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Moody's Talks - Inside Economics
Payrolls and Planes
Mark, Ryan, and Cris welcome back Dante DeAntonio, Senior Economist at Moody's Analytics, to dissect the December U.S. employment report and the latest effects of the Omicron variant on the economy. They also discuss reasons why people are quitting in droves.
Full episode transcript.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I am joined by a bevy of my colleagues today. We've got Ryan Sweet. Ryan is the director of real-time economics. You know what bevy means, right, Ryan? [inaudible 00:00:31]
Ryan Sweet: No, I have no idea. I'm going to have to google that. Is that like a flock of birds?
Mark Zandi: Right. [crosstalk 00:00:36] SAT word.
Ryan Sweet: It's like a flock of birds or something?
Mark Zandi: A flock of birds, right. I don't know if I'm using the word correctly. Well, we got Cris, Cris deRitis, who's the deputy chief economist.
Ryan Sweet: He definitely knows.
Mark Zandi: He's got to know. Cris, do you know? Is bevy the right word? Bevy.
Cris deRitis: I think so. It's a group, right? A large number.
Mark Zandi: It's a large. A reasonably good sized number. And of course, rounding out the group, is Dante DeAntonio. Dante is a regular here on Jobs Friday, and of course today is the day that the December employment data got released by the Bureau of Labor Statistics. So welcome, Dante.
Dante DeAntonio: Thanks, Mark.
Mark Zandi: Now, Dante, did you know what bevy meant? Is that in your lexicon?
Dante DeAntonio: That's in my repertoire, yeah. Bevy... [crosstalk 00:01:20]
Mark Zandi: It's in your repertoire. Okay. I think lexicon is the more appropriate word, don't you think?
Dante DeAntonio: Probably.
Mark Zandi: Yeah, probably. Yeah. Okay. Well, it's good to have... [crosstalk 00:01:28]
Cris deRitis: We're going to talk vocabulary instead of the...
Dante DeAntonio: Let's forget about employment. Yeah. [crosstalk 00:01:35]
Mark Zandi: [inaudible 00:01:35]
Ryan Sweet: [inaudible 00:01:37] SAT words.
Mark Zandi: We should point that out. You know, Dante joins us when he's wrong.
Ryan Sweet: Not just wrong, very wrong.
Mark Zandi: Like really wrong.
Dante DeAntonio: We can just move on from that discussion entirely. Something else you want to talk about today?
Mark Zandi: We'll come back and explain that, but Dante...
Ryan Sweet: Well, since we're on SAT words, my favorite SAT word, which describes how I feel right now, is apoplectic.
Mark Zandi: Apoplectic. That, in my thinking, means a chaotic confusion. Upset.
Ryan Sweet: Mad.
Mark Zandi: Bad. Yeah. Okay. Those are all good words.
Ryan Sweet: Angry.
Mark Zandi: Angry. Yeah. Okay. Because you were wrong too. We were all wrong. I was [crosstalk 00:02:22] probably the most wrong.
Ryan Sweet: We were all wrong. Yeah. I was probably the most wrong.
Mark Zandi: And of course, we're talking about the December job number, which is... It came in, 199,000 jobs create... Couldn't they have just made it an even 200K? Why 199?
Ryan Sweet: Well, why... I mean, they're wrong, so...
Mark Zandi: Yeah, you're right. [crosstalk 00:02:41]
Ryan Sweet: [crosstalk 00:02:41] number's wrong.
Mark Zandi: It's wrong anyway. But it came in at 199. Okay, so let's do this. I'm going to turn to Ryan, have him summarize the report, and then ask for commentary on that. Then we'll do the game, our game, the statistics game, and I'll explain what that is for folks who don't know. Although I believe this is our 39th podcast, guys.
Ryan Sweet: Wow.
Mark Zandi: So if you don't know what the game is, then you've been asleep. You haven't been following. And then we'll talk about some labor market issues, because obviously it's Jobs Friday and there's a lot to talk about there on the jobs front, on the labor market front. There always is. Okay. Does that sound like good roadmap for the conversation?
Ryan Sweet: Mm-hmm (affirmative). Yep.
Mark Zandi: Okay. So Ryan, just give us the numbers, give us a sense of things. How would you explain this report to folks?
Ryan Sweet: I don't want to give too many numbers, because I don't want to take somebody's number for the game, but the key numbers are... Again, I think the way to describe this employment report is a tale of two surveys, just like last month. Household survey, much stronger than the establishment survey. So that 199,000 number that you threw out there, that's the net increase in employment. That comes from the establishment survey. Job growth was pretty disappointing. The consensus was for over 400,000. Dante's number was north of 800. So...
Mark Zandi: And explain that. When you say that, what do you mean? His number.
Ryan Sweet: Well, I was going to give him a break. [inaudible 00:04:14]
Mark Zandi: You were going to rub it in some, at some other point.
Ryan Sweet: Yeah. Later. Yeah.
Mark Zandi: All right. Later we'll rub it in.
Dante DeAntonio: Thank you.
Mark Zandi: Okay, go ahead.
Ryan Sweet: But if you look at the household survey, which again, roughly 60,000 households are surveyed about employment, the unemployment rate came down from 4.2% to 3.9%. Prime age employment to population ratio ticked up from 78.8% to 79%, so we're getting closer and closer to that 80% threshold that's consistent with an economy at full employment. So again, wage growth picked up, labor supply issues are binding. All in all, I think it was a strong report. Even that 199,000, it's very, very misleading. If you look at non-seasonally adjusted employment, which removes any seasonal adjustment factor, it actually increased in December, which is very, very rare. So I don't know what the BLS is doing with their seasonal adjustment factors, but it's all very, very quirky.
Mark Zandi: Oh, that's interesting. So what you're saying is the 199 is based on seasonally adjusted data. Obviously you've got to account for normal seasonal patterns, holidays, and so forth and so on.
Ryan Sweet: Correct.
Mark Zandi: And typically you see a decline in December employment, non-seasonally adjusted. This month we actually saw an increase.
Ryan Sweet: And it increased this December. Mm-hmm (affirmative).
Mark Zandi: Despite that, the seasonally adjusted number was small. Increase was small, 199.
Ryan Sweet: Yep. So they doubled down on the seasonal adjustment factor. So if they used a normal seasonal adjustment factor, which was typical pre-pandemic, the increase in employment would have been closer to 500,000, seasonally adjusted.
Mark Zandi: Oh. [crosstalk 00:05:53] was expected [crosstalk 00:05:55] monthly job... [inaudible 00:05:56]
Ryan Sweet: I don't know. Maybe Dante can explain what they're doing, but I have no idea what's going on with this process.
Mark Zandi: Okay. So you said two things. One, bottom line, don't pay attention to the 199,000 job gain.
Ryan Sweet: No.
Mark Zandi: That belies the strength of the labor market. Everything else says strong job market. Second thing you said is, one way of seeing that is, look at the employment gain that is from the household survey. The 199 is from a survey of businesses, establishments. That's what we typically look at. But you also have the household survey, which is the basis for the unemployment rate. That increased I think 650K, didn't it? Or something like that.
Ryan Sweet: Correct. Mm-hmm (affirmative).
Mark Zandi: Which again, feels more like reality than the 199K.
Ryan Sweet: Right.
Mark Zandi: Okay. The one thing you didn't mention, which I thought you were going to mention, is revisions to previous months. Did you want to talk about that at all? Or maybe I should let Dante fill in the blanks there.
Ryan Sweet: Yeah, let Dante go.
Mark Zandi: Okay. All right, Dante.
Dante DeAntonio: Yeah. I mean, I was actually surprised that the revision to November wasn't bigger. It was a positive revision, but it was pretty small. We got a decent sized revision in October, something around 100,000, but the revision to November... The response rate was historically low last month for the first [inaudible 00:07:13] so I was expecting a bigger boost given how low the number was, and how big the difference was between the two surveys last month, and we didn't see it yet. It doesn't mean that we couldn't still get a big revision next month for November. Obviously we got a big one for the two months ago estimate now for October, so it could still get revised higher, but I'm surprised that that didn't move further this month.
Ryan Sweet: Yeah...
Mark Zandi: Yeah [crosstalk 00:07:33]. Oh, go ahead, Ryan.
Ryan Sweet: On the revision front, if you look at the QCEW, so that's the Quarterly Census of Employment and Wages... That's right, Dante, right? Did I get that right?
Dante DeAntonio: [inaudible 00:07:44]
Mark Zandi: Yep.
Ryan Sweet: So we have that through midyear. This is like a complete count, this is what's going to get benchmarked. We're going to get big upper revisions to employment.
Mark Zandi: Right. So just to make that more concrete, the establishment survey is a survey of a lot of establishments, but not the universe of businesses out there. Once a year, the Bureau of Labor Statistics says, let's go and what they call benchmark the survey based estimates, like the one we got today, the 199, to actual employment counts, full employment counts based on the QCEW. That's the unemployment insurance record. So every company, no matter how big you are, you have to report to unemployment insurance how many employees you have, for obvious reasons. And so you have a complete count. But they don't use that every month, because it's just too many data points, they can't process it, so they do this survey. But once a year, they come back and benchmark. And that benchmark data comes out next month, right? And you're saying that that's going to show a big upward... Even a further upward revision in the data.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: And how do you know that, Ryan? Because you're looking at the QCEW quarterly data that's coming out?
Ryan Sweet: Yeah. We bank it, so you can look at it...
Mark Zandi: Bank it. Yeah.
Ryan Sweet: Yep. So we can look at it. I can send you the chart afterwards. Through midyear, we're going to get a big upper revision.
Mark Zandi: [inaudible 00:09:07]
Dante DeAntonio: One thing to remember, though, is the benchmark that comes out next month is only actually through the first quarter of last year. [inaudible 00:09:13]
Ryan Sweet: Yeah, correct.
Dante DeAntonio: There wasn't much of a change through the first quarter. I think it's really going to take another year until you're going to see that big [crosstalk 00:09:20] in mid 2021.
Mark Zandi: Before that shows up. Well, this just goes to highlight the difficulty of coming to some assessment of reality, right? Because it's going to be two years before we get all the data in for what happened in this period. But it feels like everything's getting revised up. Every month we're seeing these huge upward revisions in the data, and everything suggests that we created a boatload of jobs, so that... Again, boatload of jobs. Boatload of jobs. That's a Zandi-ism. A boatload of jobs in 2021. But it's even more than that. It's going to be even more than that when all the data are in.
Ryan Sweet: Yeah. That's why Cris and I emphasize looking at the non-seasonally adjusted data, because the seasonal factors, just because of the pandemic, have been really thrown off. So looking at it a little bit differently is more important.
Mark Zandi: Okay. Hey, Dante, you heard Ryan's summary of the report, and you filled in a couple of the blanks. Any other blanks you want to fill in? Any other things you observed in the report that you think are important?
Dante DeAntonio: No, I think at a high level, the story is largely the same as last month. Like Ryan pointed out, it's seasonal adjustment, and it's the difference between the two surveys that remains to be the big thing to try to figure out.
Mark Zandi: Yeah. Okay. All the other stuff was pretty solid. I think I saw average weekly hours was up, I think it ticked higher, and I think that's obviously a positive sign. Businesses can hire more people or they can increase the hours worked of people. What else? We mentioned the unemployment rate falling below 4%, 3.9%, and that happened despite I think stable labor force participation. Isn't that right? I think participation held steady.
Ryan Sweet: Ignore that number.
Dante DeAntonio: [inaudible 00:11:10]
Mark Zandi: What's that?
Ryan Sweet: I was just saying, ignore labor force participation.
Mark Zandi: No, I know.
Ryan Sweet: I know you like to look at it.
Mark Zandi: No, but the unemployment rate didn't fall because labor force contracted or...
Ryan Sweet: No, the labor force rose. Yep.
Mark Zandi: Yeah. The labor force increased typically, so that wasn't the reason why we saw unemployment decline. What else? Any other... There are some signs of weakness in the report, abstracting from the technical measurement issues like seasonal adjustment, but... Retail is soft, but there's got to be some fundamental reasons for soft retailing employment, right? I mean there's some... Retail was weak before the pandemic because of increased online use, so that's a continued downward weight. And I think we saw job losses at motor vehicle dealerships, didn't we? And that obviously is because they can't sell cars, because they can't produce them. Healthcare was weak. Nursing homes, that's been perennially weak, I think, for lots of reasons. And that may also be burnout by healthcare workers. They're clearly struggling with the pandemic. A very, very difficult time.
Ryan Sweet: Cris, did you look at daycares?
Mark Zandi: It was down.
Dante DeAntonio: No, I didn't check it out.
Ryan Sweet: It was down.
Mark Zandi: It was down. [crosstalk 00:12:33] was down, in daycare.
Ryan Sweet: That's something that... Yeah. That's a problem.
Mark Zandi: Yeah. Particularly for you, right? Yeah.
Ryan Sweet: Dante, Cris, and I. Yeah. Daycare's important.
Mark Zandi: Struggling with that. Yeah.
Cris deRitis: Plus snow day today.
Ryan Sweet: Yeah.
Mark Zandi: Yeah, we got a snow day. You guys got a snow day today, huh?
Ryan Sweet: Mm-hmm (affirmative). Second one this week.
Mark Zandi: Really? [inaudible 00:12:53]
Dante DeAntonio: We had a COVID shutdown instead for 10 days, so just started today.
Ryan Sweet: Oh, yeah. Poor Dante.
Mark Zandi: Oh, boy. What a mess. All right. Okay, Cris, anything you want to add on... [crosstalk 00:13:04]
Ryan Sweet: You see Mark didn't offer to help out, come watch the kids.
Mark Zandi: Are you kidding me? You really want me to watch your kids?
Dante DeAntonio: Hey, at this point, it's been a long two years. [inaudible 00:13:14]
Mark Zandi: You'll take. You'll take it. Well, I'll be teaching them SAT words, so yeah, that probably... [crosstalk 00:13:22]
Dante DeAntonio: That's fine.
Cris deRitis: That all works out.
Mark Zandi: Cris, anything in job numbers you want to point out?
Cris deRitis: I look at some of the demographics, just because that's also part of the Fed mandate, so a couple things that stood out to me were education. If you break out the unemployment rate by education, biggest gains or improvement in the unemployment rate was at the lower end. So less than high school or high school graduates saw the biggest improvement, so that's encouraging. On the other hand, if you look at the numbers by race, the improvement was really driven by the white demographic. African Americans actually saw their unemployment rates rise in December, so that's troubling. And then if you dig a little bit further, you see it's actually African American women who had a big jump from November to December. So I don't know exactly what's going on there. Maybe... We talk about the pandemic in December not having a large impact on the labor force overall, but maybe it did impact certain occupations or industries where African American women tend to be more concentrated. So that certainly stood out. There was a pretty sizable jump in employment rate for them.
Mark Zandi: Yeah. Of course, again, when you get down to that level of detail...
Cris deRitis: There's volatility [inaudible 00:14:46] sure.
Mark Zandi: ... based on a small sample, and the seasonal adjustment issues, hard to...
Cris deRitis: Yeah, I don't want to...
Mark Zandi: It moved in the wrong direction, but hard to draw too much from that.
Cris deRitis: Yeah. But certainly something to bear in... If the Fed is keeping those demographic trends in mind as part of their policy decision, [crosstalk 00:15:08] something to watch.
Mark Zandi: Yeah. Okay. Two questions, then. One is... Well, obviously this is backward looking, this report. This was based on a survey that was done about a month ago, not quite a month ago, but before Omicron. This was kind of on the backside of the Delta wave. So that's one reason why we all expected a pretty solid job number for December, and why we expected a strong job report, which we got. But then there's Omicron, and that is now in full force, and in fact it feels like, when the Bureau of Labor Statistics does it survey for January, which is next week, that could coincide with the peak in infections. They're pretty close. And so what do you think about that? So what do you think of what that means for the employment report for the month of January, which we'll be talking about four weeks from now? [inaudible 00:16:03]
Ryan Sweet: Means we're going to add a million jobs. Because everything is backwards.
Cris deRitis: It's backwards.
Ryan Sweet: Everything's backwards.
Cris deRitis: Up is down.
Mark Zandi: [crosstalk 00:16:10] ... seasonals unwind.
Ryan Sweet: Yeah, exactly.
Mark Zandi: Seasonals unwind. Oh, geez.
Ryan Sweet: No, I think it's possible that employment falls. We saw that when Delta peaked, employment fell in December of last year, so this week...
Mark Zandi: I don't think that was Delta, though.
Cris deRitis: That wasn't Delta. Yeah.
Ryan Sweet: It wasn't?
Mark Zandi: No, that was a previous variant. I can't remember which variant that was.
Ryan Sweet: Oh, okay.
Mark Zandi: Delta hit it this past summer. A year ago, though, December...
Ryan Sweet: [inaudible 00:16:34] I can't keep these things straight.
Mark Zandi: I know. It fell, but it was a [inaudible 00:16:38] That was a pretty bad wave.
Ryan Sweet: Different reason then.
Cris deRitis: Might have been Beta.
Mark Zandi: [crosstalk 00:16:40] Different variant. Beta probably... [crosstalk 00:16:42]
Cris deRitis: I don't know.
Ryan Sweet: If the job growth did slow during Delta, you can see it very clear that it took a bite out of the job market, so I think employment could fall.
Mark Zandi: Yeah. I meant to ask you, Ryan, because you look at the number of people that aren't working... [crosstalk 00:16:55]
Ryan Sweet: That was my number. I got to come up with a new number.
Mark Zandi: Oh, no. Okay, sorry about that.
Ryan Sweet: It's all right. 1.6 million, up from 1.5 million.
Mark Zandi: 1.6 million?
Ryan Sweet: Yep.
Mark Zandi: Up from 1.5. [crosstalk 00:17:05]
Ryan Sweet: Mm-hmm (affirmative). So if you look at the relationship between average confirmed COVID cases during the reference week versus the number of people that are not at work because of [inaudible 00:17:16] illness, the relationship's pretty strong. If that holds, we could be over 2 million next month. For January.
Mark Zandi: Yeah. Right. Okay. So it's pretty clear that Omicron's going to do some damage here [crosstalk 00:17:32].
Ryan Sweet: Yeah, I think so.
Mark Zandi: Anyone have a different perspective on that? Obviously a lot of measurement issues and... All joking aside, you may be right. The seasonals... If they were wrong on one side in December, they got to be wrong on the other side at some point, right? So, could be month of January. Okay.
Cris deRitis: I'd agree with that, but I guess one other factor for better or worse is that the isolation period now has been cut down to five days, so...
Mark Zandi: Good point.
Cris deRitis: Whereas Delta was 10 days. The volume is still well above what it was, so I think it will have an impact certainly, but it might not be on a relative basis as big as we might otherwise expect.
Mark Zandi: Yeah. And that goes to a underlying assumption we've been making all along here, since the pandemic hit, is that we are going to experience more waves of the pandemic in all likelihood, but that each wave of the pandemic will be less disruptive than the previous wave, that Omicron is going to do damage but less damage than Delta, and Delta did less damage than let's say Beta back a year ago, and so forth and so on. And so far that feels roughly right. That feels like that's roughly right. And we're getting better in terms of how we respond from a healthcare perspective. Of course the virus itself is helping, it's becoming less virulent, and that's a positive thing. And businesses seem to be getting better at figuring this out and adjusting to it. So it's less disruptive, but still disruptive. The pandemic is still driving the train here, but increasingly less so.
Okay. I said I had two questions. The first was around Omicron. The second is, how do you... And I'll turn to Ryan for this. Ryan, how do you think the Fed members view all of this? This report. How would they... How does this fit in with the way they're thinking about things?
Ryan Sweet: There's no bearing on monetary policy.
Mark Zandi: [crosstalk 00:19:36]
Ryan Sweet: They're gung ho focused... They're laser focused on inflation. Even the most dovish members of the FOMC are turning hawkish. So yesterday Mary Daly, who's the president of the San Francisco Fed, as recently as November was pushing against any rate hikes this year, is now on board with... She said that inflation's too high. So they're really worried about inflation being higher for longer. You can see it in the FOMC minutes. They're talking about reducing the size of their balance sheet very quickly after the first rate hike. So this is like the... I think I emailed Cris. It's like The Fast And The Furious. The Fed is going to aggressively tighten monetary policy, because they're petrified of inflation.
Mark Zandi: Well, from that prism though, this report has bearing, right? If you're... [crosstalk 00:20:30]
Ryan Sweet: Yeah, I think the wage number... Even though I don't look at average hourly earnings, I think the Fed... They're paying very close attention to measures of wages, because they're worried about a wage price spiral setting in. There's no evidence of it yet, but the job market is getting tight. They're going to worry that strong wage pressures are going to pull up inflation even further.
Mark Zandi: Yeah. Right. And of course, 3.9% unemployment rate also. As you point out, that and the employment to population ratio for prime age workers, they're not quite where you would expect them to be in a full employment economy, but they're getting there fast.
Ryan Sweet: We're getting there. Mm-hmm (affirmative).
Mark Zandi: So I would think they're looking at that and saying, "We need to normalize policy here, get going here and try to normalize policy."
Ryan Sweet: Yeah. So financial markets put an 85% probability for a rate hike in March.
Mark Zandi: Oh, is that right?
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: 85%. So March is the month when their quantitative easing will come to an end, their bond buying will come to an end.
Ryan Sweet: Correct. The tapering process ends in March. Yep.
Mark Zandi: And they're saying they're going to start tightening interest rates right away. As soon as the QE, the quantitative easing, is over, they're going to start raising rates.
Ryan Sweet: Yep. That's what the bond market's saying.
Mark Zandi: Bond market says. I did notice, I looked at it before we got on the podcast, the 10 year treasure yield, actually... Even with that 199K number, which was on the soft side, 10 year yields are rising. They still rose. So it feels like investors are interpreting the employment report the same way we are. It's a strong report. The 199... Yeah. Okay. All right. Okay. Okay. Very good. Okay. Anything else on the employment...
Ryan Sweet: Do you disagree? What do you think the Fed's going to do? When do you think they're going to raise interest rates?
Mark Zandi: Well, I think it's more likely going to be June when they raise rates for the first time, the reason being that I think Omicron's going to do some damage here. I think it's [crosstalk 00:22:34] growth.
Ryan Sweet: Yeah, I agree.
Mark Zandi: And you're can see it in January, you'll probably see it in February going into March. And so unemployment could be back over 4, maybe, as you go into March. So if that forecast is right, if I'm right about Omicron doing some damage here... And we have that in our forecast. Before Omicron, we had GDP growth for the first quarter close to 5% annualized. We marked that down to 2, which is very consistent with what Delta did to the economy back in the third quarter, so we're using that as a case study here for Omicron's impact. So if you get 2% growth in Q1, you'll still get solid job growth I think coming... By March, April, job market will rev back up. But I don't think that'll be enough at that point for them to start raising rates.
I also expect inflation to come in. By the March, April period, it'll be clear that inflation has rolled over. Energy prices are down, gas prices are down, we should see some abating of the shortages and high prices for various goods, and we'll see inflation roll over. So the combination of those two things would, I think, suggest that the Fed might want to wait a little bit.
But having said all of that, I don't think I'd argue the point very strongly. It's possible it could be March. I wouldn't attach an 80% probability to it, I might attach a 30% probability to it, but I'm not going to argue with anybody about it. Rates are going up. There's no doubt about it. It's just a question of precisely when and by how much, from my perspective.
Cris, anything on that you want to add? Do you have any different perspectives?
Cris deRitis: I'd agree with you.
Mark Zandi: You agree?
Cris deRitis: Yeah.
Mark Zandi: Dante, anything? No. Okay. You're on board with that. All right, let's play the game. Well, okay, before I do that, just to make sure, is this about the time where we tease Dante? Or...
Ryan Sweet: No, we can do it. This is a good time.
Mark Zandi: Okay. So what's going on here? Dante is the key guy that puts the ADP data together. ADP is the human resources company. They have records for 20, 25 million employees. We get them, then we use that to construct an estimate of what we think the employment game will be. We're predicting the BLS number a couple days before BLS comes out. So we put out the ADP number on Wednesday, today's Friday. We said employment was going to be up 800... Was it going to be 800K, I think? Yeah. 800K private sector jobs. And Dante...
Ryan Sweet: I think it was 807. 807. [inaudible 00:25:20]
Mark Zandi: 807K. And Dante... It came in at 199, and there are months when they're pretty close, but it seems like every time we have Dante on it's really badly wrong. Is that just my... Do I have that wrong? I think that's right.
Dante DeAntonio: No, that's right. Yeah. [inaudible 00:25:37] strong correlation.
Mark Zandi: [inaudible 00:25:38] Yeah. So we know when we have you on, your ADP's going to miss pretty badly.
Dante DeAntonio: That is true. And at the time I would like to remind people that you ultimately approve that number before it gets published, so I'd like to make sure [crosstalk 00:25:53] place that blame [inaudible 00:25:53].
Mark Zandi: Thanks very much. Thanks very much. I usually remind people of that when we're right. [inaudible 00:26:00]
Ryan Sweet: I mean, to Dante's credit, or to back him up, everything else was consistent with a very, strong employment [inaudible 00:26:08].
Mark Zandi: Oh, I know.
Ryan Sweet: This is a fluke.
Mark Zandi: Well, and actually I think ADP has been consistently stronger than BLS, first print, I think all year long. And again, every month the BLS number gets revised higher and then revised higher, and we just argued it's going to be revised higher again. So by the time it's all said and done, it feels like BLS is going to be closer to ADP than the other way around.
Ryan Sweet: I don't know about... That's a big gap to close in December.
Mark Zandi: Is that right? Okay. I don't know.
Ryan Sweet: Yeah. 600,000 gap.
Mark Zandi: Yeah. 600,000.
Ryan Sweet: That's a big gap.
Mark Zandi: I don't know. Do they ever go back and adjust... The BLS, ever go back and adjust the seasonals? Do they ever do that? I guess they do do that, when they get... [inaudible 00:26:48]
Dante DeAntonio: As part of the benchmarking process, they do update the seasonal factors.
Mark Zandi: As part of the benchmark... Hey, I don't know, Ryan. It's possible. Yeah. Maybe. That seasonal feels really weird.
Ryan Sweet: I mean, again, if they used a seasonal factor that they used pre-pandemic, so like the average of 2018, 2019, the increase in employment in December would've been closer to 500.
Mark Zandi: Yeah. Right. And again, that's the average monthly job growth, roughly average monthly job growth in 2021. I think it was closer to 550 altogether. Okay. All right, let's play the game. Who wants to go first? Should we let Dante go first after we gave him such grief?
Ryan Sweet: Yeah.
Mark Zandi: Okay. There you go.
Dante DeAntonio: That's fine. Ryan walked the tightrope of giving this away, but I'm going to use it anyway because I think it makes sense, it's important.
Mark Zandi: Should I explain the game? The game is, each of us give a statistic or two, the other of us try to determine that statistic. I was going to use the word guess, but...
Ryan Sweet: There's no guessing.
Mark Zandi: No guessing.
Ryan Sweet: Deductive reasoning.
Mark Zandi: And the best statistics are one that, first, it's something that came out in the previous week, this past week. It's not too easy that we get it right away, but not too hard that it's too elusive and we all look stupid. Those are the best statistics. And bonus, it's related to the topic at hand, which is in this case the job market. But those are just guidelines. You can do what you want, which we all do. All right. And if you get it right, we do have a cowbell somewhere, although...
Ryan Sweet: It's right back there.
Mark Zandi: It's right back there. Don't get it out. It's okay. We'll keep it there. Okay, Dante. What's your statistic?
Dante DeAntonio: That's a lot of rules. No pressure to thread that needle of hitting all those [inaudible 00:28:40]. Mine is 72,000.
Mark Zandi: 72,000.
Ryan Sweet: Oh.
Mark Zandi: You know right away, Ryan?
Ryan Sweet: Was that the increase in non-seasonally...
Dante DeAntonio: Ryan was walking... You never actually said it, but yeah, you were walking the tightrope there early on.
Ryan Sweet: Is that the increase in non-seasonally adjusted employment?
Dante DeAntonio: Yeah. And so you mentioned it's been a while. That's the first time it's increased in December since 1999.
Ryan Sweet: There you go.
Mark Zandi: Oh, wow. What was the seasonally...
Ryan Sweet: I mean, that's pretty telling.
Mark Zandi: What was the... Okay. So, listener, 72K is the increase in employment in December, payroll survey, establishment survey, non-seasonally adjusted. Remember, seasonally adjusted was 199. Unadjusted is 72K, and you're saying that is the first positive, not seasonally adjusted increase in establishment payroll survey since 1999. That's what you're saying.
Dante DeAntonio: Correct.
Ryan Sweet: It usually, in December, falls by a couple hundred thousand. So this is a stark difference.
Dante DeAntonio: Right. And the difference between the two, that 199 and 72, is 127,000. That's by far the smallest difference between the two over that same 20 year period. The average difference between the unadjusted and the seasonally adjusted is about 325,000. So usually in December, the seasonal adjustment process adds about 325. This month, it only added 127, for some reason.
Mark Zandi: [crosstalk 00:30:11]
Ryan Sweet: And that's why I say this is a strong number. I mean, the takeaway is, it's a strong number. Any time employment increases, unadjusted, non-seasonally adjusted, in December, it's a strong number. It's a strong month.
Mark Zandi: Hey, Dante, do you know offhand what was the seasonally adjusted increase in December employment, 1999. How big an increase was it?
Dante DeAntonio: I do not know offhand.
Mark Zandi: Maybe look it up real fast, because I know you're online. I'm just really curious what that number was. Yeah. Okay. So Ryan, what's going on here? Is it just the pandemic is scrambling the BLS seasonals? I don't understand. What's going on?
Ryan Sweet: I don't know.
Mark Zandi: You don't know.
Ryan Sweet: I can't explain it. I don't know. And that's why, anytime I do the forecast, when I write it up for our website, I always highlight that the seasonal adjustment factor is a big wild card. It can make the number really, really strong, or in the last few months it's made it very, very weak.
Mark Zandi: I guess we can go dig deeper and go industry by industry to see if something stands out.
Ryan Sweet: Correct. Mm-hmm (affirmative).
Mark Zandi: But again, could it be more fundamental? Go back to retail. The thought was that people started buying early for Christmas, because there were shortages and prices were up, they were fearful of not getting the presents they wanted under the tree in time. So that could have juiced things up earlier in, say, October, and that steals away from the kind of numbers you would expect in December. So that would be more fundamental, right? I guess. Could it be... [crosstalk 00:31:55]
Ryan Sweet: Yeah, I think that was the case. I mean, you saw retail employment increase in October and November. But November, we had an early... This is why I'm scratching my head a little bit, is that we had a very early reference period in November, so I thought more of the holiday hiring would be captured in December. But it's possible, maybe people are shopping more online. Some of those jobs ended up in transportation and warehousing, couriers, rather than in your traditional retail employment.
Mark Zandi: And I've said this once before, but let me ask it again, just to make sure. If the seasonals are pushing things down in a month like December, it stands to reason there's going to be a month or two or something coming up where the seasonals are going to work in the opposite direction, right? That they're going to juice...
Ryan Sweet: Correct.
Mark Zandi: We're going to think a weak number, and that's what you were joking about January. We think a weak number, but we could get a big number because the seasonals work in the opposite direction.
Ryan Sweet: Yeah. Throughout the year, the seasonals have to wash out.
Mark Zandi: Right. All right. What was it in December 1999? What was the game?
Dante DeAntonio: So the unadjusted gain in 1999 was 137,000. That was the last time it was positive in December.
Mark Zandi: And what about adjusted? What was it?
Dante DeAntonio: The difference actually wasn't that big then. The adjusted was 306.
Mark Zandi: 306. Okay.
Dante DeAntonio: So that was actually a pretty small difference between the two compared to the last 20 years.
Mark Zandi: Yeah. Right. Okay. All right. Very good. Okay. That was a good one. Might have been a little easy... [crosstalk 00:33:24]
Dante DeAntonio: It was a softball. Yeah. I help Ryan out.
Mark Zandi: Yeah. Okay. Okay, Cris, what's your statistic?
Cris deRitis: All right.
Mark Zandi: Is it housing, Cris?
Ryan Sweet: Yeah. It's definitely housing.
Cris deRitis: It's 181,000.
Ryan Sweet: All right. So it's definitely labor market related.
Cris deRitis: It is labor market related.
Ryan Sweet: You hesitated?
Cris deRitis: Yes.
Mark Zandi: He always hesitates.
Cris deRitis: Yeah. I was just...
Mark Zandi: He tries these head fakes to make it more difficult for us. I'm not sure if that's right.
Cris deRitis: He's onto me. He's got my tell.
Mark Zandi: Yeah. Can I ask this? Does it come from the household survey?
Cris deRitis: No.
Mark Zandi: It comes from the payroll survey, by definition.
Cris deRitis: No.
Mark Zandi: Oh. Ooh.
Cris deRitis: There was another survey that came out this week.
Mark Zandi: Oh, it's a JOLTS number. Does it come from the JOLTS survey?
Cris deRitis: Ding, ding, ding. Yes.
Mark Zandi: JOLTS being Job Opening Labor Turnover Survey.
Ryan Sweet: Turnover.
Mark Zandi: So that's where the quits come from, hiring comes from, that's where open job positions come from. 181. Dante, you should know this.
Ryan Sweet: Mm-hmm (affirmative).
Dante DeAntonio: Too many days ago now.
Mark Zandi: The JOLTS for November came out I think on Wednesday. I think it came out on Wednesday.
Dante DeAntonio: Tuesday or Wednesday.
Mark Zandi: And that showed quits were at a record, I think, right? Four point what?
Dante DeAntonio: Six.
Mark Zandi: Six million, five million, people quit their job in the month of November. Record number of quits, which we'll come back to.
Ryan Sweet: Is that the increase in the number of quits [inaudible 00:34:53]?
Mark Zandi: That would be really...
Cris deRitis: Oh, the 181? No.
Mark Zandi: Yeah, that would violate... That's too hard, kind of rule. That's a second derivative. Give me the second... [crosstalk 00:35:07]
Cris deRitis: Oh, I might have violated that rule.
Dante DeAntonio: I was going to say, I feel like we're going down that road here.
Mark Zandi: It's probably...
Cris deRitis: It is housing related. Housing related.
Ryan Sweet: Construction quits?
Cris deRitis: It's construction layoffs.
Ryan Sweet: Layoff. [inaudible 00:35:19]
Cris deRitis: 181,000. Yeah.
Ryan Sweet: Really?
Cris deRitis: Yes.
Mark Zandi: What's that about?
Cris deRitis: 181. So it was up in November versus October. October was 132,000.
Mark Zandi: No, wait. You're saying 181,000 construction workers got laid off in the month of November?
Cris deRitis: Yes.
Mark Zandi: Oh. And that's up from 132 in the month of October.
Cris deRitis: October. Yeah.
Mark Zandi: Is 181 high, by historical standards?
Cris deRitis: Not by... No, we were at that level earlier in the year, but things had been trending down because construction activity was picking up, but now they reversed, and I attribute that to this ongoing supply chain issue. Lumber especially has become dear again, so I think there's a slowdown in construction once again, due to that. And they're laying off because they don't have the materials to actually build the homes. [inaudible 00:36:15]
Mark Zandi: Oh, boy. That's interesting. That's a long chain of events. Do you buy into that?
Cris deRitis: Well, otherwise I...
Mark Zandi: Dante, do you buy into that?
Dante DeAntonio: Well, first of all, if I would've studied the JOLTS release for an hour, I don't think I would've known that number, anyway. That was pretty deep [inaudible 00:36:34]. I think I can buy Cris's story there. The logic makes some sense.
Mark Zandi: Hold on, wait.
Cris deRitis: Why else would it jump up?
Dante DeAntonio: Right.
Mark Zandi: Well, that's why I asked, is that typical? That was seasonally adjusted, obviously. So, I don't know. I don't know. That feels weird. Why would... So what you're saying is that supply chain disruptions causing problems with lumber, appliances, building materials, means that home builders can't put up homes, therefore they're going to lay off other workers that they otherwise would have employed. That's what you're saying.
Cris deRitis: Yes.
Dante DeAntonio: If you can't get materials, you press pause on building. [inaudible 00:37:23]
Ryan Sweet: I don't know. I mean, if you look at housing starts, they're still really strong. I mean, [Katie 00:37:28] and I are trying to find an electrician to do some work, and our normal electrician's like, "I'll get to you in like three months, because I don't have enough people to cover all the jobs." So, I don't know. That sounds a little...
Mark Zandi: That was actual layoffs though, Cris, right? You said layoffs in construction.
Cris deRitis: Layoffs.
Mark Zandi: Layoffs. Okay. You could separate because of... It's not separations, is it?
Cris deRitis: No, it's layoffs.
Mark Zandi: It's layoffs. Okay. All right. I don't know. That feels bogus to me. I don't know. I'm just... [crosstalk 00:37:58]
Ryan Sweet: Yeah. I'm with you on this one, Mark.
Mark Zandi: All right.
Cris deRitis: We'll see. We'll see. But lumber is way up, right? Lumber prices have skyrocketed again. [inaudible 00:38:09]
Mark Zandi: I thought that was mostly tariffs, though, right? I thought...
Cris deRitis: No, it's climate.
Mark Zandi: Oh, okay. I thought we...
Cris deRitis: You have disruptions in Canada, so we can't actually get the lumber out.
Mark Zandi: I thought we... So lumber prices peaked back in May, I believe, at what, $1,600 a board square foot.
Cris deRitis: I think that's about right.
Mark Zandi: Got down to 600K, which is kind of more typical back couple months ago, or three months ago. Now we're back up to $1,200, I believe, something like that.
Cris deRitis: That's right.
Mark Zandi: And I thought a big part of that 600 a few months ago to 1,200 now was the tariffs. But you're saying no, that it... That may be part of it, but it's also...
Cris deRitis: I don't think that's the major reason. We're talking double...
Mark Zandi: The major factor. You actually think because of the weather in British Columbia, they couldn't get the lumber out, and so therefore it's disrupting the ability to put up homes, and therefore we're seeing some layoffs in the construction [inaudible 00:39:07]. Oh, geez. I don't know. Okay. All right. We'll dig deeper into that one. All right. All right. Only an economist, and a really good economist, could come up with that chain of events.
Ryan Sweet: He had to tie it back to housing somewhere.
Cris deRitis: It's provocative, at least.
Mark Zandi: He had to tie it, yeah. Oh, definitely provocative. Yeah, definitely provocative. Okay.
Cris deRitis: And housing related, Ryan, so I didn't disappoint.
Ryan Sweet: I know. That was impressive.
Mark Zandi: [inaudible 00:39:35] I thought he was going to give us the CoreLogic house price index again, up 18, 20%. Something like that. Okay, Ryan, you're up. What's your statistic?
Ryan Sweet: All right. So this is the Holy Trinity, it covers all three.
Mark Zandi: [inaudible 00:39:50]
Ryan Sweet: All right. You ready?
Mark Zandi: Now I'm scared, actually.
Ryan Sweet: 3%.
Mark Zandi: What is it?
Ryan Sweet: 3%.
Mark Zandi: 3%.
Ryan Sweet: 3%. Mm-hmm (affirmative).
Mark Zandi: 3%. And when you say the Holy Trinity, does that 3% apply to three different things? That 3%?
Ryan Sweet: No, it covers... It's related to the job market, it is related to the big topic, and it came out this week.
Mark Zandi: Oh, I see. I see. You nailed it, you're saying.
Cris deRitis: Oh, okay. You got all the criteria.
Mark Zandi: You nailed it.
Ryan Sweet: Mm-hmm (affirmative). I'm like Dante. I can come through.
Mark Zandi: All right. Well, let's dig a little deeper. 3%. Does that come from the household survey?
Ryan Sweet: It does not.
Mark Zandi: Does it come from the payroll survey?
Ryan Sweet: It does not.
Mark Zandi: Does it come from JOLTS?
Ryan Sweet: It does.
Mark Zandi: Okay.
Ryan Sweet: And you guys should get... You and Cris should definitely get this. I sent you a chart of it this week. I sent you a lot of charts... [crosstalk 00:40:38]
Mark Zandi: Oh, it's the quit rate. It's the quit rate.
Ryan Sweet: Yeah. Quits.
Mark Zandi: Yeah. It's the quit rate. It's the quit rate. Yeah. Okay.
Ryan Sweet: Yep. Highest on record, going back to the early 2000s. And that chart I sent you, it shows you the quit rate versus year over year growth and the employment cost index for wages, which suggests that we're going to get another very strong increase in wages in the fourth quarter. And that...
Mark Zandi: [crosstalk 00:40:59] ... rate... Oh, sorry. Go ahead. [crosstalk 00:41:02]
Ryan Sweet: Yeah, go ahead. I was just going to say, one reason why the Fed pivoted, Powell was very concerned about very strong wage growth that he saw in the ECI, the employment cost index. So this is going to spook them again, and this is why I think they're turning more and more hawkish, is that they're really concerned that wage growth is going to start pulling up inflation.
Mark Zandi: Right. And the quit rate is simply the number of people who quit their jobs divided by the labor force. So we had 4.5 million, 4.6 million people who actually quit their job in the month... One month, month of November. Record high. You divide that by the labor force, you get the 3%. That is a record high. And this data goes back to... I think it goes back to the year 2000.
Ryan Sweet: Early 2000s.
Mark Zandi: Yeah, early 2000s. And you're saying that is indicative of an incredibly tight labor market. When you have high quits, a lot of turnover, tight labor market, businesses want to retain their workers, they jack up wages, wage growth is rising very... Has accelerated. Employment cost index, probably the best measure of wages [crosstalk 00:42:08].
Ryan Sweet: The best, yep.
Mark Zandi: The best. Let me ask you this, though. I keep going back, on wages, to the Atlanta Federal Reserve Wage Tracker, which also I find equally as good as the ECI. [crosstalk 00:42:25]
Ryan Sweet: Yeah. That's very good.
Mark Zandi: Because it tracks the same workers over time, so it doesn't have these mix effects like you would have looking at average hourly earnings, the wage measure from the employment report. And that shows an acceleration, but it's all in low wage jobs.
Ryan Sweet: That's where the quits are.
Mark Zandi: That's where the quits are.
Ryan Sweet: So if you look at the quits rate for leisure and hospitality, it's going through the roof.
Mark Zandi: But it's not broad based. I mean, I look at...
Ryan Sweet: No, no.
Mark Zandi: If I look at wage growth for high wage workers, that's actually decelerated. Mid wage workers, it's flat to maybe up a little bit, it's accelerated a little bit, but it's all in the bottom quartile of the wage distribution, right?
Ryan Sweet: But isn't that where we have the... The labor supply constraints are the most binding right now, are in restaurants, in travel, leisure.
Mark Zandi: Yeah. Yeah, that's right. But then I try to connect that back to monetary policy. So, okay, how worried should I really be that this becomes more broad based, endemic, leads to higher inflation, if it's just idiosyncratic to the pandemic, labor supply issues for this one segment of the labor market, low wage jobs? Should I be... Yeah, I mean...
Ryan Sweet: They shouldn't be concerned.
Mark Zandi: I shouldn't.
Ryan Sweet: No, they shouldn't be, but they are. So it's like going back to how we forecast monetary policy. We got to forecast what they're going to do, not what they should do. But I don't think they should be panicking right now.
Mark Zandi: Yeah. Okay. Okay. I get you. But Powell did call out the acceleration and the employment cost index as a reason for why he pivoted. I guess he needed a reason, he's got to give some reason why he pivoted.
Ryan Sweet: Yeah, exactly.
Mark Zandi: Right. So he's got to come up with something. You asked me the question, when do I think the Fed would have its first rate hike? The market says March, I said, June. What do you say?
Ryan Sweet: This pains me, but I agree with you. It's going to be June.
Mark Zandi: Oh really? Okay. June. Okay.
Dante DeAntonio: Why is that so painful, Ryan?
Mark Zandi: Yeah... [crosstalk 00:44:34]
Ryan Sweet: Because Mark and I usually never agree on monetary policy, so the fact that we agree is...
Mark Zandi: Well, our debates are pretty on the... [crosstalk 00:44:42]
Ryan Sweet: Oh yeah. No, we're not...
Cris deRitis: Yeah.
Mark Zandi: Yeah. [inaudible 00:44:45] Pretty close.
Ryan Sweet: But it's fun. I enjoy you, Cris, and I going back and forth about this. Cris, what do you think? He's going to say June, because he...
Mark Zandi: He's going to say May, because that's between March and June.
Ryan Sweet: Yes, exactly. [inaudible 00:44:58]
Mark Zandi: [inaudible 00:45:00] ... do that.
Dante DeAntonio: Got a reputation [crosstalk 00:45:04] going down the middle.
Mark Zandi: [inaudible 00:45:04] He was going to say May! He was going to say May.
Cris deRitis: That was a March, not a May. I actually think...
Mark Zandi: Oh, okay. You think March. You think [crosstalk 00:45:12] March.
Cris deRitis: I'm getting more and more convinced that they're going to follow the market here. They're going to deliver.
Mark Zandi: They're going to... Yeah. Yeah, you may be right. Growth really will have to slow because of Omicron to delay... For them to pause. Yeah.
Cris deRitis: I think so, yeah. That's right.
Mark Zandi: Dante, do you have a view here on the first rate hike?
Dante DeAntonio: Yeah, I think I would lean probably towards Cris. It seems like they might... It seems like it's all shifting in that earlier direction towards March. It feels like that's what they want to do, unless there's something that comes out that seriously changes the story between now and then, that that's probably what they're going to do.
Mark Zandi: Yeah. Okay.
Ryan Sweet: Wages have... Did you see the wage growth for economists?
Mark Zandi: Is there such a thing?
Ryan Sweet: No, I'm just giving you a heads up. It's a tight labor market out there, Mark.
Mark Zandi: Where did you get that data? Wage growth for economists.
Dante DeAntonio: We do our own survey.
Ryan Sweet: Yeah. We do our own survey.
Mark Zandi: Oh, is that right?
Dante DeAntonio: Up 10% this year. That's the benchmark you're looking at. Yeah, 10%.
Mark Zandi: [inaudible 00:46:06] You guys are making some... You're making this up. Where are you getting... [crosstalk 00:46:10]
Ryan Sweet: If you want a time series, Dante and I can create you a time series.
Cris deRitis: Is that seasonally adjusted? Or...
Dante DeAntonio: Unadjusted and seasonally adjusted, both [inaudible 00:46:18] percent.
Mark Zandi: So you are making this up.
Ryan Sweet: Yeah, we're making this up.
Mark Zandi: Okay. Oh, geez. It went right over my head. You guys are too good. Too good. Yeah. All right.
Cris deRitis: So what's your number, Mark?
Mark Zandi: Okay. This runs a risk of being too easy, and I may have to ask Ryan to recuse himself, which gives you a hint, by the way. 8.7 trillion. 8.7 trillion. Ryan, do you know?
Ryan Sweet: I'm thinking? No, I don't know off the top of my head.
Mark Zandi: Oh, okay.
Ryan Sweet: Wait, did this come out this week?
Dante DeAntonio: [crosstalk 00:47:00] Fed related if Ryan's excluding himself.
Mark Zandi: Yeah.
Ryan Sweet: Oh, no. Oh, okay.
Mark Zandi: I mean, I'm stretching... What's that, Dante?
Ryan Sweet: No, wait. No, I'll let Cris and Dante.
Dante DeAntonio: [crosstalk 00:47:08] I don't know what it is, but I feel like it's got to be Fed related if Ryan was excluding himself from the conversation.
Mark Zandi: Oh, damn. I shouldn't have said anything. I actually helped you out by saying that. Which is true, it is Fed related, and that...
Cris deRitis: It's a balance sheet. Related.
Mark Zandi: Yeah. Very good. And so what is it? If it's balance sheet related. 8.7 trillion. No? All right. Ryan, go ahead. Do you know the answer? He's looking it up.
Ryan Sweet: No...
Mark Zandi: You're looking it up.
Ryan Sweet: No, actually. No, my wife is... She got pulled over because I forgot to update the registration, so she's not happy with me right now.
Cris deRitis: Oh, boy. Wow.
Mark Zandi: Do you need to go take care of that?
Ryan Sweet: No, no. What am I going to do? Isn't that the assets held outright, 8.7?
Mark Zandi: Yeah. That's the size of their balance sheet, the size of the treasuries, MBS that they hold on their balance sheet. 8.7. I picked that because we had the FOMC meeting on... Was it... Minutes from the FOMC meeting got released on Wednesday, and that was pretty hawkish, and 8.7 trillion is... That's up a lot. If you go back before the pandemic, we were closer to 4 trillion. So that's an increase of about $5 trillion. And just for context, if you go back before the financial crisis, it was 1 trillion. So it went from 1 to 4, now we're at 4 to 8.7, and by the time the QE ends, we're probably going to be pretty close to 9 trillion. Not quite, but pretty close to 9 trillion. And then I think, correct me if I'm wrong, but I think the Fed's saying we're going to now relatively quickly let that wind down. We're going to stop buying. We're buying now, we're tapering those purchases. At the current rate of tapering, our purchases will be over by March. Market says, in March they're going to start raising rates, and we've been debating that.
But then the next question is, what happens to their balance sheet? If you go back to after the financial crisis, once they stopped tapering QE, they started... They kept the balance sheet pretty stable. When a treasury matured, or a mortgage security matured or prepaid, they would take the proceeds and they would reinvest, so they'd keep the balance sheet stable. So the question is here, what are they going to do? Are they going to allow the maturing treasuries and MBS, the prepaying MBS, to start to allow the balance sheet to come down? And I think the general sense is, correct me if I'm wrong, is that they're going to allow that to happen. They're going to allow the balance sheet to start winding down pretty quickly. Again, going back to the point that they're going to normalize policy pretty fast here. Is that right? Do I have that right?
Ryan Sweet: That's correct. Yep.
Mark Zandi: And that's called quantitative tightening, right? Or QT. So we're going from QE, quantitative easing, bond buying, to quantitative tightening, QT.
Ryan Sweet: Correct.
Mark Zandi: They got that right. Okay. And.... [crosstalk 00:50:16]
Ryan Sweet: And they're going to be aggressive.
Mark Zandi: [inaudible 00:50:21] What's that, Cris?
Ryan Sweet: They're going to be aggressive.
Cris deRitis: I mean, if they're just letting it run off, it's going to be pretty slow, I would think, because of the mortgage... The prepayments are going to be way down, with rates rising. [crosstalk 00:50:29] disagree.
Mark Zandi: I think they've got a lot of debt maturing.
Ryan Sweet: They do.
Mark Zandi: Those treasuries are going to mature pretty quick, I think, 60, 70 billion a month mature, right?
Cris deRitis: Okay. On the treasuries side.
Mark Zandi: Something like that.
Ryan Sweet: Yeah. I think Cris is right on the MBS side [inaudible 00:50:43] slow.
Mark Zandi: On the MBS side.
Ryan Sweet: But you're right that they have a ton of treasuries that are maturing, so they're going to use caps. They're going to limit the amount that the treasuries can decline, but their caps are going to be larger than they were after the financial crisis, just because of the sheer amount that they have maturing.
Mark Zandi: Yeah. Okay. But we don't think they're going to outright sell.
Ryan Sweet: No, no.
Mark Zandi: That would be kind of panic mode, if they were selling.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Yeah. And I guess one reason why the 10 year treasury yield, the bond market is sold off, why treasury yields have risen so much, is because it's now... It's dawning on investors that the Fed's going to go from buying bonds, and they've been buying a lot of them during the pandemic, to actually allowing their balance sheet to come off. And that's a big change. That's a big change.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Yeah. Okay. All right. So what do you think? That was a pretty good statistic, I thought. No?
Ryan Sweet: That was a good one.
Mark Zandi: Yeah, it was pretty good. Yeah, pretty good.
Cris deRitis: Yeah.
Ryan Sweet: Not necessarily tied to the labor market, but it's all right.
Mark Zandi: Yeah, sort of. Yeah, you're right. Yeah. But I thought we needed to mix it up a little bit.
Ryan Sweet: Yeah. No, it was a good one.
Mark Zandi: Yeah. Okay. All right. I need a little stroking. Okay. Where are we? Okay. Let's now turn to the labor market in more detail, and a bunch of different questions we could try to tackle, but let's tackle the quit rate, the 3% quit rate, the 4.5 million, 6 million, that quit during the month of November. Dante, what's going on? Why such a high quit rate?
Dante DeAntonio: You've got historically high job openings. You've got wages that are rising at levels that we haven't seen in a long time, and there's just a lot more opportunities out there for people. And I think in addition to that, you've got lots of people who are looking to change their current work situation, looking for more flexible arrangements or remote work or whatever of the case may be. So I think the abundance of possibilities, and people as a result of the pandemic looking to make changes in their current work situation, I think are all contributing to the number of quits we're seeing. And I don't expect that to decline anytime soon. I think if anything, you're going to see that continue at least through the end of the year into early next year, because wages are going to continue to rise, job openings haven't really ticked down much to this point, so there's still those opportunities out there.
Mark Zandi: So there's long... I proffer, there's a long list of reasons, and you put forward two, and I assume these are at the top of your list. The first is, well, we got a lot of open job positions. So pandemic hit, lot of lost jobs, we got the vaccines, the economy reopened, every business on the planet seemingly put up a help wanted sign at the same time, so if you have all these open positions then people feel comfortable about, well, quitting and trying to find a better job, because they know that they could get one pretty fast if they needed to get a job. That's at the top of the list.
Dante DeAntonio: Yeah.
Mark Zandi: Okay. And then the second reason on the list is... I'm putting my own spin on it. Remote work. That is, people... And I use that as a euphemism for, I want workplace flexibility. I want more flexibility in my work arrangement, the hours I work, where I work, how I work. And if you, Mr. Employer, Miss Employer, don't provide me with that flexibility, well, I'm going to go find another job that does. Do I have that right?
Dante DeAntonio: Yeah.
Mark Zandi: Okay. All right. Guys, any other reasons you would put on that list? I mean, first of all, are those the top two reasons you think for the high quit rate? And would you put any other on there?
Cris deRitis: Yeah. I think so. I think there's very active recruiting going on as well, so folks who aren't even considering looking for a job may be getting calls. That might be leading to some of this impact as well. I also wonder about self-employment, people starting up their own jobs as well, or their own businesses as well, and if that's feeding into this higher quit rate at this time.
Mark Zandi: Right, right. Ryan, any other reason [inaudible 00:55:12]?
Ryan Sweet: That was a good one, Cris.
Mark Zandi: Which?
Ryan Sweet: I didn't think about the... People starting their own companies.
Cris deRitis: [inaudible 00:55:18]
Ryan Sweet: Entrepreneurship has picked up.
Mark Zandi: Picked up a lot. If you believe the data from the IRS on EIN numbers, business starts.
Ryan Sweet: Yeah. I think lower on the list would be people quitting because of the pandemic. In restaurants, with each wave people are worried about getting COVID or bringing it home, so that could be a smaller factor.
Mark Zandi: Why would you put... I would have put that pretty high on the list. I mean, particularly because we're seeing the quits in those industries that are on the front lines of the pandemic, and when the waves come through and people get sick, they quit.
Ryan Sweet: Yeah. That's a good...
Mark Zandi: So I would have thought... Actually I'd have put that probably at the top of the list, or pretty close to the top of the list.
Ryan Sweet: Yeah, I wonder if it's just more labor market churn, in the sense that people that are in restaurants, bartenders, waiters, maybe they're just fed up and they want to change industries.
Dante DeAntonio: Yeah. Could be. What about boomer retirements?
Mark Zandi: Yeah, I was going to say that too. Yeah.
Dante DeAntonio: Is that going to change? Are they quitting now, but coming back in later? Or is this a one way street here, do you think?
Mark Zandi: Well, I think it partly depends on those housing values and those stock prices. I think the boomers feel pretty comfortable about leaving maybe a little earlier than they would have otherwise. They were going to leave anyway in the next few years, because the teeth of the baby boom generation is in the early 60s now. I think it's 62, 63. So they were going to leave anyway, but they're leaving a little earlier, in part because they got shoved out by the pandemic, and they're not coming back in because they don't need to. They've got pretty sizable nest egg with stock prices, housing values, all the excess saving that built up during the pandemic. So I don't know. Do you think they'll come... I guess it's possible, right? You go, you retire, you try to figure out retirement, you go, "Hey, this isn't really working for me," or at least... Or if my retirement nest egg is diminished because prices come back down again, they can cut back in. But I would think that's on the margin, though, don't you think?
Dante DeAntonio: Mm-hmm (affirmative).
Cris deRitis: Well, I think some of the flexibility that's [inaudible 00:57:29] up.
Mark Zandi: Oh, yeah. Good point.
Cris deRitis: That could bring some people back part-time or contract, so on the margins it could help, but I think you're right. By and large, they're out. They're not coming back in any appreciable numbers, and that's going to weigh on this market then for a while.
Mark Zandi: Yeah. Right. Okay. Okay, here's the other [inaudible 00:57:48] so the long list of reasons, they all feel kind of pandemic related, and as the pandemic winds down, these things will start to normalize and recede. And in fact, I guess one could argue if people are finding better jobs, jobs that are me suited to their needs, that turnover might be even lower than it otherwise would've been a couple, three, four years down the road. Right? I mean, you might see less turnover. Possibly.
Dante DeAntonio: Moving forward, you mean, if people are finding better matches today, you may get less... [crosstalk 00:58:26]
Mark Zandi: Yeah. On the other side of the pandemic. Yeah.
Ryan Sweet: Especially with the work from home.
Mark Zandi: Yeah, exactly.
Ryan Sweet: If you find a job... Yeah. You could get less turnover down the road. Yeah, I agree.
Mark Zandi: Which gets to the question, and this is always a hard question for me to answer, is this a good thing or a bad thing? You know what I'm saying? Is the high quit rate a good thing? Is this a positive development? Or is this a... I mean, obviously there's transition costs for the businesses that are struggling filling positions for people that are quitting. That's no fun. We know that. We're hiring aggressively, and trying to add to payrolls at the same time as hold on to, retain, existing workers. That's a lot of energy. That's a lot of work. But is it a problem, longer run? Any views on that, Dante? Do you have any sense of that?
Dante DeAntonio: I find it hard to believe that it's not a good thing for workers. It seems like workers feel empowered one way or the other, and that's reflected in that higher quits number. I think you could make the case that for businesses it's probably a net negative. I mean, there might be some benefit if you get workers who aren't the best fit leaving, who maybe would have just stuck around before because they didn't have any other options, so maybe you get some benefit from better fit with workers. But I don't know that that... I think it's probably outweighed by the cost associated with recruiting and with turnover and all of that. So I have to imagine it's probably a little bit of a negative to businesses.
Mark Zandi: Yeah. Although again, it depends. It depends on your horizon. Maybe on the other side of the pandemic, they have a more stable job base than they have now. The other thing is, businesses are not standing still they're responding, presumably. They're investing, I would think. I mean, we can see it in the data, the investment data, it's been pretty strong. Some of that goes to supply chain restructuring, but some of that goes to, I think, labor saving technology. Businesses realize that this is going to be a problem long run, a tight labor market and high wages, and I need to figure out how to do things more productively, which would be a good thing, would be a positive thing. I don't know. Cris or Ryan, do you have a different... So Dante says good for workers, not so good for business. What do you think? Good or bad?
Cris deRitis: I think in that... [crosstalk 01:00:53]
Mark Zandi: Or is that the wrong question? Am I asking the wrong question?
Ryan Sweet: No, I think it's a good question.
Cris deRitis: It's a good question.
Ryan Sweet: Yeah.
Cris deRitis: I'd say good, certainly from a macro perspective overall. There are certainly some businesses that are going to struggle more than others, but in the end I think it'll push them in a direction where they increase productivity or they accommodate their labor force better, they make changes. So I think it's a positive. I think a wild card here is always immigration, and what the longer term prospects are for the labor market are going to depend heavily on what that immigration policy looks like. [crosstalk 01:01:30]
Ryan Sweet: I think it's good for businesses, in the sense that the pool of available workers is much larger now. Think about what we're doing. 10 years ago, would we have considered hiring an economist and having them stay in California? Probably not. Now, the doors are wide open.
Mark Zandi: Right. Right. Yeah. It's actually hard to disentangle all the cross currents here, in terms of what it means.
Dante DeAntonio: The question I have is, do you think this ever fully reverts back to what it was [inaudible 01:02:06] do you think job openings ever get back to where they were pre-pandemic, or they stay elevated? Do quits ever go back to the old level, or does churn stay higher than it was before?
Mark Zandi: The opposite of what I was saying on the churns [inaudible 01:02:19] elevated. Because you're saying the remote work, you're saying people can move around a lot more easily, therefore...
Dante DeAntonio: Well that, and are you in a perpetual state of a higher degree of labor shortage? You've got more openings all the time than you had before, and so you've got more opportunities for workers all the time, and they're constantly looking and evaluating more than they used to. I don't know.
Mark Zandi: Right. You're saying for other reasons, the labor market's going to be tight, demographics [crosstalk 01:02:46] out the boomers, weak immigration, so you've an inherently tight labor market, therefore that's going to keep quits up because people have opportunity to quit.
Dante DeAntonio: Possibly, I mean, we've seen lots of job gains, but job openings are still... I mean, they've barely budged. They're down slightly off of their 11 million high, but they've barely moved, even though we've added workers pretty consistently here.
Mark Zandi: Yeah. Interesting. So it's just the opposite of what I was saying, that after the pandemic we'd get a more stable workforce, fewer quits. It could be... Who knows? It could be... Hard to know that... Very interesting point. Okay.
Cris deRitis: And if we're moving to a national labor market, I think it's going to take a while for things to equilibrate here. We're just at the early stages. Everyone's grappling with what it means to... What does [inaudible 01:03:39] mean? Do you regionally adjust? Do you not? I think there are a lot of open questions here in terms of where the equilibrium actually is. It could have a lot of churn for a while, I guess is what I'm saying.
Dante DeAntonio: Yeah. There's still a lot of open questions about what remote work actually looks like in the future. I mean, do firms settle on mostly hybrid models, where they aren't hiring nationally because they still want people to come into an office periodically, or do more of them end up in a fully remote world where they don't care if people ever come to an office? I think that's still to be decided in large part for a lot of companies.
Mark Zandi: Yeah, yeah. You're right. A lot of good... A lot cross currents there. Hard to know how that's going to play out. Okay. Well, I think we've got time for one more broad labor market issue before we call it a podcast. What should we tackle here? I guess wage growth might be one place to explore a little bit in more detail, because that is key. What's your sense? Do you think wage growth is going to roll over here, that it is going to normalize? Going back to low wage workers, that's where the wage growth has accelerated the most significantly. Does that come in? Or we're going to see the wage acceleration broaden out more deeply across the labor market. What do you think?
Dante DeAntonio: I certainly don't think it comes back in soon. I think we're still probably accelerating, or plateaued maybe, but I certainly don't think it's going to start to decelerate in the near future. It seems like there's pressure on both sides. Firms are offering higher wages to retain current workers. Firms are offering even higher wages to try to lure workers to them. We see that in... We don't talk about it a lot, but the ADP wage data. The pay increases for job switchers have still been ticking higher and higher. Firms are offering bigger and bigger increases to workers over the last six months, to lure them away. And with the number of job openings that still exist, I don't see that changing anytime soon.
Mark Zandi: Right. Right. So your sense is that this acceleration in wage growth is going to continue and broaden out to other parts of the labor market.
Dante DeAntonio: Yeah. I don't know that it'll fully broaden across all income skill groups, or whether the lower end of the distribution is enough to sustain it for some period of time, but it certainly doesn't feel like it's going away in the early part of this year, for sure.
Mark Zandi: Right. And I suppose as the economy comes into full employment, that means higher wage growth, a broadening in the wage growth. All goes back to the Federal Reserve. Good reason for it to be starting to tighten monetary policy, or normalizing policy as quickly as possible. Yeah. Okay. Any other thoughts on that, on the wage picture? No? Okay.
Cris deRitis: I think short term Dante's right, but I always come back to automation and productivity enhancement. I think those investments are going in now. They will bend the curve later on. Maybe later this year, maybe next year. But I think employers are sensitive, looking for other ways to supplement or to substitute for labor.
Mark Zandi: Mm-hmm (affirmative). Yeah. I mean, our baseline forecast in the middle of the distribution of possible outcomes are a pretty sanguine one. We're saying that, as the pandemic winds down and recedes, and that's the working assumption that we're operating under, that each new wave of the pandemic is less disruptive than the previous wave, and over time this recedes, the pandemic becomes more endemic, that labor markets are going to start to normalize, get back to some... They're not going back to where they were pre-pandemic, but they are going to get back to something more resembling what we're used to. Wage growth for low wage workers will moderate, and those for other workers will remain roughly where they are today, consistent with productivity growth. We see some improvement in productivity gains as businesses respond to the tight labor market and the realization that they're going to be dealing with persistent labor shortages for a long time to come, and the higher wages gives them an economic incentive to do it.
And the combination of all that... And of course the Federal Reserve will normalize monetary policy, raise interest rates in a way that causes growth to ultimately slow, so that when the economy achieves full employment, which is, if everything sticks to script, about this time next year, about a year from now, that the economy kind of soft lands. Everything glides down, comes down on the tarmac, and life is good, we're all good. That's the baseline, and that's the strong consensus view, right? That's the view. But it feels like, based on this conversation, it's going to be pretty bumpy. Landing that economic plane on the tarmac isn't going to be quite as graceful as I just described it. It's going to be difficult. Did I get... Is that a fair characterization of the way... That's how I'm thinking about things. [inaudible 01:09:29] You guys are on board with that. Okay.
Ryan Sweet: Yeah. This is a more boom bust cycle.
Mark Zandi: Well, that's a little different. Are you saying we're booming and we're going to bust? Or are you saying it's just a little more boomy, busty, a little more bumpy, but we're still going to land the plane?
Ryan Sweet: Yeah, more bumpy. Yeah.
Dante DeAntonio: Everyone [inaudible 01:09:46] the plane metaphor.
Mark Zandi: I don't know. I'm coming to the sense, the conclusion... It's not a... Conclusion is not the right word. I need a better word. But it's starting to bother me that the plane is coming in to the tarmac at a pretty high rate of speed. You got a lot of winds blowing in lots of directions, pandemic waves, fiscal policy, and the fog of bad data, we don't know really what's going on exactly. Are they going to actually be able to land that plane on the tarmac? And by the way, historically they rarely do.
Ryan Sweet: Yeah.
Cris deRitis: Never done it before.
Mark Zandi: They never do. So I guess what I'm saying is, I'd start watching out for 2023 and 2024. This could be a little more difficult. We'll have to watch and see.
Ryan Sweet: It's one of those plane landings where it's really bumpy, that people start clapping that we actually made it on the ground.
Mark Zandi: Yes, exactly.
Ryan Sweet: Yeah. It's going to be one of those.
Mark Zandi: Yay! And everyone's clapping as you... Yeah. Right.
Ryan Sweet: I never understood that, when people clap when we land. Isn't the expectation that you land? I don't know.
Mark Zandi: I think it is. It's like... [crosstalk 01:11:01]
Dante DeAntonio: You don't applaud for meeting expectations? [inaudible 01:11:03].
Ryan Sweet: Yeah.
Mark Zandi: It's a relief. Yeah. I'm alive. Thank God. [inaudible 01:11:08] Okay. I think that's the metaphor we're going to use.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Okay. Well, I think this was a very useful podcast. We covered a lot of ground. Any last words, guys?
Ryan Sweet: You're forgetting something, Mark.
Mark Zandi: Pardon me?
Ryan Sweet: You're forgetting something.
Mark Zandi: Yeah. @Markzandi.
Ryan Sweet: There it is. There it is.
Mark Zandi: I wasn't going to say anything until you said something. I'm on Twitter. So is Ryan, but he won't tell us what his handle is.
Ryan Sweet: Next week I'll tell you.
Mark Zandi: What is it?
Ryan Sweet: I'll tell you next week.
Mark Zandi: Okay, tell me next week. @Markzandi, and please feel free to follow. And anything else, guys, before we call it a podcast? No? Okay. Hey, thanks, Dante. Always appreciate it. And...
Dante DeAntonio: Any time.
Mark Zandi: Good natured... I know we make... We have a lot of fun, but it's all good natured. You're great. Okay. Thanks everyone. See you. Talk to you next week. Take care now. Bye-bye.
