INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two trustee co-hosts, Marisa DiNatale and Cris deRitis. Hi, guys.

Cris deRitis:                       Hey, Mark.

Marisa DiNatale:              Morning, Mark.

Mark Zandi:                      Hi guys, how's it going? Good to see you, guys. And we also have Dante DeAntonio. Of course, a standard bearer on this jobs Friday. Hi, Dante.

Dante DeAntonio:           Morning, Mark.

Mark Zandi:                      I hear you're not feeling so well this morning, but thanks for toughing it out with us on the Inside Economics.

Dante DeAntonio:           Sure.

Mark Zandi:                      That wasn't very [inaudible 00:00:45].

Cris deRitis:                       It's like...

Mark Zandi:                      Hey, guys. I did not require Dante to be on this.

Dante DeAntonio:           You asked, and you received, Mark. I'm here.

Mark Zandi:                      Okay, there you go. Okay. Well, and I do feel bad, colds are no fun anytime of year, but I'm glad you're with us. I thought before we kind of dig into the meat of the matter, which is obviously the employment report for the month of December, December, 2022. Which not that I want to color anyone's perspectives, I thought that was a pretty good report all around.

                                             I'm laughing because, well, Cris, do you want to describe, or?

Cris deRitis:                       Oh, it's not great for radio, I guess. For the guys on-

Mark Zandi:                      For radio, but it's great for video. Yeah.

Cris deRitis:                       I just thought I'd put up a sign that I had handwritten five minutes. Oh, and it's backwards too, so.

Mark Zandi:                      Yeah.

Cris deRitis:                       Going exactly according to the script.

Mark Zandi:                      Oh, there you go.

Cris deRitis:                       Which I suspect was going to be your interpretation of the report.

Mark Zandi:                      That's right. That's so funny.

Marisa DiNatale:              You're making your own meme.

Mark Zandi:                      Yes.

Cris deRitis:                       My own meme. Yes. Yeah.

Mark Zandi:                      But before we dive into that, and I do think it was kind of write the script, just saying. We've had this week of slowcession. So maybe Cris, because you coined this term, you want to describe slowcession, and what it means to our outlook?

Cris deRitis:                       Sure. So we actually, it came up on one of the Inside Economics podcast, I think the one right before Christmas, if I'm not mistaken. We'd been struggling for a while to come up with a word to describe our baseline forecast for 2023, which definitely has slowing, right? No doubt about it. We're all agreed that 2023 is going to be a rough year, in terms of output. Labor market is going to slow as well. So is it a growth recession? Well that sounds maybe a little too strong. Do you expect it to be somewhat painful? Certainly. But true recession, and this is, I guess, where we debate a bit, it doesn't sound right either, because we're not... Even I am not calling for 3-4 million job losses, which would be typical. So is it a mild recession? So we came up with this slowcession term to define what we think is going to happen '23. So somewhere between a true recession, or a typical recession, and expansion. Yeah.

Mark Zandi:                      Put it together, come up a slowcession.

Cris deRitis:                       I thought it was a great description, and it feels like it's caught on, right? I mean it's out there in a very small economics world, felt like it went viral. Not in a rockstar kind of viral way, but maybe in an economic community kind of way. It felt like it went viral, so.

Mark Zandi:                      Well, hopefully it helps that you titled your economic outlook piece for slowcession.

Cris deRitis:                       Yeah, exactly.

Mark Zandi:                      And we have a slowcession.com website.

Cris deRitis:                       And I thought that was pretty creative. You did that over the holidays. So did you have to pay money to do that? How much does that cost to establish a URL these days?

Mark Zandi:                      I think it's $10.

Cris deRitis:                       $10, but it's $10 a year, right?

Mark Zandi:                      Yeah. Well, yeah. Let's see if we need it in '24. I don't know.

Cris deRitis:                       Right, exactly. Maybe then Moody's will pick up the tab. I don't know. Let's see.

Mark Zandi:                      All right.

Cris deRitis:                       Yeah, well very good. Okay, so we're going to do a few things in this podcast. One, go down deep into the bowels of the jobs numbers, and try to clean what that means for the outlook, and for monetary policy, and for markets, and everything else. We're going to do the game, the statistics game. And we have this new feature of the podcast that we've been talking about, and tried it out a little bit at the end of last year, is answer listener's questions. And we'll try to do all those things in the next hour, or so. Okay. So with that, Dante, take it away. Give us the rundown on the jobs report for the month of December 2022.

Dante DeAntonio:           Sure, I'll steal your line. I think it went exactly according to script, right? I mean, a moderation in top line job gains, right? Job growth came in at 223,000. It's down from a revised 256 in November. The three-month moving average is now just under 250,000 jobs a month. That's down pretty substantially from the prior three-month average, which was north of 350,000 jobs a month. So we're seeing the labor market moderate, maybe not as quickly as some people would've hoped or expected, but it is definitely moderating.

                                             Growth still came in above consensus expectations, which was for 200,000 jobs to be added, but consensus seems to consistently be wanting the job growth to slow more quickly than it has been. So I don't think it was unexpected to see that moderation be a little bit slower than expected. Unemployment rate edged lower, from 3.6% to 3.5%, which is probably not what the Fed wants to see, but at least it moved lower for the right reasons. We got to turnaround in-

Mark Zandi:                      Can you just explain that?

Dante DeAntonio:           Yeah, yeah. So the unemployment rate moved lower in large part because labor force participation picked up for the first time in a couple of months. And employment, as measured by the Household Survey, jumped by quite a bit, over 700,000 in December. So strong reading from the Household Survey, after it had been showing quite a bit of weakness over the last three, four, or five months. So more alignment among the two surveys, the Establishment Survey and the Household Survey, that we've seen in recent months.

                                             Industry wise, I mean there's not a whole lot of weakness. Where the weakness is, was sort of expected on a major industry basis. The only declines were in information and professional business services, and both of those are sort of exposed to the string of high profile tech layoffs that we saw back in mid-November, which would affect this report.

                                             Temp help services also continued to decline, which is part of professional business services. That's not unexpected. It's typically a bellwether of general weakness in the labor market. A slowing economy, as firms cut temporary help before they cut full-time employees. So not a huge surprise there. Construction and manufacturing, I think, continue to hold up sort of better than we would expect, given the current environment. Wage growth slowing, right, on a month-over-month basis, up about three tenths of a percent. I did that-

Mark Zandi:                      0.273, I believe.

Dante DeAntonio:           There you go.

Mark Zandi:                      Just saying.

Dante DeAntonio:           Only three decimals? Do you have more than that, or?

Mark Zandi:                      I thought that would be over the top.

Dante DeAntonio:           Oh, okay. Yeah.

Mark Zandi:                      But we'll come back to that, that that's an important number.

Dante DeAntonio:           And year-over-year wage growth now is back under 5%, after it had jumped above 5% last month, briefly. So that, again, is moving in the right direction, maybe not quite as quickly as the Fed would hope to see, but certainly moving in the right direction. Average weekly hours ticked lower again, which again is a sort of positive sign. I think that firms are starting to reel in a little bit, and it is likely an indication that job growth is going to continue to slow moving forward. Yeah, so all in all, I don't know that you could design a better picture of the labor market, given everything that's happening, and what we want to happen moving into 2023, in terms of slowing job growth.

Mark Zandi:                      Any blemishes at all in the report? I mean, we're kind of in this weird world, where we want job growth to slow, but we don't want it to obviously collapse. That would mean the economy is going to go into recession. But we need it to slow, so that it cools off, get more slack, a bit more slack in the labor market, and cause wage growth to start to moderate even further, get back to something more consistent with the Fed's target. In that kind of context, is there any blemish in the report at all?

Dante DeAntonio:           Not so much of as... I mean, in an ideal world, we'd like to see labor force participation pick up even faster to help take some of that pressure off of the unemployment rate. Yeah, we'd ideally like to see the unemployment rate edge a little bit higher, not a little bit lower. But again, the labor force did expand, and so we're moving in the right direction, maybe just not quite as quickly as we would like.

Mark Zandi:                      Yeah, because there's so many things to unpack here, but just while we're on the subject, on the labor force participation rate, it feels like that's the new norm, that it's down about a percentage point from where it was pre-pandemic. We're now three years after the start of the pandemic, and even without the pandemic, that participation rate would've declined, right? Because of the aging out of the Boomer generation from the workforce. Maybe not a full point, but pretty darn close to a full point. So it almost feels like...

                                             And the other thing to point out is participation rate has been roughly where it is now, just over 62%, for almost a year. I mean, it really been tick-up one month, tick-down another month. It hasn't gone anywhere. Just feels like this is, as I said, the new norm. We can't expect labor force participation to pick up any significant degree to provide any juice to labor supply, labor force growth.

Dante DeAntonio:           Yeah, I agree. I don't so much think about the labor force rate, compared to pre-pandemic anymore, I think, as much as I just look for the labor force to continue to grow month-over-month. I think that's the most important thing right now, is not, "Does the participation rate ever get close to where it was before?" Because I don't think it will, but do we continue to add a hundred, 200, 300,000 people to the labor force, to help take some of that pressure off, to help fill some of those open positions? I think that's more important right now.

Mark Zandi:                      Got it.

Cris deRitis:                       You know, you don't see the-

Mark Zandi:                      Oh, sorry Cris. Sorry, go ahead.

Cris deRitis:                       So you don't see the early retirees coming back in? The ones that left?

Dante DeAntonio:           I don't think we've seen much evidence of that. I think things would maybe be stabilized a little bit, where you know, don't see that exodus happening anymore. Maybe some have come back, but I don't think you're going to see a wholesale shift, in terms of a bunch of people who retired early in the last two years, start to all of a sudden come back to the labor force. Maybe if there is a recession, maybe if things turn south, maybe that encourages more people to come back after that, if finances take a hit. But I don't think in the current environment, given equity levels for people that probably made that decision to retire, that there's all that much incentive to come back right now.

Mark Zandi:                      Okay. So there's this theory that as the savings run out, all those excess savings run out, and as stock prices remain depressed, you will see some. But I guess we're saying that would be on the margin, not expecting a wholesale return.

Marisa DiNatale:              And that's also, we've seen that before in prior recessions, right? That after a recession, with the hit to asset values, we get some retirees coming back. So as Dante said, I think if we go into a recession next year, this year, I mean, yeah, then maybe you'd see some of that, but I don't think that's atypical.

Mark Zandi:                      But while we're on the topic of labor, we're now focused on labor supply, right?

Dante DeAntonio:           Yeah.

Mark Zandi:                      The supply of labor. And ultimately that's the growth in the labor force, and the growth in the labor force is equal to the participation rate, times the working age population. And we're not getting any support to labor force growth from participation. That's flat as a pancake. And maybe it'll go up a little bit if some of those retirees come back in, but we're talking on the margin here. Maybe there's some lingering COVID effects that abate parents with childcare issues, or long COVID maybe, but I don't know that we can look to a significant increase in participation to help us out on labor supply. But on working age population, that's strong. If you look at overall labor force growth, and that is labor supply, that's very strong. It's over 200,000 per month on average.

                                             So that's the key reason why, over the past almost year, even though job growth is now close to 200-250,000 per month, unemployment is stable, because we're getting increased working age population growth. And just to pull that onion back one more layer, that's because immigration has picked up to a significant degree, and we're seeing very significant increases in labor force supply from foreign-born workers. So on the labor supply front, it feels pretty good to me. I mean, anything over 200K per month is pretty darn good. Any disagreements there? Any pushback on that? No?

Marisa DiNatale:              No. I'm looking forward to next month, because next month is the population controls in the Household Survey. So every year when BLS releases the January employment release, the CPS gets re-benchmarked to actual pounds of population from the census bureau.

Mark Zandi:                      Oh wait, wasn't that this month? Or did I-

Marisa DiNatale:              No.

Mark Zandi:                      Was that next month?

Marisa DiNatale:              No, it's next month.

Mark Zandi:                      Oh, it's next month.

Marisa DiNatale:              This month they redid the seasonal adjustment.

Mark Zandi:                      Oh, they did the seasonal adjustment factors this month, right.

Marisa DiNatale:              Yeah, that's right.

Mark Zandi:                      Yeah. Okay.

Marisa DiNatale:              But next month, they'll do the population benchmarking. So we'll get a new count of what population looks like.

Mark Zandi:                      Well, I want to come back to these measurement issues around revisions to the data, because there's been a lot of debate discussion around that. And we are going to get a benchmark revision, and we'll talk about what that means in a minute. But before we go there, let's just finish the broad discussion around today's job numbers. Marisa, anything else you want to highlight, or point out, that Dante didn't mention?

Marisa DiNatale:              Well just point out that I don't see it as a big slowdown from the prior month. If you look at private sector payroll employment, it actually strengthened a bit, relative to last month, and that's because there were declines in state government. So if you take government out of it, and the government declines were due to a strike at state universities. So if you just look at the private sector, it actually was a bit stronger. It's just really solid all around.

                                             Almost all these service industries, that we've been waiting to see some weakness in, are holding up very strongly. Construction holding up, and being as strong as it is, is interesting. And the other thing I'll note is hours. If you look at the average workweek, the number of hours people are working, that has ticked down month after month, for the past several months. Which is, again, some sign of maybe a leading indicator on just slowing demand for labor.

Mark Zandi:                      Okay. Cris, anything you want to add?

Cris deRitis:                       I also picked up on the construction, that was interesting. That continues to remain quite strong, relative to what we're seeing elsewhere, in terms of construction activity. If you really want to nip it, you have to go down into some of the demographics, perhaps, or less than high school, unemployment rates actually ticked up, but that's very volatile. So you can find some blemishes if you want, but overall, very, very strong report, right? Hard to really complain about anything.

Mark Zandi:                      Oh yeah. Well, okay, so this may not surprise you, but I think that was a fantastic report all the way around. I mean, the job market is definitively slowing, throttling back. That's right. It is. Go back a year, average monthly job growth was well over 500,000 per month, abstracting from the vagaries of the monthly data. It is now definitively less than half that. We can debate it, but it's less than half that. And we're getting downward revisions now in the prior months, and this number probably will get revised lower as well. All the leading indicators of job creation are signaling, slowing job creation going forward. So temp help is down, hours worked are down. So on the labor demand side, it just definitively feels like we're moving in the right direction here.

                                             Second thing, labor supply feels, as I mentioned earlier, it feels pretty good to me. Despite the labor force participation rate just hanging tough, we're getting more labor supply. And the combination of moderating labor demand and strong labor supply means that the slack in the labor market, it's not really easing to a significant degree, but it feels like it's starting to develop. We're starting to get some slack in the labor market. And despite that, despite not having a lot of slack in the labor market, unemployment at 3.5. The employment to population ratio for prime age workers at 80%, that's kind of our threshold for full employment in the labor market.

                                             Despite that, just take a look at year-over-year growth in average hourly earnings. It's clear now, with all the revisions that occurred with this month's release, and the seasonal new seasonal adjustment factors, that that is slowing. It's now year-over-year 46, it was 56 back at the early part of 2022. And of course, the threshold there is we need something around 3.5% to be consistent with the Fed's 2% inflation target, assuming 1.5% productivity growth. So 2% inflation plus 1.5% productivity growth is 3.5. That would be where we'd want to see wage growth to ensure that we're going to get an inflation close to the Fed's target.

                                             And it feels like we're heading in that direction, even without forming a whole lot of slack in the labor market. And that goes back to something we've been talking about before, and that is, in my view, that jump in wage growth we saw earlier in the year, that was related to the Russian invasion of Ukraine, and the jump in oil commodity prices, food prices, agricultural prices. And we saw this gaping out of inflation expectations, and workers said, ,"Hey," to their employer, "You got to pay me more, to compensate for my higher cost of getting to work," and we saw that jump in wages. But now that we're seeing oil prices back in, gas prices coming back down, inflation and expectations for workers coming back in, we're seeing that wage growth moderate. And that, again, is without any significant increase in labor market slack. And we're going to get that here going forward, just looking at the trend lines.

                                             So I don't know. It's almost like if I had a piece of paper, and I wanted to write down the numbers that I wanted to see in this month's report, this came pretty close to those numbers. And going back to that 0.273, that's the month-to-month percentage change in average hourly earnings. That's November, December. And don't read too much into month-to-month changes. I know shouldn't do that, but I'm going to do it anyway, because it's consistent with my view. Take 0.273, multiply by 12, poor man's way of annualizing. What number do you get? Anybody? Anybody?

Cris deRitis:                       Three and a half percent.

Mark Zandi:                      Oh, there you go. It's close. It's very close. Hey, by the way, one of my favorite movies of all time. You want to guess what it is, based on what I just said? Anybody? Anybody?

Marisa DiNatale:              A Beautiful Mind.

Mark Zandi:                      No, no, no. I think Cris said it.

Cris deRitis:                       It's Groundhog Day.

Mark Zandi:                      No. That's a good movie.

Marisa DiNatale:              Rain Man.

Mark Zandi:                      No. Dante knows. Anybody?

Dante DeAntonio:           No.

Mark Zandi:                      Bueller. Anybody? Ferris Bueller's Day Off. Have you guys never seen that movie? Oh my gosh.

Cris deRitis:                       Oh, of course, of course.

Mark Zandi:                      That is like a classic.

Marisa DiNatale:              What is the connection to that, and three and a half percent wage growth?

Mark Zandi:                      Oh no, this, I started... There was a scene in the movie, where the professor, who is-

Marisa DiNatale:              Oh, when he said, "Anybody? Anybody?"

Mark Zandi:                      Anybody? Anybody?

Marisa DiNatale:              I got it. Got it, got it.

Mark Zandi:                      Yeah. So reminded me of the movie. Yeah.

Cris deRitis:                       So trivia, what was the question that the professor was asking him?

Mark Zandi:                      Oh, gosh.

Cris deRitis:                       It was in economics.

Mark Zandi:                      Because he was Simon, he wasn't... Was he Herb? He's an economist, an actor?

Cris deRitis:                       Yeah, exactly.

Marisa DiNatale:              Oh, it was Ben Stein.

Mark Zandi:                      Ben Stein. Ben Stein, right. Ben Stein. So what did he, do you guys know, what he asked?

Marisa DiNatale:              I don't know what he asked.

Mark Zandi:                      Cris, you know?

Cris deRitis:                       It was related to tariffs, as I recall.

Mark Zandi:                      Oh, tariffs, right. Smoot-Hawley, or something.

Cris deRitis:                       Smoot-Hawley. Yup, that's-

Mark Zandi:                      Great. Smoot-Hawley, yeah.

Cris deRitis:                       I think that was it. Well if we're wrong, the listeners are going to tell us pretty quickly.

Mark Zandi:                      Yeah, they are, pretty quickly. Yeah. But I thought that was a pretty good movie.

Cris deRitis:                       Yeah.

Mark Zandi:                      All right. So you heard my spiel. I'm actually, I feel so weird. I actually now get nervous on two days of the month. No other days do I get nervous. First is Jobs Friday, the second is now the CPI report. It's like I'm sitting there at breakfast, waiting to hit the button, bls.gov, bls.gov. And then I get really annoyed if it doesn't come up at exactly 8:30 AM Eastern Standard Time. But I felt pretty good with that report. I thought it was right down the strike zone.

                                             Okay, let's go back a little bit, and get into the nitty gritty here. And for those folks out there that don't want to get too nerded out, maybe you can turn to some music for the next five, 10 minutes, or something. But if you-

Cris deRitis:                       Go watch Ferris Bueller.

Mark Zandi:                      Or yeah, go watch that clip. I'm sure it's on YouTube somewhere. It's classic. Let's talk about revisions. Marisa, do you want to give us a rundown, on particularly the benchmark revisions? I don't know, have you been following this debate discussion around the Philly Fed work around revisions? Have you been following that at all?

Marisa DiNatale:              Yeah, Yeah. So the-

Mark Zandi:                      Okay. You want to fill us all in on that one? Because I think that's actually quite interesting and important.

Marisa DiNatale:              Sure. I mean, I don't remember the specific numbers, but I mean, I can give you the overview. The Philly Fed did an analysis of state-level data from the Quarterly Census of Employment and Wages, the QCEW. That is not a survey, actually. It's a complete count of people on payrolls that comes from unemployment insurance records. And this is the same data source that, every single year, the BLS, when they release, also when they release the January numbers, they will be benchmarking the CES, the Establishment Survey data, to this count, to see how far off they were in these month-to-month estimates that are coming from a sample survey.

                                             So the Philly Fed did an analysis a few months ago, where they looked at the state counts of employment from the QCW, and they think that average monthly job growth through... I think it was, was it through July that they did it, was actually quite weak. It was barely changed from earlier in the year. It was something like-

Mark Zandi:                      10k.

Marisa DiNatale:              They said only, yeah, 10,000 jobs had been added on that, compared to the Establishment Survey, which says there were over a million jobs added over that period. So they're suggesting that the benchmark revisions in coming years, that there'll be one next month that will be released. And then there's one every January, that it's going to show that job growth in 2022 was far, far weaker than what we've been seeing in the payroll survey. Do I have that right Dante? Roughly?

Dante DeAntonio:           Yeah, roughly. I think the one thing to be careful about, they were looking at Q2 of 2022 in the Fed piece, and when we get the benchmark revisions to national employment next month, that benchmark only actually goes through Q1, right?

Marisa DiNatale:              Right, through March.

Dante DeAntonio:           So that's unlikely to show a huge revision, right? Q2, and Q3, and Q4, will just re-estimate a data next month. They won't actually be benchmarked. When we get the state employment benchmark a little bit later on in March, that will actually be benchmarked through Q2. So that may show us a little bit more of what the Fed was talking about, in terms of a big slowdown in Q2, if it's still there. And there may be some disagreement between the national number and the state number at that point, in terms of what Q2 looks like.

Marisa DiNatale:              And we have looked at, you can look at the QCEW national data, and it does look weaker through the summer. So there's actually, if you look at year-over-year growth in the QCEW, there's actually a decline in employment through the middle of the year. So I mean, that does give some credence to this, that there may be big revisions coming when we get the benchmark for 2022.

Mark Zandi:                      Just to reiterate, because this is very hard to get your mind around-

Marisa DiNatale:              I know, it's confusing.

Mark Zandi:                      Yeah. When I first started as a professional economist, over 30 years ago, this is the first thing I focused on, and it took me three years to even have some semblance of understanding of what the heck's going on here. But broadly, the monthly data we've been getting, like today's jobs numbers for December, that's based on a survey of some sample of businesses in the economy. I think, what, 350,000?

Marisa DiNatale:              Like 400,000 businesses.

Mark Zandi:                      Is it 400,000 establishment out there.

Marisa DiNatale:              Yeah, roughly.

Mark Zandi:                      Yeah. Businesses out there. And once a year, the Bureau of Labor Statistics takes that survey-based data, and so-called benchmarks it to actual employment counts from, you said QCEW, that's an acronym. Quarterly Census of Employment and Wages. Yeah, something. I think that's what it is. That's based on unemployment insurance records. So every business on the planet, well in the United States I should say, because they have to pay UI insurance, they have to tell the BLS exactly how many people are employed. Because that's the whole universe of establishments and businesses. It's very difficult to process historically. So they only do this once a year, and as of March of each year. And so the benchmark revision we're going to get next month, in February, is based on the QCEW as of March of 2022.

                                             And by the way, we know that because the BLS told us, is going to be a revision up, they're going to revise up employment of roughly 500K, that March number. So that means we created actually more jobs in the year, through March, than previous estimated. And we know that for a fact. And now this Philly Fed report said, "Okay, let's take the QCEWs, we'll do the processing ourselves, because we get that data, we can process it and make some sense of it."

                                             And they're saying, as of the Q2, the June data, March to June, based on that analysis, it feels like the job market really slowed very sharply at that point in time. It slowed in the survey-based data that we're looking at now, but they're arguing that, "Oh no, it slowed even more than that." Obviously, I don't think it's slowed as much as they estimated, because of, as you said, they're doing this from adding up states to the national, and there's all kinds of complications which we won't go into there. The seasonal adjustment factors, a lot of complication there.

                                             So I doubt that it is slowed to the degree that the Philly Fed analysis would suggest, but it is very suggestive that the job market is actually slowing to a greater degree. But we have two of the best people on the country, in Marisa and Dante, to talk about this, because they were at the BLS, and this was kind of the work that they were doing when they were there. Did I get that right? I just reiterated, because it's so tough to get your mind around it. Does that sound about right?

Marisa DiNatale:              That's right, yeah.

Dante DeAntonio:           Yup.

Mark Zandi:                      Yeah, okay. I had thought that this made sense that we'd see some downward revision in the establishment data, and that would make it more consistent with the data we're getting from the survey of households. That's the other survey. But in this month's report, we saw a huge increase in household employment, the employment as measured by the Household Survey. And now if you look over the past year, the amount of jobs created under both surveys are roughly the same. They're roughly the same. There really isn't a whole lot of difference there. So there's telling a very similar story.

                                             Okay. Before we move on, I had a bit of a soliloquy there, in terms of my interpretation of what this means for the economy and the job market, the December report. Anybody want to push back on that? I mean, it feels like we're all kind of in the same place. Maybe not taking it the next step, and saying what it means for probability of recession in 2023, but feels like we're all pretty much on the same page. Is that right?

Marisa DiNatale:              Yeah.

Mark Zandi:                      Any disagreement? Okay.

Marisa DiNatale:              Yeah. I'll just say-

Mark Zandi:                      Yeah, go ahead.

Marisa DiNatale:              I'll just say, about wage growth, average hourly earnings, that it is affected by the composition of job growth over the month. And this month, if you look at the payroll survey, there were a lot of low wage jobs added. So there were big gains in some components of healthcare that are lower wage, and another big gain in leisure hospitality. And on the other side of the coin, there was either declines, or no growth in things like finance, and components of professional business services, which are higher paid. So that could be skewing the average earnings over the month, lower than they actually are.

Mark Zandi:                      Good point.

Marisa DiNatale:              But when we've talked about this a million times, there's no great, really good month-on-month tracking of wages. The wages that we get from the Employment Cost Index, the ECI, are quarterly, so there's a big lag there. So in the absence of anything better, this is what we have to look at, but just take that with a grain of salt.

Mark Zandi:                      Yeah. I want to talk about one other labor market issue, before we move on to the game and listener questions. And that is, this now is based on looking at the other big report we got during the week, the Job Opening Labor Turnover Survey, from the Bureau of Labor Statistics, so-called JOLTS, that kind of gives you better look into the bowels of the labor market, and what's behind the job growth that we're observing. And one thing that I've noticed, is all of the slowing in job growth that we've gotten over the past year... You remember we're at 600k per month, at the start of 2022. We're 500K to 600K, we're now down to 200-250K, something like that. Less hiring. So we've seen the number of hires by businesses decline, and as of November 2022, that's the last data point from JOLTS that we got this past week, that is back to where it was pre-pandemic.

                                             So hires are very consistent with where they were pre-pandemic. What's so different about the current environment, and why we haven't got even slower job growth, is that layoffs remain very, very low. And I'm not going to go too deep into this, because maybe I'll take someone's number for the game, but you can see in the unemployment insurance claims, you can see it in the JOLTS data. There are very low, well below pre-pandemic, well below what we've seen historically. And it feels a little counterintuitive for people, because they hear about all these tech layoffs. You saw Salesforce, a big software company, announced 7,000 in layoffs this past week. And of course, every major tech company, from Meta to Amazon, have announced layoffs. But despite that, overall, layoffs around the economy remain very, very low. Which means other sectors of the economy, they're just not laying off workers.

                                             So my expectation is that we will see a normalization of layoffs here, over the next 3, 6, 9 months, that will go from these record low layoffs, back to something that's more typical pre-pandemic. And by so doing, job growth is going to go from 200-250K, to something closer to 100K, maybe a little bit south of that. And that is precisely where the Fed would want to see that job creation go. Because at 100K, that is consistent with long-run labor force growth. You'll see some slack starting to develop in the economy, and that'll help bring that wage growth in. Does that sound, roughly right, that kind of narrative? I mean, anything to add to that kind of the observations I just made, Dante?

Dante DeAntonio:           No, I think that's roughly right. I think there is some question around the timing of announcement of layoff, and when that might actually show up in some of this data, in terms of UI claims, or in terms of JOLTS, given the sort of unknown nature of what severance pay and other things look like. I do think there's some time lag between, "Hey, we're laying off 7,000 workers." And when those people actually appear in those different pieces of data, and particularly with UI claims, for a lot of these people, if they're finding new jobs almost immediately, they may never be filing for unemployment insurance. Even though the layoffs happened, it doesn't mean that they have to show up in these different pieces of data necessarily. And it doesn't mean that if they're going to show up, that they're going to show up in a couple weeks, or even the next month. It may take a little bit longer than that. So I think there's just a timing, and sort of scale issue, that could be at play a little bit.

Mark Zandi:                      Yeah, yeah. I've had this thought, and I need to explore it more deeply. But the thought I've had is that to have a recession, it feels like you need to have a significant increase in layoff. I mean, hiring declines, obviously, in recession as well, but can you actually have a recession? Negative job numbers, the economy going backwards, without a significant pickup in layoffs? I mean, it feels like that's kind of critical, because at the end of the day, layoffs is what would spook people and consumers, and have them pull back on their spending. I mean, if it's just simply that businesses aren't hiring, but everybody is holding onto their job, it doesn't feel like that that's going to be enough to create that kind of panicked environment, where people go into the bunker and stop spending.

Marisa DiNatale:              Especially when the unemployment rate's 3.5%. If businesses stop hiring, pretty much at this point, everybody who wants a job has a job. So I agree. And historically, if you look back at recessions, you always see layoffs, and you see outright declines in payroll employment. So I can't see calling it a recession if we're not getting massive layoffs.

Mark Zandi:                      It's not even calling it. You don't have a recession-

Marisa DiNatale:              That's right.

Mark Zandi:                      You have layoffs. Yeah, okay. Cris, you were going to say something though?

Cris deRitis:                       Oh, this time is different though, right?

Mark Zandi:                      Yeah, yeah. So much so. So what are you saying?

Marisa DiNatale:              Throwing all your sayings back at you.

Cris deRitis:                       They have so much demand out there. There's structural issues here, that I agree. If you had no layoffs, if you had no declines at all, then certainly can't call it a recession. But if it's a million, so very modest compared to previous recession, or if it's half a million layoffs, is that still a recession? And consistent with slowing in other metrics; spending down, investment down, GDP contracting.

Mark Zandi:                      Well hold it.

Cris deRitis:                       Is that still the numbers though?

Mark Zandi:                      Okay, I am going to give you the numbers. This is interesting what you're saying. I just want to understand the numbers. So if I look at JOLTS in the month of November, there were 1.35 million layoffs. I don't think I'm making that number up. I think that's the right number. On average, from the start of the series from JOLTS, which is back in early the 2000s, up until the pandemic, the average monthly layoffs. And this would be therefore typical, on average in a typical economy, was 1.9 million, maybe 1.95 million. So I would think, we need to see, actually, to avoid even further rate hikes, and ultimately recession, we have to go from 1.35 to 1.9. That's an increase of 500K, 550-600K.

                                             That feels like we need to see that, but for us to go into recession, feels like we got to get into the two millions, two and a half million per month, something like that. And it feels like a far, far distance from where we are today. Those are the kind of numbers. So it's not 500K, Cris, it's got to be a big increase in layoffs.

Cris deRitis:                       Yeah, I was talking about employment, right?

Mark Zandi:                      Oh, employment. Oh, okay, sorry.

Cris deRitis:                       Yeah. A typical is 3-4 million job losses, right?

Mark Zandi:                      Yeah, right.

Cris deRitis:                       But what if it's much smaller than that? Where is that fine line between recession and no recession?

Mark Zandi:                      Right.

Cris deRitis:                       Right. Because of the structural changes in the economy, there's so much demand for labor out there, firms want to hang on to their workers. Right? They'll sweat it through, rather than lay off.

Mark Zandi:                      Right. Yeah, I guess that's my point. I mean it feels like businesses are going to be reluctant to lay off, because they know that their number one problem is finding... On the other side of this weakening in the economy, they know their number one problem for the foreseeable future is going to be finding workers and retaining workers. So they're going to be really reluctant to lay off. But therefore, the adjustment they're going to make to a weakening in demand, and just a softer economy, and they're concerns about the economy, I mean, almost every CEO out there thinks recession's headed in our direction is through less hiring.

Cris deRitis:                       Right.

Mark Zandi:                      So if you have less hiring, you get a weakening in job growth. But it doesn't feel like you actually can go into recession, unless you have an increase in layoff, which would ignite that pullback and spending that is necessary for an actual contraction in economic activity. See what I'm saying? It just feels like a different dynamic at play here. This time is different in that sense.

Cris deRitis:                       Yeah. I mean, but that lack of hiring does pile up over time, right?

Mark Zandi:                      Yeah.

Cris deRitis:                       So maybe that's enough to push us in, that by itself. It sounds like a slowcession.

Mark Zandi:                      Slowcession. It does sound like a slowcession to me.

Cris deRitis:                       Yeah, very good.

Mark Zandi:                      Okay. I just wanted to try that out on you, but I need to dig deeper. We need to dig deeper into that kind of question, but something interesting that's going on, that's very different than previous recessions, I think. Okay, let's play the game, statistics game. We each put forward a statistics. The rest of the group tries to figure that out through cues, and deductive reasoning, and clues. And the best statistic is one that's not so easy, we get it quickly. One that's not so hard, we never get it. And something that, bonus, if it's apropos to the topic at hand, which is the job market, but doesn't need to be. Okay, who wants to go first? Who's going to raise their hand? Dante, should I get you out of the way? Because I know you're kind of struggling there a little bit.

Dante DeAntonio:           I'll go first. I'm on my third number, because of all the details.

Mark Zandi:                      Oh, sorry.

Dante DeAntonio:           Oh, it's okay.

Cris deRitis:                       Oh, no.

Dante DeAntonio:           Good thing I had a third one. 147,000 is the number.

Cris deRitis:                       From the jobs report?

Dante DeAntonio:           It is from the jobs report.

Mark Zandi:                      From the payroll survey?

Dante DeAntonio:           It is not from the payroll survey.

Cris deRitis:                       From the Household Survey?

Dante DeAntonio:           It's not [inaudible 00:42:27] and to be more specific, it's a decline of 147.

Mark Zandi:                      Oh, well that's a little helpful. Minus one.

Marisa DiNatale:              Oh it sounds like you missed a negative sign.

Mark Zandi:                      Yeah. Yeah.

Dante DeAntonio:           It was intentional. I don't want to give away too much right away.

Mark Zandi:                      A decline of 147,000. Could it be the number of people who are out of the workforce, that say they want a job that declined?

Dante DeAntonio:           It is not.

Mark Zandi:                      Okay. Is it something like that, in that genre?

Dante DeAntonio:           Yeah, it's close in terms of-

Mark Zandi:                      Oh, it's close. Okay.

Dante DeAntonio:           I'll give you close short.

Cris deRitis:                       Oh, marginal, discouraged workers...

Mark Zandi:                      Yeah, it has something to do with labor...

Cris deRitis:                       One of those.

Mark Zandi:                      Yeah. One those-

Marisa DiNatale:              Time for economic reasons.

Dante DeAntonio:           Wandering around the right part of the report, I think.

Mark Zandi:                      I know. I know-

Dante DeAntonio:           And then how you look at it.

Mark Zandi:                      Because we do know that unemployment and underemployment declined in the month, right? So it's got to be one of those statistics that describe that. Is that right?

Dante DeAntonio:           That is correct, yes.

Mark Zandi:                      Okay. And it's not... Okay. What do you think, Marisa? You know the bowels of this report better than anybody.

Marisa DiNatale:              I know.

Mark Zandi:                      Yeah.

Marisa DiNatale:              I'm going to go into it, and start looking at it. I don't know. So it's not marginally attached, it's not discouraged.

Cris deRitis:                       Part-time for economic reasons, you said that?

Marisa DiNatale:              I said that. He said no.

Mark Zandi:                      No, he said no. Okay.

Marisa DiNatale:              Can you give us a hint?

Mark Zandi:                      It sounds like, "No."

Dante DeAntonio:           I'm trying to-

Cris deRitis:                       Put us out of our misery. What is it?

Mark Zandi:                      All right, what is it?

Dante DeAntonio:           It's the decline in long-term unemployment. So people that have been unemployed for 27 weeks or more. And it's backed down to, essentially, a cycle low, basically the lowest it's been in quite some time.

Mark Zandi:                      Oh, interesting.

Dante DeAntonio:           And I think that had been, at least a concern of mine, I don't know, recently, a year ago maybe, that you'd have these people out of the labor force, out of the labor market, for too long, and it'd be hard for them to get back in, given the pandemic and everything else that had happened. And that doesn't seem to be the case, right? I mean, there are very few people that are long-term unemployed at this point, at least relative to historical levels. And so that's, I think, a positive sign.

Mark Zandi:                      Yeah, it is. In the report, they provide data on the number of people unemployed by length of unemployment. Have you noticed anything else in that data? Has near-term unemployment started to rise? Maybe the tech layoffs are showing there, or is that still also very low? I suspect it is still very low.

Dante DeAntonio:           I think it is still very low. I'd have to go back.

Mark Zandi:                      Okay, no worries.

Marisa DiNatale:              It is, yeah.

Mark Zandi:                      It's still very low. Okay. Okay. Well, okay, that was a good one. Good statistic. We kind of fell down on the job, but that was a pretty good one. Hey Marisa, you want to go next?

Marisa DiNatale:              Sure. Minus 35,000.

Mark Zandi:                      Oh, okay. You sure it's a negative?

Marisa DiNatale:              Yep.

Dante DeAntonio:           Is that temp help?

Marisa DiNatale:              Yeah. Yep. I know we talked about it.

Mark Zandi:                      Oh, whoa.

Dante DeAntonio:           I wrote it in the release this morning, so that helped.

Marisa DiNatale:              Yeah, and he talked about it upfront.

Mark Zandi:                      There's the cow bell. Yeah, that's a good one. Way to go.

Marisa DiNatale:              I picked it because it's fallen for five consecutive months, and it's down about over 100,000 from its peak five months ago. And temp help is something we often look at as perhaps a leading indicator of where the rest of the job market is going. So employers will, when they're ramping up after a recession, they'll hire temporary workers at first ,when they're still kind of unsure of where things are headed. And temp workers are often the first to get laid off, or let go, before employers start to let go permanent employees, and they can easily adjust their demand for labor. And it just goes to what we were just talking about, about hiring may pull back. We haven't seen layoffs rise yet. They're incredibly low. But this is perhaps another indicator of just a weakening in demand for labor that is not yet showing up in layoffs.

Mark Zandi:                      Is there any chances labor supply, these temp help companies just can't find workers?

Marisa DiNatale:              Sure. That could certainly be.

Mark Zandi:                      Okay. Well, which is it? You argued it was demand.

Marisa DiNatale:              I think it's demand, just because we saw a temp help rising and falling with the economic cycle. So we saw it fall off, obviously, during the pandemic, started coming back again when the economy reopened and rebounded. And then when things started to weaken early and late '21, '22, with higher inflation, Russia's invasion of Ukraine, kind of weakened again. So it's very cyclical. I think it's indicative of demand. And I'll say, other surveys that we've seen of business intentions to hire over the next year, they're all showing the businesses are saying, "We're going to pull back on hiring."

Mark Zandi:                      Okay. So it could be supply, but you don't think it is?

Marisa DiNatale:              I don't think it is.

Mark Zandi:                      It's demand.

Marisa DiNatale:              I think it's demand.

Mark Zandi:                      Demand. And it's a good leading indicator signaling slower job creation going forward.

Marisa DiNatale:              I believe so, yeah.

Mark Zandi:                      So if companies aren't getting temp help, that's the first thing they cut before they actually stop cutting their own workforce, or stop hiring their own workforce.

Marisa DiNatale:              Yeah, and a lot of people think of temp help always as sort of white collar jobs, but there's a lot of temp help that's used in manufacturing too.

Mark Zandi:                      Ah, great point.

Marisa DiNatale:              And we've seen that, again, quite a bit.

Mark Zandi:                      Yeah, that's a great point. Yeah. That's where manufacturers are still adding to payrolls, but the first thing, it feels like they might be cutting their temp help.

Marisa DiNatale:              Mm-hmm.

Mark Zandi:                      And then the next thing that would happen is that they start to cut their own payrolls.

Marisa DiNatale:              Right.

Mark Zandi:                      Yeah. Okay, good. Hey Cris, what's your statistic?

Cris deRitis:                       Okay, I'm going to reframe the discussion here.

Mark Zandi:                      Oh.

Cris deRitis:                       49.6.

Mark Zandi:                      The ISM Non-Man survey just came out this morning.

Cris deRitis:                       That's the one.

Mark Zandi:                      I'm not a-

Marisa DiNatale:              Oh, it's the Non-Man.

Mark Zandi:                      See how I do that? I didn't even have a chance to look at it, because that came out after we started this report, but I could sense he was going in that direction.

Cris deRitis:                       Yeah. Reframing.

Mark Zandi:                      Yeah, your reframe was really important when you said that.

Dante DeAntonio:           That was a hint.

Cris deRitis:                       That was little-

Mark Zandi:                      Where's my cowbell?

Cris deRitis:                       I just gave it to you.

Mark Zandi:                      Oh, did you? Okay. I didn't hear it. Okay, there you go-

Cris deRitis:                       Extra.

Dante DeAntonio:           Ring didn't come through.

Mark Zandi:                      Oh, okay. So tell us about that report, because that came out while we were in the middle of this podcast, so we hadn't had a chance to look at it. So, what's it say?

Cris deRitis:                       That's right. So I-

Marisa DiNatale:              That's bad.

Cris deRitis:                       I hadn't... It's bad. 49.6 is in contractionary territory, right? Below 50. It was 56.5 in November, so big drop in the index. And across components, we can see declines in business activity, new orders. So if you're thinking of this as a more forward-looking type of index, where business is headed, certainly suggests a pullback in the services part of the economy as well. We've already talked about manufacturing, but services also seem to be softening.

Mark Zandi:                      Yeah. But although this is, "Bad news is good news," right? I mean, we were expecting this, right? I mean, this has to happen.

Cris deRitis:                       Well, to this degree? I mean, this is pretty quick.

Mark Zandi:                      Yeah. Oh yeah. Oh yeah. Yes. I would think, yeah. Plus, you're on the ISM surveys, because that those are half sentiment surveys. What people feel, because it's not based on data. But what about, do you see-

Cris deRitis:                       Well, it's some data, right? They're new orders, right? They're getting some signals.

Mark Zandi:                      Yeah.

Cris deRitis:                       It's not purely speculation.

Mark Zandi:                      Yeah. I'm curious what the markets are. How are the markets reacting to it? My guess is they're reacting positively to it. Bad news is good news, probably the case here.

Cris deRitis:                       Oh, probably the combo of this?

Mark Zandi:                      Yeah. Yeah, I'm sure they're pretty happy with that. Hey, can I ask, though, on one of the key statistics in that survey is the supplier deliveries, because that goes to inflationary pressures. How did that do? The man manufacturing, that's way down suggesting that inflationary pressures are debating pretty quickly in the manufacturing sector. What about services? That's important.

Cris deRitis:                       Yeah, that came down as well.

Mark Zandi:                      Oh, did it?

Cris deRitis:                       53.8 to 48.5, right?

Mark Zandi:                      Oh, okay. That's encouraging, okay. All right. Okay.

Cris deRitis:                       Prices paid down, right, so. Yeah, interesting.

Mark Zandi:                      Yeah. This goes back to what you were saying. You pulled out one of these surveys, similar survey, back in the last podcast, the one done by S&P.

Cris deRitis:                       Yes.

Mark Zandi:                      And that was weak as well, as I recall.

Cris deRitis:                       You criticized mercilessly.

Mark Zandi:                      I did, I did. I did. Discredit it, yeah. Yeah. But this is certainly directionally in the right direction, and consistent with that report.

Cris deRitis:                       Yeah, that's right.

Mark Zandi:                      Yeah. Oh, interesting. Okay. All right. So I guess-

Cris deRitis:                       Yeah, again, you can see what you want to see. So definitely still-

Mark Zandi:                      Yeah, yeah, yeah, yeah, yeah, you're right.

Cris deRitis:                       Is it?

Mark Zandi:                      Yeah.

Cris deRitis:                       The question is the speed of deceleration, right?

Mark Zandi:                      The speed of deceleration. That's a good point. But you're not arguing that. I mean, if you take this at literally face value, you're saying manufacturing's now below 50 ISM, Non-Man ISM is below 50. That would suggest the economy's contracting. You're not suggesting that, are you?

Cris deRitis:                       Not yet, no, but it's certainly suggesting that we're moving that-

Mark Zandi:                      Yeah.

Cris deRitis:                       The momentum is certainly moving in that direction.

Mark Zandi:                      Yeah. But now you're-

Cris deRitis:                       Again, it's deceleration-

Mark Zandi:                      Yeah. And that's right. Deceleration. That's consistent with everyone's view of what should happen, right? The economy's got to decelerate, but you're not arguing it's actually contracting.

Cris deRitis:                       Not at the moment. Not at the moment.

Mark Zandi:                      Okay. Right. Yeah. Actually, okay, this leads to my statistic, and that's a bit of a clue. You ready? Two numbers. 4.1, 1.4. Two numbers. They're related. 4.1%, I should say.

Cris deRitis:                       Oh, in [inaudible 00:52:56] and layoffs.

Mark Zandi:                      No.

Cris deRitis:                       No, oh.

Mark Zandi:                      And it's not employment related.

Cris deRitis:                       Oh.

Mark Zandi:                      It's not related to the employment report, the jobs report, or JOLTS.

Cris deRitis:                       It's not-

Marisa DiNatale:              But it came out this week?

Cris deRitis:                       Indeed. Indeed.

Dante DeAntonio:           They're both percentages, or just the first one?

Mark Zandi:                      They're both percentages. Yeah. The first one came out, it was updated this week. The second one was updated, I think, last week. 4.1., 1.4%. Percent.

Marisa DiNatale:              Percent.

Mark Zandi:                      Yeah.

Marisa DiNatale:              Not a percent change, just a percent.

Mark Zandi:                      Percent. Yeah. I'll give you a clue. This is a pretty strong clue. Economic view. Our economic view website. This is something that Dante runs. This is very embarrassing. I will have to say.

Dante DeAntonio:           It's our estimate of fourth quarter GDP. Yeah.

Mark Zandi:                      Yeah. 4.1%. Fourth quarter GDP, fourth quarter GDP. Can I repeat that please? 4.1%. That doesn't feel like contraction to me. I don't know.

Dante DeAntonio:           Again, rear mirror. All right.

Mark Zandi:                      Oh no, what do you... This ISM survey is from December.

Dante DeAntonio:           Yeah. All four of you. Well I'm talking about the first.

Mark Zandi:                      Yeah. And that's on top of 3.2% in Q3, 3.2-

Marisa DiNatale:              What was the 1.4? What was the 1.4?

Mark Zandi:                      Okay, one point Dante? Come on, Dante.

Dante DeAntonio:           That's what it was.

Mark Zandi:                      Oh.

Dante DeAntonio:           Recently.

Mark Zandi:                      That's true. But that's not-

Dante DeAntonio:           That was two revisions ago. You're talking-

Mark Zandi:                      You'll see other number on the EV website.

Marisa DiNatale:              Current month GDP.

Mark Zandi:                      So embarrassing. So embarrassing.

Dante DeAntonio:           I thought you were talking about the previous and the revision-

Mark Zandi:                      I know, I know. Blah, blah, blah.

Dante DeAntonio:           Monthly for December, and the current quarter estimate of-

Mark Zandi:                      Yeah, November. So Dante does a great job here. I'm just teasing, obviously. But he puts together a current quarter tracking estimate of GDP. So you take all the monthly data coming out, ISM surveys, employment reports, all that stuff, through our modeling, come up with an estimate, try to and summarize it, and what does it mean for GDP for the quarter. And all these numbers, I suspect when we put the ISM survey in there, it'll bring that down a little bit. We'll see how that does end of today. But we were at 4.1% GDP growth. And by the way, the Atlanta Fed, the other folks that do a good job here, they're at 4% too, I think, or something close to that. And that's top of 3.2% growth in Q3. So it doesn't feel like the economy's losing any momentum whatsoever.

                                             I mean, I don't want to overstate the case, because it's trade, and inventories, and clearly Q1 of this year is going to be a lot weaker than 4.1%, but nonetheless. And the 1.4, that's the monthly GDP estimate. So we estimate GDP monthly, as you know, from the Bureau of Economic Analysis. We get quarterly estimates, and we construct our own estimates of monthly GDP. And for the month of November, it was 1.4%. And yet, we haven't come out with December yet. We don't have all the data yet, but that feels like that's going to come in strong too. So I don't know, Cris, I put my money on Dante's statistic other than that ISM survey. I don't know. It was pretty strong.

Cris deRitis:                       Fits your story better.

Mark Zandi:                      Okay. Makes me feel better. Okay, listener questions. Let's go to listener questions. And before we go there, we have been getting some... I should level set. We've started this new part of the podcast, where we answer questions that are being posed by listeners, and now the onus is back on the listener. So if you've got questions that you'd like us to address. And we'll address a couple, three of them, try to do that every podcast, where we don't have an external guest. Please let us. Fire away. LinkedIn, Twitter, help economy at... Is that help economy? I always get confused. helpeconomy@moodys.com, go to economy.com website, you can pose questions there. You know how. Send us an email, that kind of thing. And we've been getting a lot of good comments. And Cris, we got a really kind of heartwarming comment from a listener. You want to describe that?

Cris deRitis:                       Yeah, yeah. A long time listener. It's been a commenting with me, and previously Ryan, for a long time. But Matt Forrester informed us that, well, due to our podcast, we motivated him to start a graduate degree this January. So congratulations, and good luck to Matt, and thanks for listening.

Mark Zandi:                      Yeah, I thought that was great. Yeah. Okay, here's a couple three questions. I'm just going to throw them out. First one's to you, Cris, because it goes back to slowcession.

Cris deRitis:                       Okay.

Mark Zandi:                      And just to put a finer point on it, the listener asked, "What's the difference between slowcession and stagflation?" You want to take a crack at that one?

Cris deRitis:                       Oh, I'd say they're very different. Very different. Stagflation is a really negative economic outcome, right? High inflation and slower, low growth, no growth. Or actually, negative growth contraction. So that's a very severe situation like we had in the 1970s. Slowcession is really just a slowing of the economy. Economy that's growing certainly well below potential, maybe even a couple quarters here or there of small negative growth, but not with that very high explosive type of inflationary environment. If anything, you'd expect to see inflation coming down over this period as well. So that's how I would characterize it.

Mark Zandi:                      Yeah. Yeah, they're quite different.

Cris deRitis:                       Yeah, they're very different things. Yeah.

Mark Zandi:                      Stagflation is bad. Slowcession.

Cris deRitis:                       The worst. The worst.

Mark Zandi:                      Slowcession, not great, but obviously much better than recession stagflation. So I declare victory. We should be very happy if we could slowcession in 2023, going into 2024. Okay, here's another question. "Since the recession is likely to..." See now, this listener's not assuming we are going to have a recession. "Since a recession is likely to be mild, is it possible to have a downturn that is confined to just the housing and tech sectors alone? Is that consistent with a recession?" Marisa, you want to answer that question?

Marisa DiNatale:              I think it's difficult to have a severe downturn, particularly in housing, because the multiplier on housing is big. And what I mean by that, is that there's a lot of jobs tied to the housing market, in all different industries. I mean, you have manufacturing, you have financial services, you have construction, you have professional services. So I think it would be very difficult to have a severe contraction in a segment of the economy that's that large, and keep it confined to that part of the economy.

Mark Zandi:                      One more. Okay, this is an interesting question, and I'll just read it verbatim. "The tech valuation bubble has probably already popped. Banks have decent balance sheets, emerging markets have already hiked a good deal, hiked interest rates a good deal. What fat still exists to be trimmed?" So I guess the broader question here is generally before recessions, you've got some major imbalances in the economy, something fundamental is wrong. Tech bubble, you mentioned this question you asked about merging markets, but also real estate markets overbuilt, a high leverage, that kind of thing. So it feels like a lot of those potential imbalances that could undermine the economy and lead to recession have been already addressed to some degree.

                                             I mean, stock prices are down 20%. Crypto prices have collapsed. As the listener pointed out, emerging markets have kind of adjusted, raised interest rates, stabilized their currencies. The banking system is in pretty good shape. So what's out there? What imbalance, what fundamental problem is out there, that could be at the center of a recession? Cris, do you want to answer that question?

Cris deRitis:                       Well, I mean, I guess the obvious one is that inflation is still, prices are out of whack, right?

Mark Zandi:                      Yep.

Cris deRitis:                       That's still the biggest factor facing the economy, and the Fed is trying to address those with the rate hikes and monetary policy. And that's certainly, a mistake there could certainly be the final straw that leads us into recession. So that would be one argument. I would say for the other asset, asset prices have adjusted, but you could argue that some of them have not completely adjusted, like housing. You could make the argument that we still are quite overvalued. Now we've argued for some demographics and other factors that would support housing through a more gradual adjustment process. But you could construct a scenario where house prices have to correct further, in a much more violent fashion, and that could trigger some recession. I don't put a lot of probability on that, but if you want to look for sources of imbalance, I would argue that the house prices are still out of balance relative to rents or incomes.

Dante DeAntonio:           Yeah. Makes sense.

Mark Zandi:                      Yeah. So the imbalance is the thing that's staring us in the face, and that's the high inflation.

Cris deRitis:                       Yeah, that's the obvious one. Yeah.

Mark Zandi:                      That's the obvious one. And of course, in past recessions, many of them have been preceded by high inflation, and a Fed that's been jacking up interest rates.

Cris deRitis:                       Right.

Mark Zandi:                      So similar to that kind of dynamic. The difference, probably, is that in those other recessions, we did have major imbalances in the economy that got exposed by the higher rates, that exacerbated conditions, and reinforced the problems in the economy. But that doesn't necessarily argue for no recession. You may have a recession, it's just milder, because you just don't have those imbalances. Yeah.

Cris deRitis:                       And ounce of humility, right? Typically, we only figure out those imbalances after.

Mark Zandi:                      Good point.

Cris deRitis:                       So there might be something out there that we're not identifying, or maybe we're giving too little weight to. Maybe they're company balance sheets, zombie companies out there that we don't know about, or I don't know, derivatives, who knows, right? There could be-

Mark Zandi:                      Yeah, the unknown unknowns.

Marisa DiNatale:              I think that's the question that's being asked, is what else could be out there? What shoe could drop?

Mark Zandi:                      What fat still exists to be trimmed?

Cris deRitis:                       Yeah. Yeah. Okay.

Mark Zandi:                      Okay, before we call a podcast, let's just go around the horn, like we've been typically doing, just to sum it all up. What's the probability we go into recession at some point in 2023? Do you think we should extend that out now to early '24 as well? I mean 2023, early 2024. Let's say over the next year, so that would encompass going into early 2024. Dante, let's start with you. You're the mystery man here, I think. We haven't asked you that question in a while.

Dante DeAntonio:           I think last month I said 50%, and that's where I am now. So whatever I said last month, I'm there now. So yeah, I think it's still 50:50.

Mark Zandi:                      But you have to take a side. So which side would it be? No recession, or recession?

Dante DeAntonio:           I'm still on the no recession side right now.

Mark Zandi:                      No recession side.

Dante DeAntonio:           Yeah.

Mark Zandi:                      So you and I are on the same page.

Dante DeAntonio:           I'm trying to keep my job, right?

Mark Zandi:                      Yeah, yeah. Well you can come back anytime. Come back anytime. Okay. Marisa, where do you stand?

Marisa DiNatale:              I'm still like 55.

Mark Zandi:                      I think last time you were at 55%, right?

Marisa DiNatale:              I'm still at 55.

Mark Zandi:                      You're still 55?

Marisa DiNatale:              Yeah.

Mark Zandi:                      So today's numbers didn't push you in one direction?

Marisa DiNatale:              No, I mean if anything, today's numbers are more heartening, I think.

Mark Zandi:                      You mean lower probability recession?

Marisa DiNatale:              I mean, yeah. I have no reason to up it after today, so.

Mark Zandi:                      Right. Okay. Very good. And we get the CPI number, I think, is that next week, or? Yeah, I think-

Marisa DiNatale:              Yeah, next week.

Mark Zandi:                      Yeah. Okay. So hey, Cris, it feels like she might be wavering here. If I get a good CPI number, she might come in a little bit.

Marisa DiNatale:              We'll see.

Mark Zandi:                      We'll see.

Cris deRitis:                       We'll see,

Mark Zandi:                      We'll see.

Marisa DiNatale:              These are the two reports.

Mark Zandi:                      Yeah. Okay, Cris, I think you were at 70%?

Cris deRitis:                       70. Two numbers here. That ISM is making me think so.

Marisa DiNatale:              Oh, boy.

Cris deRitis:                       But I'll go with 68.

Marisa DiNatale:              Oh.

Mark Zandi:                      Oh, that's a movement.

Marisa DiNatale:              Mr. Brightside.

Mark Zandi:                      Yeah, that's a movement. By the way, this is a little mind numbing, but you in your baseline would have a recession. For you to switch that back to no recession, with the probability of that have to be no recession, two-thirds? So one-third probability of recession going forward?

Cris deRitis:                       Yes.

Mark Zandi:                      You see what I'm saying?

Cris deRitis:                       Yeah.

Mark Zandi:                      So we're a long way from you changing your baseline forecast, from recession to no recession.

Cris deRitis:                       Well, but there's gradation, and now that we have slowcession, I have another degree of freedom there.

Mark Zandi:                      There's a degree of freedom. That makes a lot of sense. Okay. All right. And as I said, I'm still at 50:50. I do have we to choose a side, and I still side with no recession at this point. I feel I can see the last two, three months have been feeling better and better about that. So I can't wait to see that-

Cris deRitis:                       So still 50:50? No, you're not going 45, or?

Mark Zandi:                      Yeah, I think that's still reasonable to be 50:50, but if I had to pick a side, pick the no recession side. But yeah, not quite comfortable enough to say less than 50:50 at this point. Here's the other thing, which is going to complicate our discussion going forward, is we are now going to start creeping into 2024. So that adds a level of complexity to this conversation around probabilities of recession, as we move into 2024. Because that's just looking out a little bit further. Things do happen.

Cris deRitis:                       Okay, so what's your two-year probability?

Mark Zandi:                      You know, that's the question.

Cris deRitis:                       Okay, next time.

Mark Zandi:                      Let's do that next time. I'm not sure. It's got to be higher than 50:50 though, doesn't it? Almost by definition, doesn't it? Sort of?

Cris deRitis:                       It's cumulative, right?

Mark Zandi:                      Yeah.

Cris deRitis:                       If we're thinking.

Mark Zandi:                      Yeah, well, let's think about that, and talk about that in future podcasts. Okay. Anything else guys, before we call it today? Dante? Looks like you're going to say something.

Dante DeAntonio:           I was just looking at the market expectations for what the Feds are going to do in-

Mark Zandi:                      Oh, yeah.

Dante DeAntonio:           And it shifted quite a bit on the report today. I think yesterday, it was 60:40 in favor of a 25 basis point hike in early February, and it shifted to 75:25 in favor of a 25 basis point hike. So the market seems to think that the Fed likes this, and will be more likely to downshift to 25 basis points.

Mark Zandi:                      Have they brought in the terminal rate? Because it was over five, is it now below five, by any chance? Can you tell?

Dante DeAntonio:           I didn't look yet.

Mark Zandi:                      Quickly?

Dante DeAntonio:           Let me see.

Mark Zandi:                      Yeah, I'm just very curious. I mean, if it goes below five... Prior to this report, they had three-quarter-point rate hikes built in, putting the funds rate just over 5%.

Dante DeAntonio:           Yeah, it's still pretty split. So right now it is slightly in favor of the terminal rate at 475 to 500.

Mark Zandi:                      Oh, okay.

Dante DeAntonio:           It's split between that and 500 to 525. So it's not a clear-

Mark Zandi:                      Evenly split. So five on the nose, this feels like.

Dante DeAntonio:           Basically.

Mark Zandi:                      Yeah, basically. Okay, good. Thanks for that. Okay. Well, with that, we're going to call this a podcast. Thank you, listener. Talk to you next week.