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Moody's Talks - Inside Economics
Surprises, Scenarios, and Spirals
Mark, Ryan, and Cris welcome back Marisa DiNatale, Senior Director at Moody's Analytics, to discuss the latest employment report.
Full episode transcript.
Mark Zandi: Welcome to inside economics. I'm Mark Zandi, the chief economist of Moody's Analytics. And I'm joined by three of my colleagues, my two co-host Cris. Cris DeRitis is the deputy chief economist and Ryan Sweet, the director of realtime economics and Marisa. Marisa DiNatale. Marisa has been with us a few times, a couple times, at least on inside economics. Welcome everybody. Good to see everybody. How's everyone doing on this Jobs Friday?
Cris deRitis: Good.
Marisa DiNatale: Thank you.
Mark Zandi: Everyone's good.
Ryan Sweet: Yeah.
Cris deRitis: Mm-hmm (affirmative).
Mark Zandi: Yeah. I've been up since 5:00 AM. I did a believe it or not CNN interview at 5:45. So I feel like I'm in the marines, I have done so much since 5:00 AM in the morning. You will not believe. And so I'm ready for bed, actually. No, only kidding.
Marisa DiNatale: Welcome to my world.
Mark Zandi: That's right. You do this every day.
Marisa DiNatale: Yeah.
Mark Zandi: Because you're all on the west coast. When do you get up typically Marisa?
Marisa DiNatale: Usually 5:30.
Mark Zandi: 5:30.
Marisa DiNatale: Unless, there's an earlier meeting.
Mark Zandi: And this is why your picture is never on Zoom in these early East Coast meetings.
Marisa DiNatale: Sometimes if I have to host the meeting, then I make an effort to look presentable. But-
Mark Zandi: But otherwise-
Marisa DiNatale: ... if it's five o'clock in the morning and it's pitch dark outside, I'm still in my pajamas not Zoom ready.
Mark Zandi: Cris, what's your excuse? I never see your face either at 9:00 AM. But you're on the east coast. What's going on?
Cris deRitis: I'm dropping off my son at school. [crosstalk 00:01:52] in the car.
Mark Zandi: That's in the car. Right. Got it. Got it. All right. Well, very good. Well, this is Jobs Friday. I feel like we should just get right down to business and we have two things we need to accomplish. One is our game, the statistics game. We all put forward a statistic, the rest of us, try to figure that out. And the best statistics is one that is not too hard, not too easy, has something to do with what's going on in the last week and is relevant to the topic at hand. And this is Jobs Friday. So the second thing we need to do is talk about jobs. So how should we approach this? Should we just dive into the game? Or should we talk a little bit about the employment report first and then dive into the game? What's your vote? [crosstalk 00:02:37].
Marisa DiNatale: I suspect the game may lead to conversation about aspects of the report.
Mark Zandi: I agree. Okay. Although Cris only talks about housing, so I don't know. Are you going to talk about jobs too, Cris?
Cris deRitis: I'll try. I'll try.
Mark Zandi: You'll try. Okay. All right. Okay. All right. So [crosstalk 00:02:56].
Cris deRitis: We might need to start off with that disclaimer though, right?
Mark Zandi: What did you say?
Cris deRitis: We should talk about the report. Lots of asterisks here.
Mark Zandi: Are there a lot of asterisks? Okay. Well what do you think Ryan, should dive right into the game and I think that's Marisa's vote.
Ryan Sweet: Yeah, we can do that. We can dive right in.
Mark Zandi: Okay.
Ryan Sweet: All right.
Marisa DiNatale: I like to get it over with.
Mark Zandi: Cris [inaudible 00:03:14].
Cris deRitis: All right. Okay, that's cool.
Mark Zandi: I guess I'm just closing out of my Outlook so we don't keep hearing that ring. Okay. Let's play the game. Should we go with... Let's go with, because Cris didn't want to play it. Let's go with Cris first.
Ryan Sweet: Yeah, I like that.
Marisa DiNatale: [inaudible 00:03:32].
Cris deRitis: All right. All right.
Mark Zandi: Let's go far away.
Cris deRitis: I'll give you 6.3%.
Mark Zandi: 6.3%. Does it have to do with the jobs numbers?
Cris deRitis: It does.
Mark Zandi: Okay. So I met the first criteria, right?
Cris deRitis: Yes, you did.
Mark Zandi: Right off the bat. And this is-
Cris deRitis: But it's not obvious.
Mark Zandi: And just because we all assume everyone knows what we're talking about. This is the job numbers for the month of January that came out today, Friday, February 4th. So we're talking about the employment report for the month of January and your statistic is 6.3%. Is it an unemployment rate?
Cris deRitis: It is.
Mark Zandi: Is it unemployment [crosstalk 00:04:13].
Marisa DiNatale: Is it the U-6?
Cris deRitis: It is not the U-6. U-6 [crosstalk 00:04:18].
Mark Zandi: U-6 is a good guess.
Cris deRitis: U-6 is seven. Yeah. [crosstalk 00:04:20].
Mark Zandi: What is the U-6? So everyone knows.
Cris deRitis: Yeah, it was 7.1%. It fell from 7.3%.
Mark Zandi: And U-6 is exactly what is that exactly?
Cris deRitis: It's a broader, it's an alter measure of unemployment. It's a broader measure that counts unemployed people as well as people who are marginally attached to the labor market, those that are working part-time but they want a full-time job. So it's a broader measure of labor market stack.
Mark Zandi: And that fell to, what did you say? 7.1?
Cris deRitis: 7.1.
Mark Zandi: And what was that pre pandemic? Do you know?
Cris deRitis: What was U-6? It was...
Mark Zandi: That's okay.
Cris deRitis: I don't recall.
Mark Zandi: Ryan will figure that out.
Cris deRitis: Look it up.
Mark Zandi: 6.3. Is it the unemployment rate for black Americans?
Cris deRitis: No.
Mark Zandi: Hispanic Americans.
Cris deRitis: No. No, it's not a racial of demographic.
Marisa DiNatale: On a demographic group.
Cris deRitis: It is a demographic group.
Mark Zandi: Women.
Cris deRitis: No.
Mark Zandi: [inaudible 00:05:21] it is something worth, high school graduates.
Cris deRitis: Not quite.
Mark Zandi: Less than high school, less than high school.
Marisa DiNatale: Got it.
Cris deRitis: There you go.
Mark Zandi: Okay. Where's the bell.
Cris deRitis: No.
Mark Zandi: What do you mean no, no, no, no? Come on. No so what do you-
Cris deRitis: That is not.
Mark Zandi: ... what do you mean? Hold on, wait, wait, wait, wait. You don't think I should get the bell for that?
Cris deRitis: I had to guide you like a missile here.
Mark Zandi: Okay. Fair enough. All right. We had such a great time last week, we got-
Cris deRitis: Yeah, that's true.
Mark Zandi: ... all right. So 6.3% is the unemployment rate for people with less than a high school degree.
Cris deRitis: Yes. And that rose from 5.2% in December. So an increase of 1.1%. I found this interesting because the other educational group that saw an increase in unemployment rate was the college graduates. So it's the two ends, the less than high school and the college graduates. College graduates went from 2.1 to 2.3%. But what I find interesting is I think is for different reasons, the less than high school, you saw that their participation fell, presumably because of Omicron. But for the college graduates, their participation actually rose. So you have increases, but one because of the virus, the other, because perhaps strength of the labor market, there's more demand people rejoining the labor force.
Mark Zandi: Got it. Hey, this feels somehow unsatisfying to me. We were talking about the jobs numbers without any context. I think Cris was right. We got to say something about the job-
Cris deRitis: We got to back up prior.
Mark Zandi: ... numbers just to put some context here. I mean we know, I mean, you guys, everyone's been pondering over the data, but the folks out there don't, they're saying, what are you guys talking about? So I'm [crosstalk 00:07:11]. You're right. I think you're right. So Ryan, can you just give us a thumbnail description of the report? What did we get and what did it say?
Ryan Sweet: So overall there's not a lot you can explain about in this report. So job growth was north of 400,000 in January. We expected it to fall because of Omicron. So this came out noticeably better than anticipated. I think one thing that really stood out and I'm not going to use numbers was there was a big upper revision to the last couple months. Because remember last podcast when we were talking about the December jobs number, where we were puzzled why it was so weak. That's not the case anymore. It got revised up from around 200,000 to a little bit north of 500,000 and net gain. So strong job growth, wage growth picked up, prime age employment to population ratio improved.
The increasing unemployed rate isn't concerning because it rose for the right reason because more people came into the labor force, the participation rate edged higher. So across the board there I was expecting us to explain why it was really, really weak, now with a really strong job number, there's no cause for concern.
Mark Zandi: So we got 467K in the month of January, that's the payroll employment gain. And we had been, well, I think that's higher than most folks expectations [crosstalk 00:08:34].
Cris deRitis: It certainly higher than ours.
Ryan Sweet: It was outside the range.
Mark Zandi: Outside the range of consensus expectations. And I think we had our own poll that we were doing via email and we were all negative, I think. We thought employment would decline in January because of Omicron and the impact it would have, but that did not happen at all in the report.
Ryan Sweet: I mean, this is really a little bit puzzling, but I mean, I'm not going to bash a 400,000 gain in employment, but jobless claims rose, consumers assessment in the labor market weakened a little bit. So all in all, I was a little, I mean I was really surprised when I saw that number at the bus stop.
Mark Zandi: Well, and also it's not consistent with the historical performance during the pandemic.
Ryan Sweet: Correct.
Mark Zandi: We know that in the pandemic that the ups and downs in the monthly employment gains have been very closely tied to the pandemic, the number of infections, the number of people that are out sick. And if that relationship continued to hold, because with Omicron you would've expected a really weak number, probably a decline, ADP which we can come back to show to decline. So this was particularly surprising, because this does not consistent with Omicron, which was raging at the time the BLS, the Bureau of Labor Statistics, the guys who put this data together, were putting it together in mid mid-January.
Ryan Sweet: During the reference week, that's when the seven day moving average for daily confirmed cases peaked and it peaked at 800,000. So I think everyone was anticipating Omicron was going to really bite into the job market in January.
Mark Zandi: Yeah. Right. Cris-
Cris deRitis: We've got some other-
Mark Zandi: Go ahead and say.
Cris deRitis: We've got some other asterisks here though, too. We have the seasonal still, that seasonal issue. I think Ryan, you confirmed that that's still a feeding in here. But then we have revisions, benchmark revisions, population estimate. So there's a lot baked into this report as well. As usually I don't think we want to obsess about a single number here and it is likely to get revised next moth.
Ryan Sweet: I'm starting to think that the monthly jobs data's becoming increasingly unreliable, the first print because of these massive revisions. So we really need to wait until February, March to really know what happened in January. So I agree with you Cris, there's some asterisks.
Mark Zandi: So there's a few asterisks. Did you want to there explain those or should we come back to those? I mean, they're in the weeds, but sounds like they're important. Seasonal adjustment, benchmark revisions. Should we talk about that now? I mean, you want to explain that?
Cris deRitis: Let's get into the stats. I have a feeling they might up.
Mark Zandi: We might come up. Okay. We'll come back to that. These are all different wonky technical issues, but particularly important.
Cris deRitis: Important.
Mark Zandi: Okay. Marisa big picture. Anything that Ryan or Cris missed on the big picture in terms of the report?
Marisa DiNatale: I think we all thought it was going to be a negative print because we knew what Omicron was doing during this time. And if you dig into the numbers, you do see that there were millions, more people out of work because of COVID or because they were sick. So there were 3.6 million people who said they had a job, but they weren't at work because of their own illness.
Ryan Sweet: Just declines, just [crosstalk 00:11:53] number. I'll come up with a new one.
Mark Zandi: That's why he didn't want to go. He didn't want to do this.
Marisa DiNatale: To get a cowbell for that.
Mark Zandi: You wanted to play, by the way Ryan, if-
Marisa DiNatale: That's really good.
Mark Zandi: ... you had said that, I would've nailed it, immediately. You would've been embarrassed by that statistics.
Ryan Sweet: All right.
Mark Zandi: You would've been embarrassed.
Ryan Sweet: But that a huge number.
Mark Zandi: We saved you. That was-
Ryan Sweet: 3.6 million people.
Marisa DiNatale: Well, and even before we got that number, the reason I thought it was going to be a big negative is I was looking at the census bureau has been doing this household pulse survey, since the start of the pandemic. And although it doesn't line up exactly with the reference, the payroll and household survey reference weeks, it's like a day before day after in each case, the number of people who said they were sick from COVID or caring for someone with COVID and therefore couldn't work went from three million in mid-December to eight million in mid January when they did this survey. So just confirms everything that we already know about case counts.
But you can really see the impact on employment. And then BLS has also been asking these questions, these supplemental questions with the CPS, with the employment report about COVID and half of the people who said that they weren't working because of the pandemic, actually more than half, 75% were not paid for not being at work because of the pandemic. And so the key is that in order to not be counted in the payroll survey, you had to have been not paid for any of that survey period. So perhaps that's what we were missing. Depending on what a pay period is, it could be a week, it could be half a month. It could be the entire month. You would have to be out of work for that whole period and not paid in order to fall off the payroll.
Mark Zandi: I have a question on that. I mean, Marisa, so now I went back and this was a couple few days ago, looked at how the BLS determines whether to count someone as employed or not. And there seems to be an out, if it's temporary illness, if you're not working and you don't get paid and it's temporary illness, you're still counted as employed. So it depends on how the employers who are responding to the survey think about that, interpret that. So if they said, this is temporary, I know these guys are coming back next week, they're still employed, then wouldn't show up as... It would show up as an employed person. It wouldn't add to the unemployed.
Marisa DiNatale: Even if they weren't getting paid.
Mark Zandi: I think so. I think Ryan, can you back me up on that? Do you know? I mean, that was my interpretation of what I read. So maybe you guys can go dig.
Ryan Sweet: Yeah. Let me look at the questions again.
Mark Zandi: Go look at that again. Because I think in fact, I think one of the problems, the numbers that we've been having and measuring things is that employers early on in pandemic didn't know that. So they were just saying you're not here. You're not employed. I'm not paying you. You're not on my payroll, but they're getting better at understanding this nuance to the data. And that may have been what went on here and why we saw more jobs than we thought we were going to see.
Ryan Sweet: But anyway, if you're right, that would've been nice to know a couple days ago.
Mark Zandi: Yeah. Right. That's true. I looked at that-
Ryan Sweet: I appreciate it.
Mark Zandi: ... well, my thought was the bias, that's a bias, that, that bias would be the same. Why would you think businesses would be... It feels like a tenuous explanation, but nonetheless, it might be worth exploring
Marisa DiNatale: And hours fell. So you can see it in the hours data too. Almost all across the board and you see big declines in hours in service industries, like retail had a very big decline in hours over the month. But the one thing I was looking at is Cris mentioned that on the household survey side, they updated the population controls, which they do every January, which basically means they just take the last census and they re-benchmark all of the data in the household survey to those census numbers. So when you look at the data that's presented by BLS, you can't compare December to January every year because there's a break in this series and they don't go back and revise it. But there is an interesting table in the press release where BLS for a select number of top line measures, does that adjustment for you and says, okay, if we didn't have the population controls, what would these changes be over the month? And there was an almost 300,000 decline in household employment over the month between December and January after they take out that population control.
Mark Zandi: I didn't catch that.
Marisa DiNatale: Maybe this number will get... I mean, and then you mentioned ADP was down 300,000 over the month. So I don't know. I mean, you can see some weakness in the report if you look for it, it just either job growth in hiring ramped up significantly in January, beyond what it had been the past few months or because of these technical factors that you're saying, there were a lot of people out sick, but they were counted anyway. They didn't come off the payrolls, like we expected them to, or there might be a revision.
Mark Zandi: Right. Quick question. The 3.6 million people that weren't working because they were sick. This is from the household survey. What was it in the month of December? Do you do know, Ryan?
Ryan Sweet: 1.6 million.
Mark Zandi: Okay. So is 3.6 million a high for the pandemic?
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Is that a high point?
Marisa DiNatale: It's really high.
Mark Zandi: It is.
Marisa DiNatale: Yeah.
Mark Zandi: If it is consensus with consistent with that census pulse survey number that you mentioned.
Marisa DiNatale: Yes.
Ryan Sweet: Correct.
Mark Zandi: By the way in the census pulse survey, the other reason people give for not working is I'm fearful of getting sick. So if you add that to the people who are sick and taking care of sick people, it was 12 million in the January and that was a new high during the pandemic. So another reason for that is-
Marisa DiNatale: And then there's another question where they say I didn't go to work because I had to stay home with my children who couldn't go to daycare or school. And that was up by half a million between December and January as well.
Mark Zandi: Very interesting. Okay. So I'll just make one comment. I mean, just to take it even higher, I mean, 30,000 foot level, looking at all the data and the revisions to the data, we'll get back to the benchmark revisions. But it looks like the economy was incredibly consistent in creating jobs that last year and through January, that we thought it was much more volatile some months near a million, some months near 100, 200,000. But now with these revisions, it looks like it's 500K, pretty much. Maybe give or take a little bit month to month. But it was incredibly consistent, which it's almost as if the economy, I want to say that, I mean, businesses have a ceiling on how many people can actually hire. They can only add to payrolls. So we were every month hitting that ceiling, they just physically businesses in aggregate physically couldn't hire more people to fill those open positions, particularly given the high quit rate that we've been experiencing.
But bottom line, it feels like this shows you how, with all the caveats and all the asterisks, I get it. But at 30,000 foot level, it feels like it just shows you how resilient the economy is and just navigating through the pandemic. We're only down 2.9 million jobs now from the pre pandemic peak, I believe we're within spinning distance. Sorry Ryan, you were going to say something?
Ryan Sweet: So if you average it, monthly job [inaudible 00:20:14] year was 550,000.
Mark Zandi: Okay. Right there you go.
Marisa DiNatale: Got it.
Mark Zandi: Yeah, right. Very good. Okay. So I think that now I feel better. We get some context before we go back. Sorry, Cris, you were dead on, I don't know what Ryan was thinking. Although, Marisa was-
Marisa DiNatale: I was there too.
Mark Zandi: ... there, he was there too. Yeah. All right. Okay. So let's go to Ryan. And Ryan what is your... Or maybe I should go to Marisa, give you more time to come up with your statistic, Ryan.
Ryan Sweet: Yeah.
Mark Zandi: Okay.
Ryan Sweet: I appreciate that since...
Mark Zandi: I was really teasing you, but okay.
Ryan Sweet: [crosstalk 00:20:49].
Cris deRitis: She pulled on Marisa another chance today to take it away.
Mark Zandi: Yeah. All right, Marisa, you're up. What's your statistic?
Marisa DiNatale: My statistic is 1.7.
Cris deRitis: That is the number of job openings per unemployed.
Marisa DiNatale: Wow. He got it. Wow.
Cris deRitis: 1.73, I believe.
Mark Zandi: That's a cow bell. That's a cow bell.
Marisa DiNatale: That is a cowbell.
Mark Zandi: Although I thought that cowbell was reserved for me somehow, but Cris gets that too.
Cris deRitis: Sorry. What was it again?
Mark Zandi: Yeah. What was that again?
Marisa DiNatale: 1.7 jobs per unemployed person.
Mark Zandi: Okay. Do the reverse. What's the reverse, quick because I know that answer.
Cris deRitis: Point six.
Marisa DiNatale: Point six.
Mark Zandi: Okay. There, that's right. That's the way you should be looking at it.
Cris deRitis: Yeah.
Marisa DiNatale: Yeah. I know. That's the way it's reported but that's-
Mark Zandi: She's mixing it up. She's mixing it up.
Marisa DiNatale: But that's more, I mean, when we're in this situation, it's more intuitive to me to flip it around.
Mark Zandi: How did-
Marisa DiNatale: But half a person per job, that's weird.
Ryan Sweet: That's that about right. How did Cris get that?
Mark Zandi: Yeah. That was my [crosstalk 00:21:49] as Marisa is and reversing the statistics. But remember Marisa has a pension for this positive negative.
Marisa DiNatale: Oh boy [inaudible 00:22:02].
Mark Zandi: Inside joke. Inside joke. Just go listen to the previous podcast.
Marisa DiNatale: It's not really an inside joke. It was yeah.
Mark Zandi: Oh really? The whole world knows about it.
Marisa DiNatale: Broadcast to millions of people.
Mark Zandi: You can go back and listen, podcast number, whatever 23 or something. Okay. Well okay, so explain that, put that into some context, that number.
Marisa DiNatale: Well, so this combines two reports. It combines the job openings and labor turnover survey, which came out this past week for the month of December. So it's a month behind the jobs report. And that shows the number of job openings at a record high, like everything's at a record high, layoffs were at a record low, job openings were at a record high, quits are at a record high. So that shows us the composition of job growth. And then combine that with a number of unemployed people in today's report. And you get 1.7 jobs per unemployed person, which is up from the previous month and far higher than anything in the history of this series, which goes back to 2000.
Mark Zandi: Yeah. I mean, I have a rule. Some in my mind a really good labor markets, like one for one. Something like that, around one.
Cris deRitis: One opening per unemployed person. But it's pretty amazing.
Mark Zandi: Good. That's a good one. Very good Ryan, you're ready? You have your statistic.
Ryan Sweet: I got one, 50%.
Mark Zandi: What, 50% on the nose?
Ryan Sweet: On the nose.
Mark Zandi: Okay.
Ryan Sweet: Highest in 48 years.
Mark Zandi: Oh boy. And this is coming from the jobs numbers or not?
Ryan Sweet: It is not, but it's really market related.
Mark Zandi: Okay. That's hypermarket, that was a head fake. Okay. 50%. But it was a statistic that came out this week.
Ryan Sweet: It did. It came out yesterday.
Mark Zandi: Okay. Interesting. Is it from the ISM, non manufacturing survey?
Ryan Sweet: No. It is not.
Mark Zandi: The UI and plum insurance claims came out yesterday. No.
Ryan Sweet: It's not that.
Mark Zandi: If you think that would be...
Ryan Sweet: The survey.
Mark Zandi: The survey, 50%. I don't know what that would be.
Ryan Sweet: We get the entire survey next Tuesday. So they release part of it ahead of the jobs number. And then the full survey comes out on Tuesday and we do cover it on economic view.
Mark Zandi: We do. And you said it, it comes out before the jobs number. So is it labor market related?
Ryan Sweet: It is.
Marisa DiNatale: Is it from ADP.
Ryan Sweet: It is not ADP, but-
Mark Zandi: That out Wednesday. So this came out Thursday. I'm really confused.
Ryan Sweet: So the NFIB, small business association release is an employment survey ahead of the jobs number.
Mark Zandi: I did not know that.
Ryan Sweet: And in that, 50% of small businesses said that they are raising compete. A 48 year high. So just getting back to the idea of how tight the job market's getting, small businesses are starting to raise wages. So basically the solution for high wages is high wages because as wages growth accelerates, we'll start pulling more and more people back into the labor force, which we saw in today's employment numbers.
Mark Zandi: Right. Interesting. So it's 50% on the nose. So half of all small businesses that responded to the national Federation of independent business survey, the trade group for small businesses said they were raising compensation for their employees. And that survey's been done for a while back into the 70s I believe. I mean, I believe-
Ryan Sweet: Late 70s early 80s. Yeah.
Mark Zandi: ... yeah. Right. And so that's the highest that's ever been.
Ryan Sweet: In 48 years. I think it was higher.
Mark Zandi: Okay. Wow. That's pretty incredible. And I didn't look the average hourly earnings. What is that growing year over year? That also came out with today's jobs numbers. Does anyone know [crosstalk 00:26:14].
Ryan Sweet: Five to Seven?
Marisa DiNatale: Yes.
Ryan Sweet: Yeah. Five, seven.
Mark Zandi: Five seven. Okay. All right. Very good.
Ryan Sweet: But that's not keeping pace with inflation.
Mark Zandi: No. Although it's interesting, someone pointed out, one of our colleagues yesterday in a conversation we were having pointed out that if you go back to the start of the pandemic and calculate the percent increase in wages, and he used the employment cost index, because that controls for mixed issues that the average hour earnings does not, mix of industries, mix of occupations within industry. And you look at inflation, the increase in prices since the pandemic, they are roughly the same, they're about the same. So it says wage growth has been consistent with, with inflation.
Marisa DiNatale: I just looked at that actually. But if you index the CPI and you index the ECI wage component of the ECI to the fourth quarter of 2019, wages were outpacing inflation, obviously through the first part of the pandemic when we had deflation. When the pandemic first started and got ahead of it. But that gap has been narrowing and narrowing. And just as of December, now they're both right there. So actually CPI growth is since the end of 2019 is now slightly above, even ECI growth over that whole pandemic period. So a couple more months and even by that measure, it'll be wiped out by inflation.
Mark Zandi: Although it feels like to me, wage growth is going to continue, is going to remain stronger for longer than inflation. I would think.
Marisa DiNatale: That's true. Yeah.
Mark Zandi: Yeah. But what we're saying right now is that through the pandemic, since the pandemic hit, wage growth has been more or less roughly consistent with inflation. So that's not great but still means, still called real wage growth after inflation wage growth is zero and that's okay. But workers should be getting inflation plus the growth in productivity. And they've not, which by the way, someone benefits from that. And that's obviously businesses and that's one reason why businesses are doing fabulously well. I mean, if you look at corporate profit margins or corporate profits, they are extraordinary. So businesses costs are up, but they've done a pretty good job here. I mean, an excellent job of passing it through and maintaining their margins and maintaining corporate earnings. Although, I guess Facebook would be the exception to that. Sorry, I shouldn't have brought that up. So anyway, I got a question for... I got a easy one and a hard one for you, my statistic.
Ryan Sweet: All right.
Mark Zandi: Okay. I'm going to give you the easy one. Just well, I'm not going to say anything because it'll make it easier, but then I'm going to give you the hard one and make you work. Okay, 62.2.
Ryan Sweet: Labor force participation rate.
Mark Zandi: Yeah. That was the easy one.
Ryan Sweet: Which no one should be paying attention to. But obviously you do.
Mark Zandi: I brought it up just for you. Can I ask though Marisa, that number wouldn't be affected by the population controls, would it?
Marisa DiNatale: Yeah it is.
Cris deRitis: It would.
Marisa DiNatale: It is. Yeah.
Mark Zandi: It is. Okay. So did it rise as much as it looks like it rose or not?
Marisa DiNatale: No. I think when you subtract the population controls, it was unchanged from the previous month.
Mark Zandi: Really? Okay. I got it. I was head faked by that. I thought there was some improvement there. So what about unemployment? Would that be affected? It would be, wouldn't it?
Marisa DiNatale: Yeah. Anything, any of those.
Mark Zandi: Anything in the household survey to some degree would be effective.
Marisa DiNatale: So the participation rate, if you remove the population control had no change over the month. The unemployment rate would be the same. Exactly what it was, up point one over the month.
Mark Zandi: Okay. All right. Okay. Very good. Well, the that's fair. I mean, I know your favorites to say grind for measuring where we are relative to so-called full employment is prime age, employment to population. Have you had a chance to take a look at that and what that...
Ryan Sweet: Yeah. Increase from 79% to 79.1%.
Mark Zandi: Okay.
Ryan Sweet: So we're, we're barreling towards that 80% threshold, which is historically consistent with a full employment economy.
Mark Zandi: Right. Prime age 25 to 54, just-
Ryan Sweet: Correct.
Mark Zandi: ... yeah. And we bottomed during the pandemic about 10 points below that I think were something like 70 or something. And then we're now 79, 79.1. And comes a rule of thumb, obviously give or take it about 80%. So we're headed towards full employment. And of course labor force participation is just one element of the employment to population ratio.
Ryan Sweet: Right. I think what's also encouraging is the female prime age employment to population ratio. It's been climbing pretty quickly. It coincides with schools reopening. So that's an encouraging sign. So rising twice as quickly in men.
Mark Zandi: Is that right?
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Interesting. I mean, is it just because it got nailed more during the pandemic?
Ryan Sweet: Yeah. That's part of it. And then when schools reopened, we're able to pull more women back into labor force.
Mark Zandi: All right. Okay. All right. Here's the hard one. And I'll just give you hint right up top. I'm switching things up a little bit because it's an important statistic and I thought, we'll see how you do here. But it's a statistic that came out this week. 0.83. 0.826 to be precise.
Ryan Sweet: 0.826.
Mark Zandi: And let me give you a hint. It has nothing to do with the job numbers.
Ryan Sweet: You're violating one of the rules.
Mark Zandi: No, no, no. Wait, why am I violating the rule? Because it's not the topic at hand.
Marisa DiNatale: It's not topical.
Ryan Sweet: It's okay. No. I like a challenge.
Cris deRitis: I guess that was a preference not a rule.
Mark Zandi: That was a preference that wasn't a rule.
Cris deRitis: Yeah.
Ryan Sweet: Yeah.
Mark Zandi: But I'm trying to-
Marisa DiNatale: Is that growth rate mark?
Mark Zandi: Is not a growth rate.
Ryan Sweet: Is it a financial market?
Mark Zandi: No, it is not a financial market measure. No. Think what Cris or Cris's mind is generally.
Ryan Sweet: Housing?
Mark Zandi: Yes. It's housing related.
Ryan Sweet: Housing.
Mark Zandi: What statistics came out this week on housing?
Marisa DiNatale: The CoreLogic came out this week.
Mark Zandi: CoreLogic, HPI house pricing.
Marisa DiNatale: And is it the home... The vacancy. Is it a vacancy rate?
Mark Zandi: It is a vacancy rate, but you have to explain a little bit more than just that.
Marisa DiNatale: Is it...
Mark Zandi: She's really good at this game.
Ryan Sweet: Yeah. She is. This is impressive.
Mark Zandi: She is. Yeah. Putting us to shame.
Marisa DiNatale: Well, is it the rental vacancy rate or the homeowner?
Mark Zandi: Okay. I take it back. She's not that good. She okay.
Marisa DiNatale: Well, I got the report though.
Mark Zandi: No, I'm only kidding. It's not the rental vacancy rate. So that leaves you with one other key rate vacancy rate, the homeowner vacancy rate.
Ryan Sweet: She mentioned that.
Marisa DiNatale: I said that.
Mark Zandi: You did? I missed that. Sorry. Forgive me. I said no to your homeowner? You said the homeowner vacancy rate and I said, no?
Marisa DiNatale: Well, after I said it, you said, "You're not that good at this." SO I took that as a no.
Mark Zandi: No, no, no, wait, wait, wait. You said the rental vacancy rate.
Marisa DiNatale: And then I said either-
Ryan Sweet: And then she said homeowner.
Marisa DiNatale: ... or the homeowner.
Mark Zandi: Okay.
Marisa DiNatale: Yeah. The home owner vacancy rate.
Mark Zandi: I'm humbled. I apologize Marisa. That was...
Marisa DiNatale: Do I get a cowbell?
Ryan Sweet: I think so.
Mark Zandi: Yeah. She definitely gets a cowbell.
Marisa DiNatale: A guest cowbell.
Mark Zandi: Yeah. Right. Well, you know that homeowner vacancy rate, that's for homes for sale. That 0.83% is the lowest that's been in the data. We have data from the census back to 1956 and that's the lowest it has ever been. Just for context, it was a high of 3% at the peak back in the housing bust, coming out of the financial crisis. So that's pretty amazing. And a rail vacancy rate also fell in the quarter, low 5.6%, according to census. It's been lower.
But I think only once, you have to go back into the 70s or early 80s or something like that. So vacancy is excruciatingly low and while supply is picking up, you're getting more housing construction, new single multifamily starts and manufactured housing. It's still not quite keeping bind to the decline in the vacancy rate, it's still not keeping up with demand. So you can see. And that goes back to, you mentioned CoreLogic that a house price index that's up 18 and a half percent year over year. I think that data was through, was that through December Cris, that HPI data or was that through November? I can't remember.
Cris deRitis: December, I believe.
Mark Zandi: I think it was December. Yeah. I mean, that just gives you a sense of how... And then of course rank growth is going is double digit as well. So this gives you a sense of that. And by the way, all of that obviously goes back to inflation because inflation is a lot of that is around the cost of housing and with such low vacancy rates that continue to fall, we're going to continue to get strong rank growth, which means that's going to add to the inflation rate pressures. Okay.
Cris deRitis: If you want to connect that back to jobs, construction employment actually fell a little bit in the report.
Mark Zandi: Dit it?
Cris deRitis: So little bit of a puzzle there. Is that it gives you [crosstalk 00:36:02] supply. It could be weather. It could be building materials. Yeah. They don't have the supplies.
Mark Zandi: Well, before we go big picture here on the labor market, maybe we should go little picture on the labor. Do we want to fill any of the blanks on some of the wonky stuff you brought up earlier around the benchmark revisions or seasonal adjustment or any of that kind of stuff, did you want to go into that at all? I mean, maybe you should explain the benchmark revisions. I mean, because they're important. Marisa do you want to do that?
Marisa DiNatale: Sure. You can fill in what I miss.
Cris deRitis: Okay.
Marisa DiNatale: So every year the BLS, the payroll survey is a sample that covers about a third of all establishments in the country that have employment. And every year they benchmark the counts of employment that they're getting out of this sample to actual unemployment insurance records. So almost every single employer with the exception of a few industries are required to pay unemployment insurance taxes or to report their payrolls into the UI system. So the BLS takes these counts and they benchmark the payroll numbers to this every single year. And when they do that, they go back and they revise data. So what's being benched mark. What was released this morning is a benchmark of the March, 2021 level of payroll employment to actual unemployment insurance counts. And then they go and they take those revisions back a year, and then they come forward as well and do revisions from April all the way through to December where they take the benchmark revision. And they basically distribute it over the months, the intervening months. I don't know if that's clear.
Mark Zandi: Oh my Gosh. [crosstalk 00:38:12]. That was pretty fantastic.
Marisa DiNatale: Clear as I'm saying, okay.
Mark Zandi: They should take this and put it up on the BLS website. That was fantastic.
Marisa DiNatale: Well, I did work for the BLS, so there's that.
Mark Zandi: There you go. Right. But very well done. Yeah.
Marisa DiNatale: So then we see all the data over the past year gets revised and we see, okay, if you were to actually benchmark this to the actual unemployment insurance counts, what would payroll employment look like? And we saw that for most months over last year, there were upward revisions to most of the months over 2021, including in the fourth quarters as you both mentioned, as you all mentioned, there was an upward revision combined, and that data would've been revised anyway, because we get a couple revisions on each month, but combined, it was over 700,000 in upward previously uncounted jobs to November and December.
Mark Zandi: To my eye though. I mean, and I didn't do the calculation, but looking month to month, the revisions, it looked like a netted out so that we still got about the same amount of job creation in-
Cris deRitis: What we added in-
Mark Zandi: ... 2021.
Cris deRitis: ... yeah. What we added in November, December got taken away from June and July.
Mark Zandi: Exactly.
Cris deRitis: So I think it was all revisions. I think it was 200,000 positive. I think it was all upper revisions. So that's what 50,000 a month. It was nothing big.
Mark Zandi: Although my guess is, and we've been saying this for a while, when we get next year's revision, when we're doing this podcast next year, I would expect some upper revisions for the entire year because we've been getting a lot of businesses formed and I'd be surprised if the BLS is capturing the job creation that's going on in those small business as they're being created. So I wouldn't be surprised if we saw the some upper revisions for next year. But we'll see.
Marisa DiNatale: I thought that that would happen this year. I mean, I've been really wondering about that. They do this, they have this birth death model where they try to impute the number of new business formations based on the number of businesses that are leaving the sample, because they're going out of business. And I just would think that that would be incredibly difficult and off during something like the pandemic over the past couple years. And yet these revisions aren't that big in-
Mark Zandi: Yeah. But this is through-
Marisa DiNatale: ... historically speaking,
Mark Zandi: ... but the benchmark is March of 2021. A lot of the formation was post that. So I'd expect to see that with the 2022 benchmark. That'd be my guess.
Cris deRitis: Yeah. And not to beat up to BLS too much. I mean, what they're doing is extremely difficult.
Mark Zandi: Absolutely.
Cris deRitis: I would not want to try to estimate these seasonal adjustment factors.
Mark Zandi: Yeah. Hey, talking about difficulty measuring things. Maybe we should talk about ADP for just a second. Where's Dante? Actually, Dante-
Marisa DiNatale: Is hiding.
Mark Zandi: ... should be on this podcast. Because he is usually on when the ADP misses the BLS by a significant amount. Dante does a lot of work on ADP, poor guy. This miss was pretty large, but the reality is as you pointed out, when we get all the visions in, it might be actually look a lot closer to reality. Ryan, did you want to talk about seasonal adjustment at all? I mean, that feels like that could be a big deal here too. The seasonal factors that are BLS is using or seem to be all over the map, or at least hard figure out.
Ryan Sweet: They had a big write up in the report today explaining the changes to the seasonal adjustment. So I thought they're being very, very transparent. But what the BLS does is they try to adjust non-seasonally adjusted data for these seasonal fluctuations that we know that's coming. So January, for example, unadjusted for seasonal fluctuations, employment usually falls. And it was down 2.8 million between December and January. That's the average over the last 20 years. So nothing out of line there. But going forward to the next few months, we got to pay close attention to these seasonal adjustment factors. Because they make things look a lot better than they really are, or much worse than the what the underlying data is saying.
Mark Zandi: Yeah. Okay. All right. Let's go big picture. And the one thing that immediately comes to mind is, and you can feel it in financial markets [crosstalk 00:42:35]-
Ryan Sweet: Thought this is where you're going, Cris, you didn't bring it up yet. 1.93% the 10 year.
Mark Zandi: ... I didn't see that.
Ryan Sweet: [crosstalk 00:42:44] points.
Mark Zandi: It's at 1.93. Wow.
Ryan Sweet: About 10 basis points.
Mark Zandi: 10 basis points this morning since the employment report. So explain that what's going on? What are investors... What are they contemplating here?
Ryan Sweet: That the Fed's going to go 50 basis points? They're starting to pencil in a more aggressive fed in March. I mean, it's a slam dunk that they're raising rates in March. I think we're assuming 25 basis points, but-
Mark Zandi: We are.
Ryan Sweet: ... if you got marked at pricing, they're starting to price in maybe 50 basis point move. Which I think would be too much.
Mark Zandi: Okay. The job numbers are good. The economy's obviously creating a lot of jobs every month, pretty consistently 500K. By the way, in a well functioning economy per pandemic, if we were creating anything north of 150, certainly over 200, that meant unemployment was going to be declining. So we're going along here at a pretty heady clip means unemployment's going to keep coming in, means labor force participation employment population is going to continue to arise, means we're already within speeding distance of full employment. We're going to be on top of full employment here in the not too distant future and we're coming in at the same time that inflation is high has more to do with the pandemic. But nonetheless, it's still very high. So bond investors are saying, oh my goodness, this is a hot economy. And so now the 10 year yield is at 1.93%, which is the high since the pandemic hit.
Ryan Sweet: Yeah. We're in that period where good news, good economic news is bad news for financial markets. Good job numbers, the labor market's healing, but that to the bond market is signaling and the stock market that the Fed's going to start pressing on the brakes.
Mark Zandi: Right. And so you're saying that the market expectations investors are now saying, what is being priced in? Is it now a 50 basis point and a 0.5 percentage point increase in the federal fund rate target, which is close to zero right now in March. And how many rate hikes for the year? Is it now five or six rate hikes for the year? Something like that.
Ryan Sweet: Five.
Mark Zandi: Five rate hikes for the year. Yeah.
Ryan Sweet: It's 50 basis points isn't fully priced into March yet. No, it could be by the end of the day. I don't know, but it's 25 in March so far.
Mark Zandi: Okay. And you said markets are starting to expect 50, let me ask you this, do you think that's what the... And then you said the feds shouldn't do that. Are you also saying that won't do that? Do you think that they will actually raise at 25 basis points?
Ryan Sweet: I think they'll raise at 25.
Mark Zandi: Okay. And why shouldn't they do 50 basis points?
Ryan Sweet: Well, it all depends on the expectations. I mean, if the market's betting on 50, then they'll go 50.
Mark Zandi: Really?
Ryan Sweet: If the market's not fully pricing in 50 basis points, they're not going to go in surprise markets. They usually how to avoid surprises when they start a tightening cycle.
Mark Zandi: Aren't they going to be data dependent? I mean, that's been the message, right?
Ryan Sweet: They say that, but, well.
Mark Zandi: We they guide expectations, don't they? I mean, I mean, if they're doing their job right, they should be guiding expectations to where they want the expectations to be. They're not going to be... You made it sound like the feds being led by the nose, the bond mark.
Ryan Sweet: Right. Well, they have in the past sometimes.
Mark Zandi: Well, but they're not. Here they're presumably they're going to lead the market where they want it to go.
Ryan Sweet: Yeah. We have plenty of time until a March meeting, so they'll come out and Jawbone expectations to where they want them to be.
Mark Zandi: Right. I think a lot, I mean, as Cris says is data dependent, but I think the other thing that that has to matter is got to be financial conditions, more broadly. When I say financial conditions, I mean, stock prices. I mean, the bond market credit spreads in the bond market. That's the extra interest rate bond investors get for buying corporate debt that has risk. It has to do real estate prices, particularly housing values. The link between what the federal reserve is doing interest rates and the economy and economic growth runs through these financial conditions. The other thing I throw in there is lending terms, underwriting standards by financial institutions. Right now the stock market is down a little bit I think, I don't know what it is today, but maybe it's down six, seven, 8% from its all time high, credit spreads, you tell me Ryan, have they increased at all?
Ryan Sweet: Yeah. They're still not a lot. I think-
Mark Zandi: Not a lot.
Ryan Sweet: ... 25 basis point. I haven't checked today, but as of yesterday.
Mark Zandi: Right. We just talked about housing values. They haven't slowed a bid. At least not. It takes a while for that to happen. But for it to show up in the data, but I don't see anything either. And underwriting standards are easing. We've got the senior loan officer survey, the fed survey that they go to banks and say, "Hey, are you easing or tightening your underwriting standards for cards, credit cards, auto loans, commercial loans." And everybody's easing. So it feels like financial conditions they're a little tighter than they were a few weeks ago, but they're anything but tight. I mean-
Ryan Sweet: Yeah, I agree with you.
Mark Zandi: ... so it feels like to me, the Fed's got to keep pushing here until they get some so-called tightening and financial conditions, meaning lower stock prices, wider credit spreads, some weakening in the housing market house prices, some tightening down on underwriting or at least no further reason. Does that make sense?
Ryan Sweet: I agree. So the idea of the fed put, so the fed put, I think it got coined under Greenspan. So any time there was a big hiccup in the stock market, that threatened the economy, the fed would step in, ride in and save the day there isn't a fed put this time around. I think inflation and the strength of the economy killed the fed put.
Mark Zandi: I guess okay. Fair enough. But that hasn't sunk in apparently to investors. I mean, again, the stock prices they're down, but they're not... Again, I haven't looked today. I don't know what's going on, but-
Ryan Sweet: They're down a little bit.
Mark Zandi: ... down a little bit, so they-
Ryan Sweet: But we have plenty more room to fall before.
Mark Zandi: ... all right. Do you have any perspective on this, Cris?
Cris deRitis: Yeah. I was going to associate expect more hawkish speeches and more job. Yeah. My take is if they went 50 in March, that's could be interpreted as a sign of panic. That they really are [crosstalk 00:49:11]. So I think the more effective route here is to talk down the market, make people aware of you. Remember the Apollo press conference from December. That shocked people a bit. I think there's going to be more of that type of talk that they stand prepared, everyone's got to cool it here. It's start to appreciating the risks that are out there. I think they let the market do some of the work for them.
Mark Zandi: Exactly.
Cris deRitis: Like Mark was saying, if they get financial conditions tighten that's on top of a 25 basis point rate height in March.
Mark Zandi: I guess of course financial conditions also means long term interest rates, a 10 year treasury. So there's been some tightening there as well, I guess.
Cris deRitis: Yeah.
Mark Zandi: Yeah. Okay. It just feels like to me that there's this relationship between what the Fed's going to do and what financial conditions are doing. So if the fed is going to have to raise rates by more, more quickly, if financial markets don't respond, if the financial markets, if equity prices hang tough, if credit spreads remain thin, if the housing market doesn't start to weaken the bed, Fed's going to have to push on the brakes even harder. They're going to have to keep pushing and pushing and pushing, which means that if I were an investor, this feels like this is in a particularly good environment to be holding onto assets.
It feels like the prices ultimately have to come down for these asset, particularly, because they're so richly valued. I mean, valuations are so high in a lot of these markets, even with the correction that we've seen so far. I mean, what's fair value for a 10 year treasury yield, according to your calculations Ryan, right now what should the 10 year treasury yield be?
Ryan Sweet: 2.1 to 2.2.
Mark Zandi: So not that much higher from already today.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Okay. All right. Okay here, I have another related question, big picture question is, is the... And this goes to the appropriate conduct and monetary policy as well in financial market conditions, is the acceleration in wage growth that we're observing, is that inflationary? Do you think that's a key? Let me put it this way, do you think that's a key part of the inflation that we've acceleration inflation we've observed so far this past year. And do you think that we run the risk of it becoming an issue going forward? So maybe I'll turn to you Marisa, do you think consumer price inflation through December was 7%, lot of reasons for that is the acceleration and wage growth, a big part of that, a part of that, or is that just more a reflection of the higher rates of inflation? How do you think about that?
Marisa DiNatale: I tend to think of it the latter so that it's more of a reaction and reflection to higher inflation. I mean, we've broken down the growth and inflation by all of the factors causing it. So there's still supply chain issues, there's still some pen up demand being unleashed from the pandemic particularly on the services side. We got a ton of stimulus, direct stimulus to households over the past couple of years that is still there and being spent down and allowing for spending that maybe wouldn't have taken place. So there's a lot that's juicing inflation. I think that came before the wage increases.
And as we were talking about earlier, we were talking about tracking right wages the ECI over the past couple years, relative to inflation. I mean, wage growth had been pretty steady during 2020 and most of 2021, you just had deflation in early 2020 when the pandemic began and started picking up. And now we're in a situation where wage growth isn't keeping pace with inflation anymore. And now that could become a spiral. That's the fear is that you keep chasing inflation and wages around. But I tend to think of it as more reactionary to inflation than causing it. What do you think?
Mark Zandi: I guess, that's how I view it. I mean, at least so far that the acceleration in wage growth that we've observed this year is more a reflection of the higher inflation than driving the higher inflation because most of the inflation has been on the good side of the economy anyway. Not on the service side, which is where wage growth would lead to higher inflationary pressures. And it's the goods price inflation that's driven the train here. Vehicle prices have gone sky word, energy prices have gone sky ward, food prices have gone sky ward, but not the price for most services. They're picking up. And rent growth that has nothing to do with wages. That has everything to do with what we were talking about earlier in terms of vacancy rates.
So no, and so that gives me some soul list about monetary policy in the course of monetary policy. Inflation first going forward and therefore the course of interest rates and monetary policy going forward that really becomes an issue, a problem for the economy. And thus requires the fed to get very aggressive in raising rates if in fact, the causality reverses and the wage growth starts to drive inflation, drives pricing decisions, that kind of thing. And I don't think we're there yet. The other thing that gives me a little bit of soul list is most of the wage growth acceleration is really in the bottom parts of the wage distribution, that's the land of fed wage tracker data, which tracks individuals and their wages. So it corrects, there are some biases, which I know Marisa, I would like to hear a little bit about, but it does control for mixed issues in a very effective way.
So it gives you a really clear read on wages and you can see wage growth by different demographic cut and if you look at it by part of the wage distribution, across the wage distribution, it's really the acceleration is really among those that are in the bottom quartile of the distribution, maybe in the bottom half, but mostly in the bottom quartile and really very young workers, teenagers folks in their twenties and people with lesser education, high school or less education, which again goes back to what's driving that it's the pandemic. The pandemic is making in leisure hospitality, in retail, recreational activities, personal services, that's where those folks are employed. They're not at work because they're sick or they're taking care of sick people, or feel for real good at sick, they can't get childcare for their kids.
And that's where the labor shortages are more so intense. And that's where you'd expect the wage growth to be. So if that diagnosis is correct, as the pandemic recedes, those labor shortages abate and wage growth will moderate. And again, wage growth won't be driving inflation. We won't get into that wage price dynamic. That's been a problem in the past. So I concur with your view. Ryan or Cris, do you have a different perspective on that or a different take on that or want to add to it?
Ryan Sweet: Sure. So I guess you're assuming in then that we won't transition from goods driven demand to services driven demand. Is that the crafts of it? Because if most of the inflation so far has been goods driven, but you see given the labor report, there's lots of demand for leisure hospitality and other services. You could make the argument that wages will now start to drive inflation. It sounds like you're not seeing that demand picking up sufficiently to-
Mark Zandi: No, well, I'm thinking a couple things. One there's a rebalancing in the economy. So we actually see some good price deflation. Energy prices come down, vehicle prices come and that offsets some acceleration and service price inflation. So the net of all of that is still a deceleration in overall inflation. So I think that's a key aspect of that. And second I'm also assuming that the growth rates in the economy are going to slow, that we're creating 500K a month, but I'm expecting by the end of the year, we're going to be back close to 200K a month. 150K closer to that rate of growth that's consistent with stable unemployment. So we're at 500K, unemployment's 4%. We stay there.
Unemployment comes into the mid threes, low threes, E pop. Ryan's favorite measure for employment goes from 79.1 to 80%. And by that, when all that is coming together because of the tightening and monetary policy, higher interest rates, because of the lack of additional fiscal support, in fact, it's becoming a drag on the economy because we're not going to get any boost from inventories. We can talk about all the reasons why, but there's enough reasons out there that I think the economy's growth for each slows to a point where labor market is a full employment, but we don't go barreling past it. If we do, growth remain strong and we barrel past it, then we got a world of hurt. Then the causality shifts.
And that's when wage growth starts to drive inflation. And when that happens, you're are a whole different scenario. The world's going to look very different. In that scenario, I think the fed goes on the war path, steps on the breaks really hard. And the probability that the economy goes into recession is awfully high as you go into 2023. That's not the most likely scenario. That's definitely a scenario that we have to worry about. But I'm assuming those two things are rebalancing in the economy from good side to service side that allows inflation to moderate and then secondly that we growth moderates as we move forward. Does that make sense?
Ryan Sweet: Got it. It does. I guess a counter argument out there is the excess savings, that remain. That are still trillions of dollars on household balance sheets that could come in. But again, I guess it sounds like you're saying, you're assuming that the prices themselves and the broader slow down in economy is going to prevent people spending with abandoned.
Mark Zandi: Well, that's a really good point, because we've got a boatload of excess savings saving that people did above, which they would typically have done if there had been no pandemic. I mean, we calculate 2.6 trillion, that's a lot of cash.
Ryan Sweet: It's a lot, sitting out there.
Mark Zandi: But the whole, the vast, vast majority of that sitting was very high income households and I don't think they view that as you know, income I'm going to spend. They view that as part of my nest egg, that's my wealth. I don't think they're going to take that and spend it. For folks in the bottom, half of the distribution, they're I think going to start, especially [crosstalk 01:00:18]-
Ryan Sweet: They're running out.
Mark Zandi: ... been working, you're going to blow through, particularly with these high rates inflation, they're going to blow through that and now they're going to become much more sensitive to price. So far they haven't been too sensitive because they have cash in the bank. But once you run out of cash in your deposit accounts then you start saying, "I got to be more careful about what I'm buying." If that price for that thing is up, I'm going to go buy something else or buy less of it. That kind of thing. More price sensitive, which should help to moderate inflation as well. But that's a good point. That's an assumption I'm making.
I'm assuming that that's what's going to happen here and we'll have to see. If high income household keep on spending aggressively and start to spend down some of that excess saving, then growth, it's going to take more work by the fed, [inaudible 01:01:04] they're going to have to really press to get stock prices down and housing values to moderate and to get the people, to pull back on their spending otherwise, we'll get into that alternative scenario where we overheat. I know Ryan, what do you think of all that?
Ryan Sweet: I'm good with it.
Mark Zandi: In fact, I laid out two scenarios, well going forward and we're going to end pretty soon. I'm going to ask what is the probability of those scenarios? I'm really curious. Scenario number one, the base is the sanguine view that everything, the economic plane guided by the fed, some rate hikes lands on the plane. Everything looks like we're back to normal, feels pretty good by say early mid 2023. The alternative is we keep barreling along here coming into the tarmac at too high rate of the speed. The fed has to really get the plane down, but it crashes, the boom bus cycle. Is that a pretty... Do you think that's a good way of characterizing the all coming forward.
Ryan Sweet: Yeah, I think it's good.
Mark Zandi: Good. Marisa, you think that's a good way of characterizing things? Okay.
Marisa DiNatale: Yeah.
Mark Zandi: Okay. All right. Okay. So we're going to make this a shorter podcast just because we've got a lot of things going on, but then typical, but we're going to end it this way, what is the probability of scenario number one, the same when we land the economic plane on the tarmac scenario and what's the probability of the alternative scenario of a more boom bust crash landing, or very hard landing for the economic plane. Ryan, you want to go first? And obviously there's a lot of other scenarios.
Ryan Sweet: Yeah.
Mark Zandi: But I'm just broadly characterizing the distribution of possible outcomes in those two buckets to simplify things, unless you feel strongly, that's why I asked you if you were okay with that characterization.
Ryan Sweet: No, I'm good with them.
Mark Zandi: You're good. Okay. So what's the probability?
Ryan Sweet: Probability of the first scenario, where everything goes right, is 40% and then 60% that we crash land.
Mark Zandi: So you have a different baseline.
Ryan Sweet: Yeah.
Mark Zandi: We're crash landing, according to you.
Ryan Sweet: Yeah. The economy's just barreling toward... Yeah, I'm worried. I'm worried about 2023.
Mark Zandi: Okay. This is interesting. Hold on. I got to catch my breath here. Hold on one second. Shocking.
Ryan Sweet: Shocking.
Marisa DiNatale: Shocked.
Mark Zandi: This is what I like about Ryan. He mixes things up a little bit. This is really...
Ryan Sweet: Because Cris is going to go 50, 50.
Marisa DiNatale: [Crosstalk 01:03:31].
Mark Zandi: No. You shouldn't have said that. [inaudible 01:03:34] said that. That's rude.
Ryan Sweet: [inaudible 01:03:37] the March rate hike by the way. Two podcast to go.
Cris deRitis: Yeah. The March [crosstalk 01:03:44].
Mark Zandi: Yeah. He did. I think he did, Ryan. He did very... Exactly.
Ryan Sweet: Anyway.
Mark Zandi: What was I going to say? Here's what I was going to ask. Okay. 60, 40 we crash which means recession, recession, something like that. What indicators would you be looking at to gauge whether we're going down the crash landing route or the alternative, we land the plane on the tarmac route?
Ryan Sweet: Well, I think you mentioned two of them wages, inflation, Prime E pop. And then another thing that we have to watch very closely this year is inventories. If that inventory bill gets too big, that sets us up for a big hangover in 2023. So you're going to get an inventory drag in 2023, you're going to have the fed pushing on the brake. Financial market conditions are going to be tightening. I just think this is going to be a rocky rocky lane.
Mark Zandi: Yeah. Okay. I was going to say the yield curve.
Ryan Sweet: Oh God.
Mark Zandi: More about that in the next podcast listener, but it is the yield curve, just a hint.
Ryan Sweet: Not the yield curve.
Mark Zandi: The shape between... The difference between long and short term interest rate. I'm just saying, listener. It's never wrong.
Ryan Sweet: It's never wrong.
Mark Zandi: Okay. Marisa, what's the probability of a soft landing? What's the probability of a hard landing.
Marisa DiNatale: I go the inverse of Ryan. So I think it's 60 soft 40 hard.
Mark Zandi: And where do you push back on Ryan? Why do you think he's wrong?
Marisa DiNatale: I don't know. I mean, I just think that a lot of the in... I do believe that a lot of the inflation that we're seeing is hangover from supply chain, pen up demand. I expect it to soften this year. We're going to have to look at that very closely. I mean, if the fed starts raising and we're still seeing inflation above 5%, then I think that scenario where there's a hard landing and they're trying to... They're fighting to keep up with that, then I think there's a very real possibility that that has happens. That they could crash the plane and we get a recession next year or early 2024. But I'm not ready to say it's over 50% yet.
Ryan Sweet: Don't forget the saying, they say, expansions don't die old age. The fed kills them.
Marisa DiNatale: Right. Yeah. I think the fed's in a really, really tricky situation. And I think it's going to have to navigate it's very carefully and it's going to be difficult to do. And we're going to find out how much of this inflation is persistent once they start raising and if they don't go fast enough, then they're going to be chasing it. And I just think the probability of that happening is rising. I think I would've given this a 25% probability a month or two ago. Now I think it's probably about 40%.
Mark Zandi: Cris, what do you say?
Cris deRitis: These guys are bringing me, I was going to go two thirds, one third. I'm going to stick with that.
Mark Zandi: Baseline?
Cris deRitis: Baseline, that little I'll be able to-
Mark Zandi: Sanguine.
Cris deRitis: Yeah. Land.
Mark Zandi: Yeah. That's where I'm at.
Cris deRitis: Land reasonably well.
Mark Zandi: I'm at two thirds, one third.
Cris deRitis: I see the risks really from the outside. More than anything that there's going to be some international debt.
Mark Zandi: Geopolitical.
Cris deRitis: Yeah. Geopolitical or some other economy is experiencing troubles, China.
Mark Zandi: There's a lot out there.
Cris deRitis: But otherwise I think the fed has a lot of... They've got a lot of levers still.
Mark Zandi: Yeah. Well it is ironic, isn't it? We had a good day on the jobs numbers. I mean, I mean there's caveats and asterisks, but bottom line, it was a pretty good jobs number. And you're saying, look, this economy's resilient. We've come a long way back. We got nailed by this awful pandemic, but look, we've done a pretty good job getting our way back here. But we're ending on such a tower note that it might not work out. But I think it will. I do. I think we'll be able to navigate and land that plane, but lot of podcast between now and then, I presume. So well, thank you listener for listening into this podcast. Please go to economy.com. We want to hear your views on what we should be talking about. So please let us know. And Ryan, what's your Twitter handle?
Ryan Sweet: @realtime_econ.
Mark Zandi: And how's it going?
Ryan Sweet: It's going, this thing's actually fun.
Mark Zandi: Yeah.
Ryan Sweet: I'm having fun with it. I was skeptical going into this, but I was wrong.
Mark Zandi: That was my feeling as well. @markzandi and I'm going to start retweeting you Ryan. So please reciprocate.
Ryan Sweet: I will.
Mark Zandi: No, only I will only if you want to. Okay.
Ryan Sweet: Cris, come on, Cris.
Cris deRitis: No, really, no.
Mark Zandi: Yeah.
Ryan Sweet: Come on.
Mark Zandi: What about Marisa, she'd be great. No, all right. Okay.
Marisa DiNatale: I'm on Twitter, but-
Mark Zandi: You are?
Marisa DiNatale: ... I don't tweet anything. I just follow a bunch of people. Yeah.
Mark Zandi: Very good. All right. Well, thanks [crosstalk 01:08:53], sorry guys, we got to hustle, but it was very good conversation. I appreciate it. And look forward to the conversation next week. Take care, everyone.
