
Ryan Sweet: Well, there's still schools closed because of COVID. I believe in September we had 2000 schools nationally that were closed or went on to be virtual because of COVID.
Cris deRitis: Okay.
Mark Zandi: Okay. Okay, great. I guess let's play the game. Yeah. I don't feel good about this at all, to tell you the truth.
Ryan Sweet: You shouldn't.
Mark Zandi: I shouldn't feel good?
Ryan Sweet: No, because you're tied up with presentations, they way you're dressed, I think you just didn't have the time to prep ...
Mark Zandi: I know. That's my point. I didn't time to really ... And I know you're going to kill me on this. Cris, did you prepare?
Cris deRitis: I've got one. It is non-BLS, it is non-employment related, just to mix it up.
Mark Zandi: Okay.
Cris deRitis: So, you might stand a chance with that one.
Mark Zandi: If it's housing, I'm going to throw you out.
Cris deRitis: No, no. It's not housing. There's no housing data came out this week.
Mark Zandi: Really? You can always find housing data.
Cris deRitis: Last week. Just check what Bitcoin prices did.
Mark Zandi: Bitcoin prices. Oh, by the way, I want to come back to the 10-year treasury yield, Ryan. The market reaction to today's numbers was ... well, stock market was up. Okay. They liked it. Long-term bond yields were down. We'll come back to that. All right. Okay. Let's go, Ryan. We'll go with you first. So, fire away.
Ryan Sweet: I got two numbers for you.
Mark Zandi: Are they related?
Ryan Sweet: They're related. Okay. All right. The first is 75.6, and that's a diffusion index, and then 60,000, which is a net change.
Mark Zandi: Are these like two different statistics or the related statistics?
Ryan Sweet: Different reports, but they're related to ... they're tied together.
Mark Zandi: Okay. So, 75.6% diffusion index. And you said 60K?
Ryan Sweet: 60K.
Mark Zandi: The only diffusion index I'm familiar with in the BLS -
Ryan Sweet: No, [inaudible 00:20:37]. That was not BLAS. Think earlier in the week.
Mark Zandi: We're not talking about the employment report?
Ryan Sweet: One number could be in the employment number.
Mark Zandi: Oh, the 60K is in the employment report, correct?
Ryan Sweet: Yeah. You'll get that one.
Mark Zandi: Oh, okay. The 75.6 is not in the employment report.
Ryan Sweet: Correct.
Mark Zandi: But it is a diffusion index.
Ryan Sweet: Correct.
Mark Zandi: Oh, man. So hard for me to remember back earlier in the week.
Ryan Sweet: You can't remember Monday.
Cris deRitis: Yeah. [crosstalk 00:21:05].
Mark Zandi: The number was on Monday. Damn.
Ryan Sweet: Cris.
Cris deRitis: We were all focused on the election on Monday.
Mark Zandi: Can you give some other hint?
Ryan Sweet: It's a big top of mind issue. Think of all the-
Mark Zandi: Supply chain.
Ryan Sweet: [crosstalk 00:21:28]. Supply chain.
Mark Zandi: Oh, Supply Chain Index. You're supply chain -
Ryan Sweet: No, it's not our index. Okay. You're close. I'll give it to you.
Mark Zandi: I know what it is. I know what it is. Don't tell me, don't tell me. Don't tell me. Don't tell me. Right? Ism, manufacturing, survey, supplier delivery index.
Ryan Sweet: Very good. Mark.
Mark Zandi: Get, cowbell out, buddy.
Ryan Sweet: I'll get the cowbell. You second one. Why you guys talk amongst yourselves. See if you can get the second one.
Mark Zandi: Okay. Right, right. I know that. That was a little painful to get out. So he is getting his cowbell. There you go. You any kids home today or sleeping or anything going on?
Cris deRitis: He can't hear you.
Mark Zandi: All right. So 60K, 60K ...
Ryan Sweet: So think about that.
Cris deRitis: Transportation warehouse.
Mark Zandi: You can't hear me.
Ryan Sweet: You're close. You're close.
Cris deRitis: Employment now?
Mark Zandi: Employment?
Ryan Sweet: So we have all sign point towards supply chain issues.
Mark Zandi: Yes, exactly.
Ryan Sweet: But this number employment was surprisingly strong.
Mark Zandi: I think Cris said it, didn't he?
Ryan Sweet: [inaudible 00:22:27].
Mark Zandi: Go ahead.
Cris deRitis: I said transportation warehouse or employment.
Mark Zandi: Manufacturing was up.
Cris deRitis: Manufacturing.
Mark Zandi: Yeah.
Mark Zandi: That's not it? It's not it?
Ryan Sweet: So manufacturing was up 60,000 and within manufacturing autos, which has been just crushed from the supply chain issues. Employment was up 27,000, which is a good sign.
Mark Zandi: Interesting. Yeah. I find a little confusing because I was just talking to Mike Brison, who's our auto guy. Auto economist. He was saying that production is still down. Yeah. Okay. But this would suggest -
Ryan Sweet: But auto production schedules point towards a little bit of a pickup.
Mark Zandi: Okay. Are they the year seasonal factors? I guess that's what's going on.
Ryan Sweet: Usually I'm the one that screams seasonal factors. This is go to when [crosstalk 00:23:17].
Mark Zandi: Yeah.
Ryan Sweet: Seasonal factors. I was encouraged though. I think it's early indication that maybe they're going to be a little less binding. I think there's still going to be problematic for the next year, but hopefully they cut less into growth than what they've done most of this year.
Mark Zandi: So do you think we're kind of at the worst of the supply chain, it sounds like you think we're at the worst of the supply chain issues. I guess it make sense in the context of Delta winding down.
Ryan Sweet: Correct?
Cris deRitis: I think that's what the Toyota CEO said earlier in the week that we were at the peak here, but, and things should get better.
Ryan Sweet: Slowly.
Mark Zandi: Yeah. The one indicator I would love to get my hands on and I think we can is the number of ships that are out in LA Long Beach port that are just waiting to be unloaded. Have you had a chance to take a look at that at all, Ryan?
Ryan Sweet: Yeah. I have. They're coming down a little bit because the Bidens ... I don't know if it was an executive order, but the longshoreman have to work 24 hours a day, seven days a week to offload these container ships.
Mark Zandi: Yeah. I heard and they actually are working those 24, seven hours. Okay.
Ryan Sweet: One interesting thing to keep in mind for next June or July, the longshoreman contract and the west coast expired. So we could have a port strike like we did back in 2015.
Mark Zandi: Mm-hmm (affirmative). That would be a problem.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Okay. So Delta wave is winding down here globally. Germany aside or Europe, I guess Europe's on a different kind of trajectory here, but certainly in Asia it's been winding down. Activities picking back up factories, reopening ports reopening in China here in the U.S were responding by going 24,7, at least partially going 24,7, trying to make some efforts here. And it feels like that the worst of the supply chain issues are at hand or just behind us. And we're starting to see some improvement here. And you're saying either was an indication of that in the jobs number with the increase in jobs at motor vehicles. And you don't think that's seasonal adjustment. You think that is something [crosstalk 00:25:41].
Ryan Sweet: I think that's legit.
Mark Zandi: Okay.
Ryan Sweet: It's a small step, small step in the right direction.
Mark Zandi: Yeah.
Ryan Sweet: We still have a long way to ways to go.
Mark Zandi: Well, just to get people context around there, vehicle sales, which obviously have been depressed because there's no vehicles to sell. Here's the other statistic, Mike Brison told me, I found amazing. There's about 75,000 vehicles on dealer lots as of last week, typically there's 500,000 on dealer lines. That gives you a sense, record low inventory. So we're not getting sales. Sales hit 12.2 million annualized in September. They're back up to 13 million in October. And you're saying, "Okay, that perhaps indicates that the supply chain issues are ironing up in the manufacturers, vehicle manufacturers are getting it together again."
Ryan Sweet: Yep, absolutely.
Mark Zandi: Here's the other point. Typically, typical sales are 17 million units per year. So that's would suggest there's a lot of juice coming as we go from 13 million to 17 and production picks up again, as we get those chips admittedly, that's going to take some time and overtime, but that's going to add to growth in a very significant way.
Ryan Sweet: Yeah.
Mark Zandi: I'm sorry, Cris. I interrupted you.
Cris deRitis: No. A question for you, Do you think this lean inventories on dealer lots is going to be a new normal or auto makers going to take this opportunity to kind of having lean inventories allows them to control the prices a bit more? Do they coordinate here and people are adapting to the online environment to order cars? Is this something that's going to be permanent? Or do you think next year will be right back to 500K?
Mark Zandi: Well, I can't imagine they want 75K because they're losing sales. They can't sell anymore.
Cris deRitis: Well, that might too low, but do they go all the way back to the inventory levels of the past?
Mark Zandi: Yeah. That's a good point or the thought is completely the opposite and is, "Oh, I got to have a question here." If something goes wrong because look, "I lost a lot of sales because I had no inventory. I've been managing my inventories so leanly that if anything goes wrong in the world, then I got a huge problem. I'm destroying sales even at these higher prices." So I'm not sure how that cuts, tell you the truth.
Cris deRitis: That feeds perfectly into, I had a client ask me what the catalyst for the next recession's going to be. What do you think?
Mark Zandi: The catalyst for the next recession?
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Well, I think the biggest threat is of a classic business cycle [crosstalk 00:28:28].
Ryan Sweet: ... inventories.
Mark Zandi: Yeah. Too lean.
Ryan Sweet: Yep.
Mark Zandi: Labor market's too tight, inflation remains too elevated. Fed has to respond more aggressively than anyone's anticipating at this point. Obviously asset prices, stock values, housing prices, every crypto, everything becomes very vulnerable in that kind of scenario. And that's kind of a classic business cycle. That's how I would've responded to that. Is that what you would say?
Ryan Sweet: Yeah. I pinpoint inventories. I think businesses are double ordering, triple ordering now because we have all these supply issues, they're going to get caught maybe with too much inventory in a couple years. And then traditional inventories have caused recessions in the US and they're going to have to [inaudible 00:29:11] with too much to get that inventory correction short recession, boom bus type cycle in the U.S.
Mark Zandi: So what you're saying is that inventories get too lean going and you get inflationary pressures.
Ryan Sweet: No, no, no. They're lean right now. They're very, very lean.
Mark Zandi: Oh, you're saying, Oh, I see what you're saying.
Ryan Sweet: Over the next couple years -
Mark Zandi: I see.
Ryan Sweet: - they double book.
Cris deRitis: [crosstalk 00:29:35].
Ryan Sweet: Yeah. They get a [inaudible 00:29:37].
Mark Zandi: Also a lot of capacities is going to come online too. Because every manufacturing, every industry seems to be planning for additional capacity, chips and everything expanding.
Ryan Sweet: It's [crosstalk 00:29:50] overshoot.
Mark Zandi: Yeah, maybe overshoot. This is interesting.
Cris deRitis: So this is the [inaudible 00:29:55].
Mark Zandi: Yeah.
Cris deRitis: The [inaudible 00:29:57].
Mark Zandi: Yeah. Which is well known in the agricultural circles. You have a shortage, prices go up for whatever the ag commodity is. Farmers respond to that plant too much stuff. And because it all happens with a lag, they get surprised and get into this kind of circular kind of mess. Okay. So you're arguing the opposite of what Cris was arguing that we're in store for excess inventory down the road. That that's the risk, not to lean inventory.
Ryan Sweet: Yeah. Couple years inventory.
Mark Zandi: Couple of years down the road?
Ryan Sweet: Yeah.
Mark Zandi: Okay. Yeah. Interesting. Okay, Cris, your number?
Cris deRitis: 66.7.
Ryan Sweet: And this is non employment related?
Cris deRitis: Not employment related.
Mark Zandi: That's Cris's probability that he's going to win the Formula One race. He's about to ... [crosstalk 00:30:48] probability.
Ryan Sweet: I think he violated the first rule of Fight Club.
Mark Zandi: What's that?
Ryan Sweet: Not to pick something that's too obvious.
Mark Zandi: Obvious.
Ryan Sweet: Yeah.
Cris deRitis: All right.
Mark Zandi: So you know -
Cris deRitis: How come I don't? So obvious to you that what that number is?
Mark Zandi: It's related to the other one. Yeah. It's related.
Cris deRitis: Just went over.
Ryan Sweet: Manufacturing was the sister survey.
Mark Zandi: No, he didn't go there. Did he?
Ryan Sweet: Yeah. He did.
Mark Zandi: The ISM Non-Man Service [crosstalk 00:31:15].
Ryan Sweet: Yes he did.
Mark Zandi: Supplier deliveries.
Ryan Sweet: Yeah, services. Services pillar.
Cris deRitis: The services Pillar.
Mark Zandi: Okay.
Ryan Sweet: It was a good number.
Mark Zandi: Yeah. It was a good number. Actually the top line number was a record number.
Ryan Sweet: It was a great number.
Mark Zandi: Yeah. Cris you're surprised. You didn't know that it was [crosstalk 00:31:31].
Cris deRitis: Yeah, It was a surprise 66.7.
Mark Zandi: Okay. Is that the top line number? Not the supplier deliveries in ... it's the top line number in the ISM Non-Man [crosstalk 00:31:41].
Ryan Sweet: That's a top line number. The composite index.
Cris deRitis: Yeah.
Mark Zandi: Okay. And that was a record high. All time high. And that survey's been, how long has the purchasing manager's been doing that one?
Ryan Sweet: Early 2000s.
Mark Zandi: Early 2000s.
Ryan Sweet: Yeah. The ISM Manufacturing Survey goes way further back, but ISM Not-Man was early 2000s, I believe.
Mark Zandi: Guys we were talking like recession or weeks ago now feels like, boom, doesn't it? So all these guys [crosstalk 00:32:08]recession, the economy is actually booming. Not going into recession.
Ryan Sweet: I want to make a change. My 10% probability of a decline in GDP in the fourth quarter is now zero.
Mark Zandi: It's not happening?
Ryan Sweet: It's not happening.
Mark Zandi: Yeah. I agree with you. What's our tracking estimate or GDP. I know it's early, early days.
Ryan Sweet: It's early.
Mark Zandi: The track system is we take all the real time statistics, monthly statistics and translate that into what it means for GDP growth, the valuable things we produce in the current quarter. We're now in Q4. And what is our tracking estimate for Q4?
Ryan Sweet: 7.7.
Mark Zandi: Okay. Seven. That that's boom. Yeah. We're back. There's a couple of other folks that do this and they're really good at it. Like the Elena Federal Reserve, have they come out with a number yet?
Ryan Sweet: They have, they're closer too. They're above eight and a half. Maybe closer.
Mark Zandi: They're eight. Okay. Even stronger than we are. Okay. Very good. Okay. All very good. Anything else in that? I think you do justice in pointing to that ISM Non-Man survey, because that was a blowout survey. Anything in the bowels of the survey, Cris, that stood out to you?
Cris deRitis: It was pretty strong across the board. I believe employment. Employment was a little weak, but all the other components were strong. It points to the post Delta environment here.
Mark Zandi: Orders are positive.
Cris deRitis: Very positive.
Ryan Sweet: Okay.
Mark Zandi: All right. Okay. So I guess it's my turn, right?
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Okay. I got one for you. And this might ... because there's so many numbers, this might be a little unfair, but this is a pretty important number. I think.
Ryan Sweet: The CNN [inaudible 00:33:49].
Mark Zandi: 3.8 million, 3.8 million.
Ryan Sweet: 0.89. This is in [crosstalk 00:33:55].
Mark Zandi: Is in obviously in the jobs report. It's in the jobs report. I'll go far is to tell you it actually in the text, the Bureau of Labor Statistics provides 3.8 million. It goes to ...
Cris deRitis: [crosstalk 00:34:08] is this the number of people ...
Mark Zandi: [crosstalk 00:34:09] go ahead.
Cris deRitis: ... people not working because of the pandemic?
Mark Zandi: Yeah. Exactly.
Ryan Sweet: Very good.
Mark Zandi: Yeah. This exactly ... were you going to get that, Ryan?
Ryan Sweet: Of course, I have the notes for sure.
Mark Zandi: You've already got okay.
Cris deRitis: He's he's being modest.
Mark Zandi: Yeah. There was, according to BLS, 3.8 million people that are unable to work because their employer closed or lost business during the pandemic. 3.8 million. And the reason I bring that up well, but lots of reasons for that. But one of the interesting things is that's almost precisely the number of people were down in the labor force today compared to pre pandemic. So if you look at the size of the labor force today, look at what it was pre pandemic we're down about 4 million something like that. So that would suggest that as we get to the other side of ... well, let's suggest two things to me, I'm curious if you agree, first that as we continue to work through the pandemic, hopefully get to the other side of the pandemic. These folks will get back to work, come back into the labor force and everything start to normalize in terms of labor force and labor force participation.
Mark Zandi: But the other thing that suggests to me is it's not going to be quick. It's going to take time because these are people who've lost jobs at employers that have actually closed. So they're gone, they failed and now you got to go find another job somewhere else. And there are plenty of jobs out there openings, but it's going to take some time. Is that a fair kind of read on things guys?
Cris deRitis: Yeah, I think it sounds reasonable. The only thing gives me hope is that there are a lot of startup and small business openings as you've mentioned earlier, tthat could certainly accelerate thing. If that wasn't the case, it would be even longer for people to try to find new jobs.
Ryan Sweet: Yeah. And I thought in our macro meeting or our monthly meeting where the whole stack is together, I thought you brought up a very interesting point about the long COVID. So if you look at the number of people that were employed, but not at work because of own illness, it's still above a million, which is elevated.
Mark Zandi: 1.3 million. Yeah.
Ryan Sweet: 1.3?
Mark Zandi: Yeah.
Ryan Sweet: 1.378 to be exact. But -
Cris deRitis: There you go.
Ryan Sweet: It's been above a million since the pandemic began. I think that's a point that this is going to linger for some time.
Cris deRitis: It's going to take some time.
Ryan Sweet: Yeah.
Mark Zandi: Okay. This now leads us into kind of some of the broader labor Market issues I want to talk about as our big topic and the one that's really top of mind here, and I think came to the floor with this report today is labor force participation. So just to provide context, a pre pandemic labor force participation, this is the ratio of the number of people who are working or looking for work relative to the working age population. So it's the percent of the working age population that's out there working or looking for work. Unemployed and looking for work, that was 63.5 percent-ish give or take pre pandemic. And of course it got crushed in the height of the pandemic back in the early part of 2020, it's made its way back.
Mark Zandi: But as we said earlier, it's sitting at 61.5% ish, actually 61.6% to be precise in October. So we're still down two percentage points from pre pandemic. And you do the arithmetic, that's about four of 4 million people-ish, something like that. So the question is, and we've been stuck there ... it's 61.5, 61.6, 61.7, 61.5 really for more than a year now, I think you go back to the summer of 2020, we've been kind of stuck there. So increasingly the question is, Is it going to rise? Is it going to go? Or are we going first? Are we going back to pre pandemic levels? I think the answer is no, we can talk about why, but is it going to start normalizing? Are we going to see any increase here from 61.5%? And I guess that's an open question to either of, How are you thinking about future participation?
Mark Zandi: I should say in our forecast, our baseline forecast, that where we put pen to paper, we have participation going back up to 62.5%. So we're down two points from where we were pre pandemic. We're going to get one point back. We're not going to get the other point. We're going to get one point back. I'm just wondering how you're thinking about this and where do you think that's a reasonable outlook and what's going on here? I'll start with you, Cris, Do you have any views on this?
Cris deRitis: Yeah, absolutely. I do think there's a cyclical and, the structural component here. So on the cyclical side, we've been talking about the pandemic itself. People sick are taking care of people who are sick children, not able to go to school. So you do have a number of parents in particular who are not in labor force, who would come back in once things clear up here. So I think we will get that component back in, hopefully relatively short order. But then I look at the demographic shift that we're seeing in terms of people taking early retirement. And that was accelerated during the pandemic. I don't think we get many of those folks back. We might get some like this flexible work arrangements, but we shouldn't count on it. It sounds like a 50, 50 split is what's picked in the forecast. I'm perhaps a little less optimistic. I think some folks are not coming back in. And so I would probably put it closer to 62, maybe 60 to the quarter.
Mark Zandi: Okay.
Cris deRitis: But I think it's a reasonable assessment.
Mark Zandi: And those people not coming back, you mentioned the boomers?
Cris deRitis: Yeah.
Mark Zandi: Okay. So they were going to leave anyway. But what we're saying here is that they just left early?
Cris deRitis: That's right.
Mark Zandi: They lost their job in the pandemic. Hard to get back in. And I guess the other reason they might not come back is they're financially in a much better spot?
Cris deRitis: So I think you have those two groups, some are taking early retirement because they did lose their jobs. And it's too late to restart, let's say. And then others who benefited and able to take advantage of higher house prices and stock prices and take early retirement.
Mark Zandi: And then I guess the other factor which Ryan mentioned was, and this one, it is pretty hard to gauge, but it feels intuitive is long COVID that you've got people who got sick and it's just taking a long time for them to get healthy enough to go to work or healthy enough to go back and work the same hours that they were before, or they're maybe working maybe putting the same hours, but they're just not as productive.
Ryan Sweet: Right, because it's hard to work.
Mark Zandi: Yeah. So I guess that's hard to gauge. That's kind of a wild cart here. We don't really know how big a deal that is?
Cris deRitis: Yeah. Absolutely. I think it's real though. Certainly I think [crosstalk 00:41:42].
Mark Zandi: Yeah.
Cris deRitis: We just don't know what the consequences, it's uncertain.
Mark Zandi: I know people loved ones who got this problem.
Cris deRitis: Absolutely.
Mark Zandi: Any other group that would be in that category that have left aren't coming back any? So there's the boomers. There's the long COVID, I guess the other issue might be here. And this is kind of between cyclical and structural, cyclical means very near term, structural means longer run, is the mandates for vaccination. How big a deal do you think that is? It feels like that might be more of a deal than people are ... even if it's 10, 15, 20% of the labor force that says, "I'm not getting a vaccination, no matter what you say, or even if I lose my job," that might be an issue.
Ryan Sweet: Yeah. I use the Census Pulse data and they question people that are employed and by vaccination status. And there's the two cohorts are focused on those, those that said, they're absolutely not going to get vaccinated no matter what. And those that are most likely not going to. So these looking at the universe of people that these mandates could affect the impact on employment, it's pretty significant. It's two to 6 million people.
Mark Zandi: Is that many?
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: No. I guess we're going to figure this one out pretty quickly here, because -
Ryan Sweet: Over the next few months.
Mark Zandi: Because I saw it. I think it was yesterday, the Executive Order January 4th, that large employers are all ... I think it's employers with over 100 employees. Is that right?
Ryan Sweet: Yes.
Mark Zandi: Yeah, need to have all their folks vaccinated all their employees vaccinated, or at least they're not vaccinated. They have to take a test, I believe once a week, to show that they're COVID free.
Ryan Sweet: So that testing should like reduce the impact on employment a little bit. And it doesn't mean like that two to 6 million estimate, it's a huge range, but that doesn't mean that's the amount of jobs we're going to lose. These are people that may quit working for an employer that has over a hundred employees and work for a smaller company or start their own company. So I don't think it's going to be hard to tease out the effect, but in the end, shouldn't it be a net positive. We talked about all the people that don't feel comfortable going back to work because of COVID. If you know all your coworkers are vaccinated, you're more likely going to reenter.
Mark Zandi: That's a good point. And maybe a near term hit to labor force, but ultimately it's a positive because it makes everyone feel confident that they're safe when they go to work.
Ryan Sweet: Right. And I know you and Cris are ... you guys kind of get stuck in your ways. I don't even pay attention to the labor force participation rate. The total one, all I focus on is a prime age employment. And that went up from 78% in September to 78.3% in October.
Mark Zandi: Oh, that's an interesting point.
Ryan Sweet: So if we keep this trend going, we'll be at 80%, which we've talked about on the podcast before is our threshold for full employment by the end of next year.
Mark Zandi: This is the employment to population ratio?
Ryan Sweet: Correct?
Mark Zandi: Not the labor force participation?
Ryan Sweet: I don't even pay attention to that.
Mark Zandi: Okay. So you're looking at the employment, the number of employed people 25 to 54 divided by the population of those prime age workers?
Ryan Sweet: Correct.
Mark Zandi: And you're saying that historically, if you look at past business cycles, if it gets over 80%, that's consistent with a full employment economy?
Ryan Sweet: Correct.
Mark Zandi: What was it in October?
Ryan Sweet: 78.3.
Mark Zandi: And that's up from 78 in September?
Ryan Sweet: Correct. [crosstalk 00:45:29] and during the -
Mark Zandi: I guess is the lowest. I recall the low, it was like 70 or something.
Ryan Sweet: Correct?
Ryan Sweet: So we've 69.6.
Mark Zandi: 69.6. So by that measure, you said we're at 78.8? So we're -
Ryan Sweet: 78.3.
Mark Zandi: 78.3. Oh, sorry. So we're 1.7 percentage points away from employment.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: It doesn't give us a lot of room actually. Does it?
Ryan Sweet: It's about a year.
Mark Zandi: I think that's the case. How many people [crosstalk 00:46:00] that? Can you multiply 0.017 times the number of people, 25 to 54?
Ryan Sweet: I can't do it. Why right now?
Mark Zandi: Okay. I was hoping you could, because that's interesting. That is very interesting, really interesting point. I was going to say something about the testing this anecdote. I had to go to a business function and to be able to participate. I had to take a COVID test. And so they sent me a COVID test. And first thing I'll say, it's really easy. I hope they're accurate. I think they're accurate, but it's no big deal. You take a swab, you circle it up. Everyone's probably had a test now, but you do it yourself. You put it up your nose and you put it into a vial with a little bit of solution. And it's like a pregnancy test. If you get a blue line, you're good.
Mark Zandi: You're not pregnant. If you get a red line you're pregnant. So very, very easy. That's the first thing I'd say, but here's the really funny thing, I open up the package, get the instructions out and I'm reading the instructions. I get to the end of the instructions. I go, "I don't know how to do this." It's like. "They missed the step of taking the swab out of a pack and putting it up your nose." That was not in the instructions. I am not kidding.
Mark Zandi: It was professionally done. 1, 2, 3, 4, 5, here's what you do. And I go, "Well, when do I put the swab up my nose? What do I do?" And I'm telling you, I wasn't the only one, because then I get an email from the group that I was speaking at or participating at. And they, said, "By the way, they were missing a step. Here's the step." I thought that was almost funny but anyway, bottom line they're easy. These tests are easy to take
Ryan Sweet: And they're accurate. My son's school will accept a home negative COVID test. Yeah. And then you can return, like it doesn't have to quarantine or anything like that.
Mark Zandi: [crosstalk 00:48:14] so maybe there's concern about taking vaccinations and their impact on labor force may not be that big a deal. Who knows, but why would people object taking the test? I do that. I guess it depends on who pays for the test, I suppose. Hopefully government, it's paying for that. I don't know.
Ryan Sweet: The next few months is going to be, you have the vaccine mandates, but you also have five to 11 year olds are now able to get vaccinated and maybe that takes some of the strain off parents. They're more comfortable sending their kids to daycare, to school and everything.
Mark Zandi: Yeah. Good point. So Cris said, our forecast, the Moody's Analytics, most likely scenario, we have the participation rate going from 60. This is the overall participation rate. I know caveat, Ryan doesn't pay attention to this, but that's caveat. Everyone else does. 61.5, we're going to 62.5. That's the new normal, we're not going back to 63.5. Cris says, "Well, well maybe 62." And Ryan says, "I don't even have a forecast regular for that because I don't care about it."
Ryan Sweet: I don't pay attention to it.
Mark Zandi: Employment to population.
Ryan Sweet: Doesn't matter.
Mark Zandi: Are we going back to 80% employment to pop on primary age?
Ryan Sweet: Yep.
Cris deRitis: He says, yes.
Ryan Sweet: Yes.
Mark Zandi: Okay. That's all cyclical. This is we mostly cyclical, yeah. Of course we [crosstalk 00:49:34]. The real problem might be the non-prime age workers where we see the real problems in terms of getting people back to work, right?
Ryan Sweet: Could be. But we had the same debate after the Great Recession [inaudible 00:49:44] the male labor force participation wasn't coming back and some people speculated there living in their parents basement playing video games. That wasn't true. It came back. It's going to come back.
Cris deRitis: So once crypto crashes they'll have to come back in.
Ryan Sweet: I guess.
Cris deRitis: That's the trigger. That's a good point.
Mark Zandi: Well, that's the other point I've been making about excess saving. Another reason we expect participation rates to pick up here in a more meaningful way relatively soon is that I do think there's evidence that we there's a lot of excess savings out. People been able to save above which they would typically do if there was no pandemic and for high income, high net worth households, that's mostly the result of those households sheltering in place and not spending. And they've been saving and for lower middle income households, that's probably mostly government support, stimulus checks. We had three rounds of stimulus checks, unemployment insurance, rental assistance, food assistance. And it could be the case that that's just slowing when workers go back to work because they have a financial cushion, they have that cash they can use to pay their bills.
Mark Zandi: But here's the point that if you do the arithmetic and take a look at spending patterns, certainly pre pandemic, many of those middle income households are going to blow through that excess saving here pretty quickly over the next month, two or three. And that would argue that there's going to be more financial pressure on those workers to actually get back to work. So that would be a reason to think we're going to start to see the participation rate EPOP rise even more here over the next 3, 4, 5, 6 months. Again, that's embedded in our kind of forecast, but very much a forecast.
Mark Zandi: Also, I just put in a plug for the legislation that's being debated in Washington today. There's two pieces of legislation, one around public infrastructure, the other around social programs. And I do think that some of the policies in that social program legislation, particularly around helping with childcare and housing and elder care will be important for lifting long labor force participation longer run. It doesn't really help here. Certainly doesn't help in the next year or longer run. That could be very helpful in getting people back to work, particularly lower income, less educated workers, that potential workers that just can't afford the childcare and the elder care and need the help. They need housing that's closer to their jobs, that kind of thing. I think that's going to become increasingly important that we -
Ryan Sweet: Where was the plug?
Mark Zandi: The plus was what I say that's a reason for the legislation. Vote for that legislation plug.
Ryan Sweet: I didn't know [crosstalk 00:52:39].
Cris deRitis: There's a good reason for it.
Ryan Sweet: Yeah.
Mark Zandi: Go back to the [crosstalk 00:52:42].
Ryan Sweet: If you're testified or had a TV commercial. I was just curious.
Mark Zandi: I'm preparing.
Ryan Sweet: Okay. You're preparing.
Mark Zandi: Yeah, actually I ran a nice [Bernard Jars 00:52:50]. One of our other colleague who's been on the podcast before. We wrote update to our analysis of the macro consequences, that's up on EV economic view. So people might find that interesting. They can go take a look.
Cris deRitis: What odds do you place in the legislation now actually passing and what signs?
Mark Zandi: On the table is 1.75 trillion over 10 years, that's a social program tax credit. And then 550 billion in additional funding and public infrastructure. That's the other piece of legislation. Well, public infrastructure that's going to get passed. That could get [inaudible 00:53:29] today.
Cris deRitis: Absolutely.
Mark Zandi: ... because the House is going to vote on it. The Senate's already voted on it. President's going to sign it. I put a 60, 65% probability that the $1.75 trillion package gets through.
Mark Zandi: I think depends on what lesson Democrats took from the election results. And I think the lesson they took and this was President Biden ... this was his point after he talked about this after the election results was that they need to show results. They got to get something done. And if they don't do anything here, I think people are going to think, "Why'd we elect you know, back in 2020. So we're not going to reelect you in 2022." That'd be my sense of it although I've heard counter arguments to the other side. Do you have a view on that, Cris? Do you have a probability?
Cris deRitis: I think it gets skinny down.
Ryan Sweet: Even further?
Mark Zandi: Even further.
Cris deRitis: Right. Because the tax assessment ... No, the tax. I can't remember the acronym now.
Ryan Sweet: The Tax Committee assessed -
Mark Zandi: Joint Committee on Taxation.
Cris deRitis: Yeah. Thank you.
Ryan Sweet: I think it was assessed at 1.5 trillion, for the tax revenue, if I'm not mistaken. So it'd still be deficit positive if it passes.
Mark Zandi: On a static basis.
Ryan Sweet: Correct. That's what matters though.
Mark Zandi: I guess.
Ryan Sweet: So Cris, Do you support it? Would you vote for this?
Cris deRitis: I think if it was skinny down, I think then. I think it has to be skinny down is my point. I don't think mansion is going to go far.
Mark Zandi: [crosstalk 00:55:05] one to five, that makes the difference to you?
Cris deRitis: I think so. Well, I think it's all the optics of deficit spending.
Mark Zandi: But It's dynamically going to be paid for.
Cris deRitis: Again, it's the spin, it's the spin.
Mark Zandi: Okay. But I hate this.
Cris deRitis: We'll see.
Mark Zandi: Hey, there's one other big topic I wanted to talk about with regard to the labor market to dig in deeper here. First was obvious participation. Another is around wage growth and inflation. This obviously comes to the four today in today's number. The average hour earnings as we discussed earlier was up 4.9% year over year. That's pretty strong. And then you guys mentioned the Employment Cost Index, ECI, which is another med of wages compensation. That's better than the average hour earnings, because it controls for the mix of jobs, the occupations and industries, which can really mess with the numbers. But that's also ... Ryan, Can you fill us in on the ECI numbers? You followed them pretty carefully. They were up a lot.
Ryan Sweet: Yeah. They're very strong. And even if you adjust for incentive peg, which is less sticky, the ECI private wage growth is very, very strong. Well above what we saw pre pandemic. One thing we do is there's all these different wage measures, you have the Atlanta Fed, you have the ECI unit labor costs, which came out on Thursday, which were up more than 8% annualized, a lot of different messages. So we kind of take them all together and create a wage tracker. So like our Moody's Analytics tracker and year over year, that's around 3.5% which is stronger than what we saw pre pandemic. So wage growth is definitely picking up.
Mark Zandi: Yeah. And a lot of it, I notice is that among low wage workers, which is entirely [crosstalk 00:56:53]. Yeah. The Atlanta Fed -
Ryan Sweet: That's part of your tracker too.
Mark Zandi: I think the Atlanta Fed creates a wage tracker based on following the same workers over time. So it controls for these mixed issues and they can cut that data by lots of demographics, including the wage of the worker. And if you look the wage growth for folks in the bottom, I think quintile of the wage distribution, that's where a lot of the wage growth is really occurring.
Ryan Sweet: Yeah, which makes sense because that's where we're having the most labor supply issues. It's in leisure and hospitality. It's in retail.
Mark Zandi: Right. So I guess this leads to a bunch of questions and one is, Is this acceleration in wage growth, temporary transitory as the Fed would say, or are we here to stay? Can guys have any view on that one? What do you think, are we going to be here at 5% or higher going forward?
Ryan Sweet: For wage growth or inflation?
Mark Zandi: Yeah.
Ryan Sweet: Which one?
Mark Zandi: Wage growth.
Ryan Sweet: Wage growth?
Mark Zandi: Yeah. What's the other one, ECI or?
Ryan Sweet: I thought you're asking like, are we at 5% nominal wage growth for the foreseeable future or 5% inflation for the forecast.
Mark Zandi: I'll get to the inflation. I'm just kind of stuck on the wage growth because then of tie that back into inflation, which you're right, that's also 5%, which by the way, may not be an accident. Workers are getting pay increases or consider with the acceleration and inflation to some degree. But my sense is the wage rate is temporary. Just like everything else we've been talking about. It's pandemic related. The labor market's been [inaudible 00:58:39], all supply chains were all jumbled because of the pandemic, labor markets, all jumbled because of the pandemic, all these severe. As you say, there's circular and cyclical elements to it, but there's definitely a cyclical element to this related to the pandemic. And so wages are getting jacked up because of the labor shortages that we're experiencing now, due to the pandemic. As the pandemic winds down as Delta winds down, as people get back to work, as the participation rates starts to rise, then that takes some pressure off and we see wage growth a moderate, not by percent, year for now just 3.5 to 4%, something like that.
Mark Zandi: And again, it depends on which wage measure you're using, but if we're using average hourly earnings, that's kind of how I'm thinking about it. Any disagreement on that perspective? No?
Cris deRitis: No. I think that's right. You have people coming back. The other factor is productivity, which actually came ou this week as well.
Mark Zandi: One quarter Cris, it's one quarter.
Cris deRitis: It's not a good number. Yeah, yeah. I'm not clicking in my boots yet, but -
Mark Zandi: This now connects the dot between wage growth and inflation.
Cris deRitis: Exactly. Exactly.
Mark Zandi: The wall between strong wage growth and higher rates of inflation, the thinking is, wages growth is going up. Businesses are going to have problems with that. Because their profit ability's going to weaken their margins are going to narrow. Therefore they're going to raise prices more aggressively for the stuff they produce and you get into this kind of wage price firewall. But the break wall. Is that what they called?
Ryan Sweet: Firewall?
Mark Zandi: What's it called?
Ryan Sweet: The firewall.
Mark Zandi: Firewall, the firewall, the firewall. Yeah, the firewall, firewall break wall too. But the firewall is pro productivity growth. Productivity growth accelerates, that allows businesses to produce the same amount of stuff with fewer labor hours. So the higher wages per hour doesn't cause their margins decline and that doesn't put pressure on the raise prices more aggressively. And the question What's going on with productivity growth? And we got a data point this week on that too. And you're saying that was bad.
Ryan Sweet: There was the largest decline since the early 1980s.
Mark Zandi: And that was for Q3 when -
Ryan Sweet: Right. Supply chain issue.
Mark Zandi: Yeah. Growth got creamed by the pandemic, by the Delta wave.
Ryan Sweet: Correct.
Mark Zandi: But [inaudible 01:01:02] Dante on right now. By the way, Dante usually comes on unemployment Friday, but he had something come up. He couldn't participate. Unfortunately for him though, because the ADP number, which is what he works on, he nailed it. Didn't need this month? ADP said what? 570,000 private sector workers. And that's pretty much what we got, I think.
Ryan Sweet: 600. Yeah.
Mark Zandi: Dante comes on and every time the ADP misses.
Ryan Sweet: He deserves a lot of, but I will remind him. I was closer.
Cris deRitis: You were?
Mark Zandi: That's because you have the luxury of using the ADP number in your ...
Ryan Sweet: Correct. Actually the ADP number made me sweat this off. I was like, "Wow. We're like really close to one another." And that's usually not a good thing. I'm just kidding. But Dante [crosstalk 01:01:58].
Mark Zandi: That's rude. That's a rude [crosstalk 01:02:02].
Ryan Sweet: I think ADP is going to be ... it's gotten a bad rap over the last several months. But if you look at the errors, they're usually large when you have this different waves of COVID maybe how BLS versus ADP measure employment. But I think it's going to be more accurate going forward as long as we don't get these. Another wave of COVID.
Mark Zandi: I should say for the listener, ADP is the human resource company. They process a lot of payrolls and we put together an estimate of the BLS jobs numbers on the Wednesday before this Friday based on the ADP number. And Dante, we've been doing this for a long time, Dante's leading a charge on that right now and takes great pride in that. And he should. He nailed it this month, but unfortunately he wasn't on. I brought up Dante because he's a productivity growth skeptic. Isn't he, Cris?
Cris deRitis: Yes.
Mark Zandi: [inaudible 01:02:55].
Cris deRitis: He is.
Mark Zandi: What's his argument? What's he saying about productivity growth? And what's the logic behind it?
Cris deRitis: We have a very strong demographic head headwinds like aging of the population. And also if you look at previous recessions, the pattern is large productivity gains during the early stage of the recovery. And then those fall by the wayside as normalize and firms start to higher up again. So based on that track record, you shouldn't get overly excited by the productivity gains we've seen so far. And I guess the data point that came out this week would support that argument. I think it's temporary, just a blip, but something to consider.
Mark Zandi: And you're the evangelist, as I understand [crosstalk 01:03:42] he's the skeptic near the productivity event. So what's your argument?
Cris deRitis: My argument is that the technological changes and other changes in organization that we've adopted during in the pandemic are actually going to be more long lived. That they're more structural in nature. We've been putting off a lot of these changes for a while, but now we all adopted this Video conferencing, Cloud computing, Machine Learning, AI or robotics. Everything is coming online. And I see those as having a much longer tail going forward. So I don't think it productivity screams from here, it doesn't go up to 5% or anything like that. But we were at 1% predictivity growth prior to the recession. If we are prior to the pandemic, if we're closer to one at 1.7. I think that's a huge gain.
Mark Zandi: That sounds pretty precise to me. Ryan -
Ryan Sweet: That's unusual for Cris. He usually [crosstalk 01:04:43].
Cris deRitis: But one point says we're at right now. So that's what I [crosstalk 01:04:45]. But if we're closer to 2% -
Ryan Sweet: If we're closer to 2%, that's a significant increase.
Mark Zandi: Ryan, are you more a skeptic or [inaudible 01:04:57] to be growth skeptic or more of evangelist or neither? You're kind of agnostic.
Ryan Sweet: I was about to ask you the same thing. I'm an optimist.
Mark Zandi: I'll tell you -
Ryan Sweet: I'm an optimist first.
Mark Zandi: I'll tell you what my view is, but I wanted to hear what your view first.
Ryan Sweet: No, I'm optimistic about productivity growth.
Mark Zandi: You're optimistic?
Ryan Sweet: Mm-hmm (affirmative). Particularly over the next five years, we should see trend productivity growth. Ignoring these quarter to quarter fluctuations trend, productivity growth is going to be well ahead of what we saw pre pandemic.
Mark Zandi: So we were, as Cris said, 1% trend productivity growth prior to pandemic. What are we going to be -
Ryan Sweet: Two.
Mark Zandi: Two? And I think it's exactly where we were between World War II and the Financial crisis.
Ryan Sweet: Yeah. And I agree with everything Cris said, but also businesses are investing a ton in intellectual property, in software, in equipment, that leads productivity growth. So these little wiggles now don't stress about it. It's going to pick over the next couple years.
Mark Zandi: Yeah. I'm a flaming evangelist. I think productivity growth is going to be very strong and for the reasons that you guys gave. I hold out less on technological changes because I just don't know. It's hard to gauge that AI is on a panel. I think I said this once before with Mark Cuban and he's saying we're going to see very strong productivity growth, meaning so strong, it's going to be dystopic for the labor Market. We're going to have so many unemployed people because AI, Machine Learning is going to wipe out of these jobs. Okay. Maybe I guess that's a forecast of scenario, but I don't put a lot of weight on it. I just say, "Okay, the rate of technological change is going to remain it what it has been."
Mark Zandi: And it's not only about the rate of technological change. It's about the rate of incorporating that technology into business practices, which is probably the more difficult thing and really some more difficult for this, that dystopic view to ever come to pass. I'm more in line with Ryan's perspective on investment, both IP, which is a lot of that software and also information equipment. And there's very strong relationship between what investment happens today and what happens with productivity growth 3, 4, 5 years down. We have a great chart, by the way, maybe you can update that chart, Ryan, or maybe I'll do it. That relates information process equipment a few years ago to productivity growth today. And over history, it's been very, very, very strong relationship. Here's the other thing, I don't think people recognize, trend underlying productivity growth abstracting from the vagaries of the data.
Mark Zandi: Quarterly data was actually accelerating well before the pandemic. It wasn't just a pandemic thing. If you go back and look we were 1% ish below, we were like a half a point, half a point in productivity growth back in midlife decade 2015, 2014, 2015, 2016. We were like over one before the pandemic hit. So we were already trending a lot higher. And the other thing I'd say is, and this goes to a study that I did with Adam OECK who's now over at Indeed, their Chief Economist ... Was Dante in that? Dante was part of that too. Wasn't he in that study? You guys remember?
Ryan Sweet: Yeah, Dante helped out.
Mark Zandi: Yeah. Dante, and this is maybe coloring his view, demographics, the aging of the population, the large number of boomers in the workforce. That's still a drag on productivity growth. Older workers tend to keep productivity down because they don't incorporate new technologies into their own work. They're very resistant to do that because they're not going to be in labor force that much longer and they just don't want to change what they're doing. It's painful to do that. Except for me guys, I embrace technologies when someone tells me I have to adopt them. I'm on Twitter by the way.
Cris deRitis: There we go. I knew it.
Mark Zandi: Perfect time to plug my Twitter handle @MarkZandi, follow me. I'm tweeting. Good stuff. See, I adopted new technology.
Cris deRitis: [crosstalk 01:09:14] you going to enter the Meta verse?
Ryan Sweet: Exactly.
Mark Zandi: That one really creeps me out a little bit because I know the Matrix movies all too well. That feels very Matrix.
Cris deRitis: Getting close.
Mark Zandi: It's getting feels that way. It makes me a little -
Ryan Sweet: That squirrel scene and the Matrix creep me out.
Mark Zandi: The squirrel scene?
Ryan Sweet: Think about it. Remember we were talking about your favorite movie was Groundhog day and you described Groundhog as squirrel. Got to keep up Mark. Got to keep up.
Mark Zandi: Yes I hot you, sorry.
Ryan Sweet: This was an actual squirrel.
Mark Zandi: [inaudible 01:09:53] no one. Well maybe careful listeners we'll know what the hell you're talking about.
Ryan Sweet: No, I know.
Mark Zandi: You have to go back to podcast.
Ryan Sweet: I got [inaudible 01:10:01].
Mark Zandi: There is a podcast labeled and it was a Groundhog, not a squirrel or something like that. So you can go find it anyway. Where was I? On the productivity growth, but that's key because even if wage growth comes starts to come back in from 5%, I don't think it's coming way back in because labor markets are going to be primarily tight here. We talked about labor force participation, but we didn't even really talk about growth and working age population, which is going to be weaker too because of less foreign immigration and what's going on with birth rates and death threads. There's a lot to be anxious there about. Wage growth is going to continue to be quite strong here and we need that stronger productivity growth. Otherwise, we have an inflation problem and that's a different kind of environment down the road compared to what we think is the world going to look like and certainly what the Federal reserve thinks the world's going to look like. So very, very important. Anything else on the wage productivity inflation angle that you want to bring up? I think we covered it, but no.
Ryan Sweet: Think everything's pull out so far to our script.
Mark Zandi: Yeah [crosstalk 01:11:15].
Ryan Sweet: Maybe inflation. So that's why I some nights I get a little worried about inflation, but I think with productivity growth we're okay.
Mark Zandi: And I'd say sticking closer to my script in your script, I'm just saying someone's got to go back and look at all these bets we made.
Cris deRitis: So speaking of the tenure.
Mark Zandi: Speaking of the tenure, let's end on this one. What the heck? So the Fed says we're going to begin ending quantitative easing, winding down QE bond buying to the tune of about 15 billion per month. So we're 120 billion a month. We're going to take that down by 15 billion per month. And if everything kind of hangs together, we'll be done bond buying by June of next year. And long term rates did seem to go up, the 10 year treasury yield went from one five to one six, maybe 1.6, not a lot, and that'd be consistent because everyone knew that that was going to do this. Wasn't a big surprise.
Mark Zandi: But today's number last dialogue. Maybe it's changed. It could I've noticed that'll check moving around a lot. They're back down below 1,5.
Cris deRitis: We're 146.
Mark Zandi: We're 146 right now. I don't know I'm I don't expect you to know the answer or there is an answer. Who the heck knows, maybe Ryan because this is your statistic that you always go back to. Anything there that you can point to what's going on. Why would that happen today? When job number is so good? So strong.
Ryan Sweet: There could be some technical issues going on. The treasury announced that they're going to cut their coupon issuance in this, in the fourth quarter. So there's a lot of moving parts. Bank of England yesterday surprised everybody by not raising interest, there could be some like knock on effects of that that maybe markets are getting ahead of themselves with the haw expectations for central banks to tighten, Powell he's been cool as conversing. I don't worry about inflation, like get the job market back to full employment, then we'll raise rates. I think there's a lot going on. You may be more comfortable with your inflation forecast, but Chris and I are still looking good on our tenure.
Mark Zandi: I know. I know. I hear you and clients are asking about it.
Ryan Sweet: Yeah.
Mark Zandi: All right. Anyway. Okay.
Ryan Sweet: Before we wrap up.
Mark Zandi: Yep. Go ahead.
Ryan Sweet: I have promised Dante. I would ask you this.
Mark Zandi: Okay.
Ryan Sweet: What goes on at the [Zandy 01:13:39] household at Thanksgiving? What are these Zandy games?
Mark Zandi: We play the game. We play games.
Ryan Sweet: Is it like hunger games? What's going on?
Mark Zandi: Squid game.
Ryan Sweet: Squid game?
Mark Zandi: Not a Squid game.
Ryan Sweet: Because apparently, everybody knows about this.
Mark Zandi: Just like the hunger games. Yeah. What we do, we play ... have you heard of volleyball? Volleyball in a kind of a racketball court and this is a great game for getting everyone involved. Women, men, guys like me who are in their 60s and young guys that ... We've got guys. Andy guys that are playing professional soccer and we're -
Cris deRitis: How do you play?
Mark Zandi: We've been playing games. We've been playing physical games for 30 years, maybe 35 years. Every Thanksgiving, the Friday after we all morning along, we were playing some physical game. We were playing kickball. We played football. We many years played soccer and we had to figure out what we were going to do with all this distribution? How am I going to hang with this with the professional soccer player. Volleyball does that. It's a great game. Fantastic game. We have [crosstalk 01:14:58].
Ryan Sweet: He was just curious. He was curious because apparently it's famous.
Mark Zandi: It's famous. It's classic.
Ryan Sweet: Is it on email? And he forwards it to me. He was like, "All these people know about the Zandy games." Like, "what are they talking about?" I'm like, "We'll bring it up on the podcast."
Mark Zandi: I'm not sure you want to be invited because I'm sore for three weeks afterwards [inaudible 01:15:17]. We missed that last year, obviously with the pandemic. So we're very, very excited about getting back to those games this Thanksgiving. So thanks.
Cris deRitis: How do you draw team? Is this team Mark versus team [inaudible 01:15:32].
Mark Zandi: Like you would in high school or elementary school you take the two best players, one on this side, one on the other side and they pick. We care about the quality of the game. So if it ends up where we think it's the teams and this is a collective decision after a lot of screaming and yelling, 15 minutes worth, we might divvy up a few players to make it even because we want it to death even.
Mark Zandi: It always works out, generally works.
Ryan Sweet: So it is the Squid games.
Mark Zandi: Pretty close. I guess.
Cris deRitis: It's got some flavor.
Mark Zandi: You can get pretty messy out there. Lot of injuries.
Ryan Sweet: [inaudible 01:16:08].
Cris deRitis: How'd you do last year.?
Mark Zandi: Pardon me?
Cris deRitis: How did you do last year? Did you win?
Mark Zandi: We didn't have Thanksgiving because of the pandemic.
Cris deRitis: Right. The volleyball.
Mark Zandi: No, no volleyball.
Cris deRitis: That's right.
Mark Zandi: Yeah. So we're back at it this year. Anyway. We've lost all our listeners at this point. But anyway -
Cris deRitis: I think we've gained them, but I think -
Mark Zandi: You think so? Okay. All right. I do want to say thank you for listening in and please give us a rating on Apple. Go to economy.com. That's one of our websites on there. You can vote for future topics to us to address. We got a lot of really good guests and topics coming up, Climate change. And we got some really good people on Climate change coming and a lot going on. So please let us know what you want us to hear about. So with that, let's call it a podcast. Thank you everyone.
