INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and we've got an action packed podcast for you. We're going to be talking about the job market and we'll bring in a discussion around remote work. We've got my two co-hosts. We've got Cris. Cris, looks like you got a haircut. A little less swirl there on top of your hair.

Cris deRitis:                       No. I was wearing a hat, that's all.

Mark Zandi:                      Oh, is that what it is? Looks good though. You always look good though. Marisa. Marisa DiNatale. You look better. You look marvelous, Marisa.

Marisa DiNatale:              Thanks.

Mark Zandi:                      You're a little blurry from my perspective, but that might be my glasses. I'm not sure.

Marisa DiNatale:              My background is blurred, but I look blurry?

Mark Zandi:                      You look a little blurry.

Cris deRitis:                       It's just the background.

Mark Zandi:                      It's just the background? And we've got two guests here, repeat guests, back by popular demand. We've got Adam Ozimek. Adam was our first guest back on this podcast. Adam, can you believe it was almost a year and a half ago?

Adam Ozimek:                  Was I the very first guest?

Mark Zandi:                      I think you were. Cris, wasn't Adam the first guest? I believe he was. Number one.

Adam Ozimek:                  I don't remember. It's all blurry.

Mark Zandi:                      I'm pretty positive. Just like I'm positive about the odds of recession. I'm positive.

Adam Ozimek:                  Oh, zing. Little testy.

Mark Zandi:                      We got to get into it. Adam, you switched jobs though since the last time you were on the podcast. What are you up to now?

Adam Ozimek:                  I'm the chief economist at the Economic Innovation Group. So I moved into a think tank world. It's a public policy think tank focused on increasing economic dynamism, reducing spatial inequality, stuff like that.

Mark Zandi:                      Cool. And I ran across EIG back around Opportunity Zones. The think tank was doing a lot of work around the Opportunity Zones. Is that still on the radar screen or is that-

Adam Ozimek:                  Yeah. EIG created Opportunity Zones and they were part of the Tax Cuts and Jobs Act. They do exist and seem to working pretty well so far.

Mark Zandi:                      Are they? I've lost track. Are they working pretty well?

Adam Ozimek:                  It's really early. All the data is basically only able to show so far where is an investment going versus what are these downstream impacts and stuff. Its past this Tax Cut and Jobs Act, but then they had to put the rules out and put everything in place. So there really hasn't been that long. But so far it does look like it's increasing investment in places that weren't getting a lot of investment for the basic takeaway.

Mark Zandi:                      Very cool. And your original claim to fame was you worked at Moody's Analytics. We worked together many years ago. At this point. But it's good to have you back on and you just recently published a paper on remote work and its impact on rents and connecting the dots back to CPI and inflation and definitely want to talk about that. You just published it recently, in the last few days I think.

Adam Ozimek:                  Yes, just yesterday.

Mark Zandi:                      Oh is it yesterday? Okay. And I haven't had a chance to read it. I read the executive summary and it's a little counterintuitive to me. A bit counterintuitive, so we can dive into that. And we also have Nick. Nick Bunker. Nick, good to have you on. And you were-

Nick Bunker:                     Good to be back.

Mark Zandi:                      You were on, I don't know, a couple, three months ago and it's good to have you back. And Nick, you're the head of economic research at Indeed?

Nick Bunker:                     Yes. Just for North America though. Don't want to steal any-

Mark Zandi:                      North America.

Nick Bunker:                     ... credit for my colleague over in Europe. No, it's all good.

Mark Zandi:                      Very good.

Nick Bunker:                     I'd love for people to think I'm associated with that fantastic work, but I don't want to steal any credit.

Adam Ozimek:                  If he brings up Australia, he's in big trouble, huge trouble. North America. Got to stay in North America.

Mark Zandi:                      Oh, I see. Well North America's a big place though. Lot of room there to start your intellectual stuff, so good. And of course, Indeed, are you the largest job site in the world? Would that be fair to say? Indeed is largest.

Nick Bunker:                     Indeed it is.

Mark Zandi:                      Indeed it is. Very good. So right person to be talking about the job market. So let's talk about the job market. And I'm really curious to get a broad sense of where your mind is thinking about the labor market and ultimately bringing that back to the broader economy and this whole debate about how tough the economic conditions are going to be next year, are we going into recession or not? So maybe before we dig down deeper into the kinds of things you guys are looking at to assess the job market and then as I said, we'll come back to remote work. Maybe in giving us a broad sense of, based on the things you're looking at, how you're thinking about the labor market and the economy more broadly. And maybe I'll begin with you Nick, if that's okay.

Nick Bunker:                     Yeah, sure. Happy to do that. So I think-

Mark Zandi:                      And by the way, just so you know... I know, I interrupt all the time, I'm going to interrupt immediately. You probably don't know this, but Cris and I have been just going at it. Cris is a bear and I wouldn't call myself a bull, but I'm certainly more bullish than he is. And Marisa, I haven't quite figured her out yet.

Cris deRitis:                       She's been coming over to the light.

Mark Zandi:                      So just so you know, to couch your comments in that context, just to say it. So go ahead Nick. Go ahead.

Nick Bunker:                     Gotcha. We'll throw that needle for sure. So I think my view of the labor market right now is it's just incredibly resilient. That you see a lots of concerns elsewhere in the US economy about the strength currently or even the outlook for next year. And I think the labor market continues to be a source of strength. That payroll growth has been slowing down this year but it's still at the pace or the rate of growth that if you told me that number in 2019, I would've been really happy about it. That it's well in excess of population growth or what you'd need to pull folks into the labor force. I think there's an interesting conversation right now about that's what the payroll survey's telling you and the household surveys indicating much weaker growth, but that's maybe something we can dive into more.

                                             But then the outlook demand for workers continues to be incredibly strong. I know there's mixed feelings on the Jolts job openings numbers, but that's still very elevated even if it's come down a bit this year. At Indeed we track job postings on our platform. Very similar story there where it's drifted down this year and there's been some sectors of the labor market where things have cooled down more, but postings are still very elevated from where they were back in 2019. And the thing I track, it's a top tier statistic for me, is the quits rate. That is again, a similar story. It's not as elevated as openings or postings, but there's still lots of job switching in the labor market and wage trails are really strong. So I think things right now in the labor market, it's still a tight, still a hot labor market. Even if there's some sectors like the tech sector and housing to a certain extent, that are cooling off, that overall things are pretty robust.

Mark Zandi:                      So there's two ways of thinking about what you just said about the resilience of the labor market. And I think that's a good description of the labor market. It's throttling back, but it's still moving forward at a pretty good clip here. Monthly job growth, beginning of the year where 600K felt like on average per month, feels like maybe 250K, something like that right now. But 250K is still a lot of jobs being created every month, given the underlying growth in the labor force.

                                             One perspective on that would be, well that's a problem because inflation is high, wage growth is strong, Federal Reserve is on DEFCON one, raising interest rates trying to cool things off and they're having a hard time cooling them off, therefore they're going to have to raise rates even more, and the more they raise rates, the longer they keep them high, the more likely you break something in the financial system, in the economy, recession risks rise in that perspective. The other perspective is, well it's slowing. It will likely continue to slow. All the trend lines suggest that it's going to slow here given what the Fed's doing. And this resilience is a reason to be optimistic that the labor market, the economy broadly, is going to bend, things will cool off, but it won't break. We're not going to see mass layoff. And mass layoff is what you need for recession. You need businesses laying off people in a significant way, unemployment rising in a significant way, for that to occur. So of those two perspectives, which are you most sympathetic to?

Nick Bunker:                     So I feel like the last time I was on this podcast, I was leaning more towards that first camp and I've been slowly drifting towards that second camp. And I think because there is the potential for wage growth, which I think is how the Federal Reserve is thinking about inflation moving forward, for that to slow down without layoffs or and unemployment rate spiking too much. So I think there is some signs that the quits rate's cooling off a little bit and wage growth might be turning down. So I think there's some signs there. I think my view is that this is very dependent on the Federal Reserve's reaction to what's happening in the labor market.

                                             And that if we start to see inflation slow down and some of its wage growth measures tick down, maybe that makes them a little bit more patient or the slow down in rate hikes is even slower and there we get closer to a pause and that would make me more optimistic about the outlook. So I think for me it's looking at the actual labor market data, really trying to keep an eye on what's happening to wage growth and quits and measures of job switching as a antecedent to that. And then also, honestly it's like the inflation numbers, just if those continue to cool, then maybe the Fed gets a little bit less antsy and that makes me more optimistic about the resilience and strength the labor market can carry through next year.

Mark Zandi:                      So I got it right, you're saying when you were last on, you were more worried that the economy would, let's say overheat, that the labor market would remain too resilient, Fed would have to step on the brakes even harder and by so doing, make it more difficult to navigate through without recession. Now you're feeling, it sounds like a little bit more optimistic that maybe we can get through this period with the labor market bending here, things cooling off sufficiently to convince the Fed to stop raising rates as aggressively and we can navigate through. Did I get that right?

Nick Bunker:                     I think that's fair. I think it's less that I'm more optimistic about the labor market, not overheating. It's, I'm more optimistic that signs from the labor market are going to show up cool down and the Federal Reserve will become less concerned about the labor market overheating. So I think there's a little bit more potential in the labor market on the supply side than maybe other people do. Maybe Adam I think is similarly sympathetic to this view, so that if there are some-

Mark Zandi:                      You guys have been talking to each other, huh? I didn't realize that. Nick and [inaudible 00:12:29] buddies.

Nick Bunker:                     [inaudible 00:12:29] from time to time.

Adam Ozimek:                  Collusion.

Mark Zandi:                      Oh collusion. It feels like collusion. Lucky we're not playing the statistics games. They say they wanted to come on at the same time because they were going to play the statistics game and sweep us. You getting that? That's what I'm hearing here.

Nick Bunker:                     They've uncovered the [inaudible 00:12:46]

Adam Ozimek:                  That's logical conclusion.

Cris deRitis:                       We have to burn all the transcripts. Now we have to burn all the secret recordings of our [inaudible 00:12:50]

Adam Ozimek:                  Don't tell the FTC

Mark Zandi:                      Don't tell the FTC. Oh, okay. Very good. Well you did mention one technical point. Maybe we can close a loop on that before I go to Adam and get his broader perspective on this. The household employment survey versus the payroll employment survey. Do you want just dive into that a little bit and give us a sense of that?

Nick Bunker:                     So broad strokes, it's that if there's... In the jobs report it's the two surveys and the household survey, which is the survey that gives us the unemployment rate, employment to population ratios, has been showing much, much weaker gains in employment in the terms of the levels and even rates as well, to the point where the last report it's essentially flat or negative if you adjust it to make it similar to the establishment survey, which has been much stronger showing that 250,000 a month average the last few months. So there's a disagreement in those surveys as to the actual underlying pace of employment growth. And I think most people tend to lean towards the establishment survey for a better barometer of the actual pace of underlying job gains. But I think it's worth keeping an eye on the household survey, just that there is some signs of more significant slowdown. But I think part of the reason why people prefer the establishment survey over the household survey is the establishment survey has a much larger sample size so it tends to be more reliable and less variable.

Mark Zandi:                      From my mind's eye, I think the household employment, if you look at overall employment by the household survey, it basically has gone nowhere for the last, I don't know, six months or so. It's basically flat. No job growth. Is that right Marisa? Do I have that right?

Marisa DiNatale:              If you take a six month moving average, I think it's around a hundred thousand a month if you just look at-

Mark Zandi:                      Oh, is it?

Marisa DiNatale:              ... household. But there was a negative print last month, so that is very disconnected from what we saw in the payroll survey where the six month average is around 250.

Mark Zandi:                      One other technical question maybe to Marisa and to Nick, if I look at labor force growth, which is labor supply, year over year, it's pretty strong. It's 2%. So if you do the arithmetic that translates into 250, 300,000 people being added to the labor force every month, which would be consistent with the current growth in payroll employment, the 250K in monthly payroll employment, and also consistent with other labor market measures like the unemployment rate which has stopped falling and has actually risen... Well maybe data, I'm not sure, but it is up a little bit from where it was 3.7 versus 3.5.

                                             And also the employment to population ratio for prime age workers, 25 to 54, that's another, we think, a pretty good... And actually Adam, this was something you uncovered back in the day when you were at Moody's Analytics. The relationship between e-pop for prime age workers was probably a better measure of labor market slack, at least in terms of what it meant for wage growth, than the unemployment rate. And that also has come in a little bit. 80% is the threshold. We were a little bit above that back in the spring, we're now a little bit below that. Does that resonate with you Marisa, that labor force growth has picked up? Do I have that right?

Marisa DiNatale:              It's stronger than it was going into the pandemic certainly, but I think labor force growth has slowed a bit from where it was earlier in the year. So you're right, it's right under 2% now. It was a bit over 2% coming into 2022. And if you look at prime age workers, you see prime age women's labor force participation rate is back to where it was prior to the pandemic, men is still a little slightly less than where it was prior to the pandemic. And so if you take everybody in the prime age bucket, it's still a little under where it was prior to the pandemic, suggesting maybe there's some supply still out there but not much.

Mark Zandi:                      Nick, did you want to add anything to that? I see you're shaking your head. Disagree.

Nick Bunker:                     yeah , no, I agree with that.

Mark Zandi:                      The one thing I have noticed in terms of the labor force growth, it feels like a large share of that is of foreign born workers. The BLS, the Bureau of Labor Statistics, now publishes and has been for a bit, employment by foreign born versus native born. It feels like immigration's coming back. The labor supply growth isn't related, it's not labor force participation because that's flat to down, it's really the working age population it feels like immigration is starting to come back and that's driving it. But if that's the case, that makes me feel a little more comfortable that maybe we don't need job growth at zero to cause the labor market to ease up enough to get wage growth down, maybe something less than that if we continue to get this labor force growth. Does that sound right?

Marisa DiNatale:              I think so.

Mark Zandi:                      All right. Hey Cris, I don't know, I took some solace in what Nick said there. It felt like he's moving in my direction. What do you think?

Cris deRitis:                       That's a little confirmation bias there. You see what you want to see.

Mark Zandi:                      I am definitely guilty of that all the time.

Cris deRitis:                       Confirmation bias.

Mark Zandi:                      I know. It's a terrible thing, that confirmation bias. Anything to add to the conversation so far Cris?

Cris deRitis:                       No, I think that's accurate. 30% chance that we make it through is still high in my opinion.

Mark Zandi:                      Just to articulate for the listener, Cris you're at 70% probability of recession between now and the end of 2023. So that means 30% we can make our way through, and you're saying that that feels high,

Cris deRitis:                       That's pretty good.

Mark Zandi:                      Pretty good. All right, Adam, let me turn to you. So same question. What's your broad, 30,000 foot, maybe take it down to the 10,000 foot level, maybe 5,000 foot level, perspective on the labor market and what it means for the economy broadly and for recession prospects next year.

Adam Ozimek:                  So agree with basically what most of what Nick said. So to add onto that a little bit, focus on whether the Fed will get it right, I think is a big question. And I think that the Fed has put themselves in a very tough spot. They've put themselves and the economy's put them in a very tough spot. It's a genuinely difficult labor market to read, and I think the Fed could have a soft landing much more easily if they could simply optimize based on the incoming data and the [inaudible 00:19:59] economy. But they tied their hands quite a bit by their accumulated mistakes. They just drastically underestimated inflation over and over and over again, along with the market and professional forecasters in their defense.

                                             But now they're at a place where their loss function can't be as symmetric as it would be anymore. If you take all the data and you project an optimal inflation path or rate hike path to get you that soft landing, they can't be on that. They can't be on that because they can't afford to be wrong. They can't afford to be wrong like they could have if they had been warning about... Even if they had done basically the same forecast, had they been constantly warning the risks to inflation are high, the risks to inflation are high, if they'd been doing something like that to preserve their credibility. But when the data starts to suggest it's time to let off, they can't quite let off because they need the data to really, clearly, surely say it's time to let off. So what I take from that is the Fed is basically forced to raise rates too much. They're just going to have to. They're going to have to go higher than they want to, they're going to go higher than they otherwise would have.

                                             And so I think that's bad news. The good news is I don't believe that the Fed having to go too high is necessarily going to induce recession. I think we tend to have this very zero one view of recessions based on the som rule correlation that if unemployment goes up a little bit, it tends to go up a lot. That's certainly true. But I don't think it's necessarily the case that labor demand being reduced necessarily triggers unemployment to go up a substantial amount. So that's the real question. It's not, can we increase unemployment without increasing it a lot? It's, can we reduce labor demand without triggering unemployment increase? And I think we, I think we have two recent historical episodes that should give us some solace. One is 2018 through 2019 the Fed raised rates too fast.

                                             And time series econometrics is tricky but you see it so clearly the data, the Fed was going too fast, job growth slowed, inflation slowed and then the Fed pivoted and said, "Oh actually we were making a mistake. We were raising rates too fast. There's more slack in the labor market than we thought. We need to just be way more dovish." And they cut rates. So when they cut rates, that's the end of the debate. The Fed raise rates too fast, they admitted it, they cut rates and we didn't see job losses. What we saw was job growth slow. What we saw was inflation slow. The other historical episode I would point to is 2012 the extended time horizon, 2012 through 2018. In 2018 the mistake became beyond debate because the Fed essentially acknowledged it and cut rates. But I think even longer than that, the Fed was raising rates too fast. And before they raised rates in 2015, they were signaling they were going to raise rates too fast.

                                             And they were signaling that they thought the economy's productive capacity was far lower than it was. And as a result we had low inflation, we had inflation below target for almost a decade, we had a Fed that was too hawkish for almost a decade. But we didn't see unemployment go up. We didn't send the economy in the wrong direction, we just held the economy down. We just held demand down. And so I really think we need to get off the zero one view of reduced demand equals recession. And I think what we're going to have is just the kind of mistake that they made in the past where they raise rates too fast, demand slows down more than it needs to and that things cool down and they go a little too far and then I think they're going to be cutting rates next year, 2024, something like that.

Mark Zandi:                      Oh, fascinating. And I'm sympathetic to what you're saying and I got a couple questions, but Cris I'm going to put you on notice because this is not what you think so I want to listen to your perspective on this. But going back to a number of things that you said to unpack it a little bit. One thing he said was the Fed is likely to inappropriately raise rates, do too much here. And that's because of the loss of credibility when they didn't raise rates fast enough earlier in the year when it was getting pretty clear that they should. And inflation expectations took off and things got to a place where we are today. One other interpretation of the tough talk, and I'm assuming that one reason why you think this is because they're talking very tough here, very, very hawkish.

                                             The other interpretation of that would be that they're just trying to keep inflation expectations in and financial conditions sufficiently tight that to the tougher they talk now, the more likely they keep inflation expectations anchored. And right now if you look at expectations, bond market expectations is pretty close to where you'd want it, two and a quarter, 250, somewhere in there. And also keeping the stock market from rallying back, keep the credit spreads from coming in, they're not that wide already but coming in. Keep mortgage rates up to keep pressure on the housing market, which they need to slow the economy because that's the most rate sensitive sector. And so by being as hawkish as they are in their language, that in fact they won't have to raise rates as much going forward, that this is actually a strategy. It's not signal that they're going to make an error, this is actually a strategy. Does that resonate at all?

Adam Ozimek:                  So I think that what you're saying is correct in the sense that those are all the way that the Fed holds back the economy. But you can imagine a world where the Fed was much more ahead of the curve on inflation and they weren't really concerned about inflation expectations. Inflation expectations didn't move up, short term inflation moved up more. And expectations didn't move up nearly as much because everyone thought, the Fed saw this coming, the Fed's not worried about this. They would've been doing a much better job convincing people this is supply side, they won't have to do as much. So I think that what you're describing, the fact that they feel that they have to hammer on expectations is, that is what I'm describing playing out in reality. So I don't think that's different from what I'm describing.

                                             And I think that the real evidence of it is going to be when they go past where you think they should be. And I think they've gone up very quickly and I think they've gone up in a way that they're not playing wait and see anymore. You know what I mean? When you look back at the average inflation targeting mindset is very wait and see kind of thing, and they're beyond wait and see. They're raising rates, acting like inflation has been disappointing when the reality is you wouldn't have expected that much of an impact on the CPI and most of the real economy from rate hikes. Yet outside of housing, you expect these things to take six, nine months and we only started hiking, what, in March or something like that. So those first rate hikes should just be starting to impact. The Fed does not seem patient. So yes, I think that is the strategy of ensuring that the rate hikes are working and pulling things down. But I think they just could have been more relaxed about everything if they weren't worried about expectations.

Mark Zandi:                      Well let me tell you our baseline path of funds rate and let me get your reaction to it. I'm not sure if you do explicit forecasts, but maybe you can.

Adam Ozimek:                  No, I live in the luxury of just being able to talk about general-

Mark Zandi:                      You think tank guys. Another think tank guy. But let me give you ours and I'd like to hear your reaction to that in the context of what you just said. So the federal fund rate today is three and three quarters to four. That's the range. We have the Fed raising rates a half a point in December when they meet, a quarter point in January and we're going to put a quarter point in in March. So that would bring the funds rate to four and three quarters and five. We have to discuss this. But I think-

Adam Ozimek:                  Breaking news.

Mark Zandi:                      Breaking news, we're going to add one more in March and go to four and three quarters to five. And I think that's what broadly markets expect, more or less. That's what's embedded in stock prices and credit spreads and mortgage rates, the value of the dollar, all those kinds of things. Then they pause. They stop, they took a take a look around, they see what's going on with inflation.

                                             It sounds like you and myself and maybe Nick, I'm not sure about Cris and Marisa, but think at that point there's more evidence of job market slowing, wage growth is rolling over, inflation is starting to come in and that's the terminal rate. That's the end of the story, they don't need to raise rates any further. They keep rates at 5% through next year into 2024, by spring summer of '24 inflation's back to the Federal Reserve's target within spitting distance or close enough, and that's when they start easing up and allowing the funds rate to come back in. And they go back to the so-called equilibrium rate, our star neither contractionary or stimulatory to the economy, of two and a half percent by mid decade. That's the path. How does that resonate with you, that path?

Adam Ozimek:                  I don't think it's going to take them that long to start cutting. Because I think it's hard for me Mark, to square that with your view that a lot of this is still supply side, because that supply side stuff is going to be deflationary too. And if you look at labor force growth. So one note about labor force growth also is, if we're not taking the household survey seriously on employment growth, you shouldn't take it seriously on labor force growth either in that same period, because it's the same problems basically.

Mark Zandi:                      Good point.

Adam Ozimek:                  So I back into labor force growth based on what we see in a job growth, which is super strong. I think that the household survey is much better for utilization where it's giving us approximation.

Mark Zandi:                      Just to make a quick, finer point on that, what you're saying is we're getting all this job growth and unemployment's not moving the and e-pop's not moving, therefore, you're saying ergo, we're getting a lot of labor force growth consistent with this job growth.

Adam Ozimek:                  I think the real e-pop probably is improving and we'll probably see some step up from that. And we see this from time to time in the data, the CPS is just volatile. So I think non-farm payrolls are much closer to describing reality and I think labor force growth has been strong, and I think that should be deflationary. And you are seeing evidence of that in wage growth, so obviously labor market utilization has gone up compared to December of last year. Over the last year, labor market utilization has gone up and yet wage growth has gone down. Now why would that happen except for an increase in labor supply.

                                             And so I think labor supply is having the effect that we would expect to have, a little bit slower than I expected it to have. But I think that that's also going to be a positive for prices as well because labor supply is holding back output and wheat productivity growth is holding back output. And I think we're going to see those things start to become deflationary. I don't see how the Fed can be two and a half percentage points above the terminal rate, the long run rate, and labor supply and aggregate supply is coming back online quickly and it still takes what, two years for them to start needing to cut rates. I just don't see that.

Mark Zandi:                      Interesting. And I think your view is more consistent with the market expectations, right Cris? That we go to up to about 5% terminal rate and then the Fed starts cutting more towards the end of next year. Is that right? Do you recall?

Cris deRitis:                       I don't recall.

Mark Zandi:                      Or is it more consistent with what I just articulated?

Cris deRitis:                       I though it was higher for longer.

Mark Zandi:                      Oh, okay. I think it's come in a little bit, but maybe you can take a look. But don't do that. Don't worry about that. How do you react? I'm just saying. And I didn't know where Nick and Adam's minds were before they came on the podcast, but I love the way they think. Nick is coming more towards my perspective and Adam is beyond me, it feels like. He's even more optimistic it sounds like, about the labor market adjustment inflation coming in and the Fed not needing to raise rates as much or keep rates as high for as long, and it feels like that gives us a even greater chance of navigating through. And I don't mean to put words in your mouth, but if you had to put odds on a recession in 2023, sounds like it's a lot lower than Cris, would that be fair?

Adam Ozimek:                  Yeah, for sure.

Mark Zandi:                      And again he's a think tank guy and he's not going to put a number on it.

Adam Ozimek:                  Well what are your-

Mark Zandi:                      I'm 50%, and you say that's a cop out and it is a bit of a cop out. But the baseline forecast, the forecast that we publish in the modal forecast, the forecast with the highest probability, is no recession. We have no recession. A weak economy, no doubt. Job growth stalls out at some point and we get unemployment north of four and wage growth rolls over, but no recession. So I'm at 50. And Marisa you're at 60 I believe, last I heard.

Adam Ozimek:                  I thought it was 65.

Marisa DiNatale:              I've wavered between 60 and two thirds.

Mark Zandi:                      Oh, so where are you today?

Marisa DiNatale:              Depending on the day and the data.

Mark Zandi:                      Depending on the day. And today you're at?

Marisa DiNatale:              I'm still there. I'm still in that range.

Mark Zandi:                      60, 65. Okay.

Marisa DiNatale:              I'm not going to distinguish between 60 and 66.

Mark Zandi:                      No worries. So do you want to put a number on it Adam?

Adam Ozimek:                  Well my professional forecasting services or thousands of dollars an hour, so I can't give you the exact number obviously.

Mark Zandi:                      Oh great. We got to pay you money for that. Yes.

Adam Ozimek:                  I can tell you it, I would say I'm willing to say the odds of recession are 30% or lower. That's right, 30% or lower.

Mark Zandi:                      You can come on anytime you want Adam. Anytime. I need him in the macro meeting, that's what I need. Interesting. Nick, I want to come back to you on this resilience question. And the labor market feels resilient, meaning job growth is slowing but hasn't slowed as quickly as some might anticipate. Two theories I'm going to throw out and get your reaction to and you can add any other theory you want as to what's going on. First is to Adam's point, we're just impatient. It takes time. These large corporations, and we are in a big large corporation, you are too. Six months ago we were hiring handover fist and to tell the HR guys stop hiring, but now reducing payrolls, that is moving a container ship around. It's going to take some time. It feels like it's coming. It feels like we are going to get more layoffs. And when I say more layoffs, just simply a normalization of layoffs. So it's a matter of time.

                                             The second explanation is businesses know that their number one problem going forward for the foreseeable future is finding good workers and holding onto them. That was the problem before the pandemic, that's the problem except for the immediate shutdown of the economy, been the problem. And demographics, aging out of the boomer generation, me and immigration constraints are going to keep labor supply constrained, therefore I'm not going to layoff workers. I might cut my hiring, I'm going to get rid of those unfilled positions and I might normalize layoffs, but I am not going to lay off workers on mass and therefore resilient labor market and no recession. So those are my two explanations for your point about resilience. Do they resonate with you and are there any other explanations for what's going on here?

Nick Bunker:                     So they do resonate with me. I think the matter of time or just the hikes need to move their way through the economy. I think that's true and that there will be a softening in the labor market. I just think that part of this too is that if you look at job openings data in some of the sectors that are still pretty constrained, they're still holding up quite a bit like leader in hospitality. There's still lots of demand. And so Adam referenced earlier historical examples of what the Fed could do. But I think within some of the sectors in the US labor market right now, you are seeing already some signs of soft landing esque labor market dynamics. So retail trade, hiring has slowed down there. Considerably, payroll growth has come down and payroll level of employment is close to flattish over the last several months.

                                             But layoffs really haven't spiked. But the hiring and the jolts data has come down quite a bit and so has the quits rate data. And you can see a very similar story, to a lesser extent in leisure and hospitality. So those are two sectors that there are some signs that it's already cooling and also those aren't very interest rate sensitive. So maybe that still powers through. But then the labor hoarding story, that I think I'm very sympathetic to. That there's just structural issues and not only is it that employers can see down the line that the population's aging, that's a stubborn fact of reality. But also for some of them there just might be, they're looking back and thinking about what they did in 2020 and thinking, maybe that was the lesson learned, that maybe there was some hit to their ability to hire because people remembered what happened in 2020 and are now a little bit shy of taking some opportunities.

                                             And I think one thing that is also, I think related to your earlier point, so this is maybe a sub theory there, and I mentioned this a bit, it's just the interest rate sensitivity of some sectors, that a lot of the excess demand is in sectors that aren't as interest rate sensitive as construction or manufacturing. So it might take more time to get through there, but there's so much forward momentum there that once we get to that spot where those sectors are really starting to cool down in terms of the labor market and there are some layoffs, then maybe there's enough strength in momentum there that, as Adam said, the non-binary distinction between recession or strong period, it just cools down a little bit. And then the rate hikes have made their way through and have picked back up.

Mark Zandi:                      That's an interesting point. You can feel that in the construction trades. Another twist on what you said, it's interest rate sensitive, but what's happening is the single family construction is coming way down because we've had such shortages on the multi-family side and they've been constrained by supply chain issues. The people may be losing their job building a single flaming home, all they do is walk across the street and go work in a multi-family unit to build up a multi-family unit. One place where you'd expect to see some job loss you're not seeing it, in the construction trades, at least not so far.

Nick Bunker:                     And I think that's also part of it is that you could have... Say a demand for hiring new workers come down some and layoffs normalize, that would be layoffs getting back to 2018, 2019 levels, but demand coming down, even if it comes down quite a bit, that's still relatively elevated demand and layoffs that were consistent back in 2018, 2019, which is a pretty tight labor market. So there might be some normalization but it's not a massive swing and there's a huge rise. So layoffs could rise over 30% on a monthly basis and their average monthly rate would be similar to what we're seeing back in 2017 through 2019. So there's a lot of margin there. [inaudible 00:41:08] could rise a lot and it would be back to normal.

Mark Zandi:                      Economists shouldn't rely on anecdotes, but I can't help myself. So I was talking to a private equity guy yesterday, and it was the most optimistic thing I had heard in a long time. And he was saying they own a lot of companies, all kinds of consumer product companies. And they own restaurant chains and they own grocery stores and they own all this kind of stuff. And he says, we're not laying off anybody, for the very reason that what you just said, Nick. I remember what happened back during the [inaudible 00:41:45] of the pandemic. I could not get these people back and I'm not going to lay them off now because I know I'm not going to be able to get them back a year from now.

                                             But he did say they are going back to the workers and saying, look, business is weakening, particularly in some of these lines, and our cost pressures are very high. And we gave you a big wage increase this past year, we're just not doing it this year, we're just not doing it. We'll see if that sticks, but it feels like it is because you can see wage growth coming in pretty fast in leisure and hospitality and retailing. And again, those are the... So I go, this is an anecdote, sorry Cris, confirmation bias that confirms my view of how things are working. But this guy's a big PE guy. He's got a lot of companies all over the place. And I thought that was fascinating.

Nick Bunker:                     I think-

Mark Zandi:                      Go ahead. Sure.

Nick Bunker:                     Just to add one thing I think. Maybe another margin there beyond just saying hey, we gave you a big raise last year, please remember that. Also there's other ways for firms to produce their labor utilization without letting people go. So keeping an eye on part-time for economic reasons, those measures, that might be a way to semi lay people off. But just hey, business is weak right now, we just need to bring you down to 25 hours a week or something like that and we'll try to ride through this. So it's a private sector response similar to short term work programs you see in other countries. In some sectors you might see

Mark Zandi:                      We haven't seen that yet in the data. Not here. I think we're seeing that actually in the UK. In the UK they're starting to observe that happening, but not in the US. Oh Cris, you've heard all this Cris, and you've been quite silent over there in your office.

Cris deRitis:                       I'm just taking it all in.

Mark Zandi:                      We're coming back to remote work in just a second. And Adam, can you see this guy? He's the only guy who's in the office, which is testimonial to what Adam's going to be talking about in just a minute. And Nick. But what do you think of all this? This must be eyeopening for you.

Cris deRitis:                       It's nice to be here, it's nice to feel good for a little bit. Put on the rose color glasses and see how things could work out.

Mark Zandi:                      You're the one with the rose colored glasses. Come on. No, not today.

Cris deRitis:                       What are you talking about? 70% recession knots?

Mark Zandi:                      No, literally the rose colored glasses.

Cris deRitis:                       There is a path. It's possible. But there are so many other factors that I see that are going to continue to weigh on the economy. We already talked about the rate hikes not actually having had a chance to be fully digested yet. That's certainly going to have an impact on restriction in credit. We have all these regional Fed reports that Marisa loves, showing weakness in manufacturing, industrial production coming down. There's a lot of momentum in the other direction here that I don't think we're fully accounting for. And we know that employment is the last shoe to drop. So that great the labor market is hanging tough here, but when it turns it can turn pretty fast.

Adam Ozimek:                  Mark, can I offer something I think that might bring the Cris and Mark [inaudible 00:44:58] a little-

Mark Zandi:                      No, you can't do that.

Adam Ozimek:                  A little bridge to jump-

Mark Zandi:                      No. No bridges. No bridges on this podcast. It's like all out... No, go ahead Adam.

Cris deRitis:                       The audience loves the debates.

Mark Zandi:                      Go ahead.

Adam Ozimek:                  I think what we will see is what people are going to call a goods recession. That's my expectation. Because Cris is talking about these signs of industrial production and whatnot. And look, there is no denying that goods demand has been wild over the last two years. It's going to manifest as weaker goods spending, and it's going to look like a goods recession. We'll have really weak prices there, we'll have weak goods spending and Cris will be able to say, see there's the recession. And Mark, you'll be able to say, actually overall employment is still growing so it's not a recession. And then that's going to be the synthesis of the two.

Mark Zandi:                      Oh, well that's the nice synthesis, but I'm still declaring victory if that's what happens.

Adam Ozimek:                  Oh, you'll be right. No, you'll be right, it'll just give Cris the chance to feel like he got [inaudible 00:45:56]

Mark Zandi:                      Oh, I see. Feel a little better.

Adam Ozimek:                  One other thing I would add on just employer's perspective, I think there's a cyclical aspect here, which is Mark, you talked to a lot of employers and think about the period from 2016 through 2018, how many employers thought that they were dealing with the new normal labor markets. Everyone thought, this is full employment, this is it, this is as good as it gets. Hold aside any slow down in population growth or aging in the population, actually I don't think those make the labor market tighter so I don't think that that's really the issue. You look at Japan as a country that's aged rapidly. Really weak labor force growth, didn't really manifest itself as fast wage growth. So I don't think aging necessarily gets you that tight labor market.

                                             I think people are starting to realize, actually the US economy can generate what feels like a really tight labor market. It's really that simple. What is full employment is not 2016 to 2018. That wasn't full employment, that was actually still a pretty weak labor market. Full employment is going to look more... It's not going to look like 2020, 2021 that was temporary tightness. But it'll look somewhere between there and 2019, which is a lot harder to find the workers that you need and now people know that. So it's structural change in thinking around the cyclical nature of the labor market, if that makes sense.

Mark Zandi:                      It does. And this is something I learned from you when we were working together back in that period. You kept saying to me, how can the labor market be tight if the economy's creating so many jobs? That's what you said. And it's a great question. And back then of course, wage growth was pretty pedestrian. It was three and a half percent. So you could also point to no wage growth. Wage growth was-

Adam Ozimek:                  And inflation.

Mark Zandi:                      But today people will say, we got the strong wage growth therefore the labor market is tight. But my sense of that is that, wage growth is really strong because we had these supply shocks that infected inflation expectations and workers demanded, particularly in certain sectors where the labor market was tight, I need a pay increase, I want a pay increase. And that actually underlying labor market is not as tight as it appears from looking at the wage risk, because we are creating a boatload of jobs. If we were running out of workers, if labor supply was a real problem, we would not be able to generate 250,000 jobs per month. Does that sound right?

Adam Ozimek:                  Somewhat. I think that you have the circle of causality between inflation and the labor market. I think it goes both directions. But I think that the the tight labor market cause wage growth. But what's important is that almost throughout most of history, fluctuations in the labor market are driven by changes in labor demand. That's usually what happens. But what happens to some extent over the pandemic, not entirely, but to some extent, is changes in labor supply. So it's going to change a lot of the normal things that we expect to see. But the things you're describing to me are consistent with labor supply went down and then labor supply is coming back up. Those would generate the same sorts of... That's not to say that that reduction labor supply didn't generate... I believe it generated labor market tightness, wage growth, which then fed into inflation.

                                             And I think another important thing that gets missed here is most of our understanding about the way that tight labor markets pass through to inflation comes from the fluctuation of labor market demand. So we look for those kinds of outcomes, which is labor markets are tight, wage growth goes up, and that flows through to output prices and inflation. But when you're dealing with temporary labor supply shocks, there's an entirely different mechanism through which tight labor markets can generate inflation, which is, I'm an employer, my labor supply is down, but I don't believe that it's permanent, which is rational of course. And so I'm not going to increase wages to the market clearing level because wages are sticky.

                                             What I'm going to do is throttle output, and I'm going to deal with a lack of output, which means prices and margins go up, but my total production goes down by GDP is weak. That to me is what we've seen. We've seen a lot of employers reduce output, reduce employment, and they're just waiting out the labor market. They're not raising wages to the clearing levels and then passing that through to inflation. They're reducing output, which also generates inflation. So I think we shouldn't just be saying, well, if we don't see a direct sectoral wage growth and then inflation... It can happen through output reduction as well. And I think that that's what you see. That is also a reason to be bullish going forward because labor supply goes up, output goes up, and that brings down price growth. But it's a different mechanism than normal.

Mark Zandi:                      Well, I want to move on to the remote. That's a very interesting description of the dynamics that are playing out here. And I think we're coming up to the moment of truth on this. We've been debating and debating and debating it. May be overstating the case, but it feels like over the next six months we're going to get a clearer sense of how this is all going to play out. Well fair listener, this podcast ran on for a bit and great conversation with Nick Bunker and Adam Ozimek and the team. But we're going to end it here, this discussion around the job market, and then pick it up in part two in a conversation around remote work and that'll be released in a couple days after Thanksgiving. So we'll catch you soon. Have a great Thanksgiving.