Debating Jobs, Debating Forecasts

Episode Summary

Executive Summary: The hosts dissected the October jobs report and concluded the labor market is cooling but remains solid: payrolls rose 261,000, unemployment ticked up to 3.7%, and wage growth is easing only gradually. They agreed the Fed will likely keep tightening, while debating whether recession risk is more likely from a policy mistake, a negative shock, or a lagged slowdown already unfolding.

Main Topics: October jobs report: solid but clearly cooling (Priority: 5/5): The panel views the report as stronger than expected but consistent with a slowing labor market. Payroll gains remain robust, yet the pace has fallen sharply from earlier in the year. Wage growth and inflation dynamics (Priority: 5/5): They focused on wage growth as a key Fed concern, noting it is no longer accelerating and may be topping out, though still too high for comfort. Labor force growth, participation, and household survey weakness (Priority: 4/5): Mark emphasized strong labor supply growth driven by working-age population and immigration, while the household survey showed flat employment and a lower participation rate. Sector detail: services strength, warehousing and construction softness (Priority: 3/5): Job gains were broad, led by leisure and hospitality, but warehousing weakened and construction showed only minimal growth, signaling a broader cooling. Fed policy path and market expectations (Priority: 5/5): They discussed how the report fits the Fed’s expected tightening path and whether markets are pricing a higher terminal rate than Moody’s baseline. Recession odds and forecast philosophy (Priority: 5/5): A long debate centered on whether recession will come from the economy failing to cooperate, a Fed policy mistake, or an external shock—and how to incorporate that into a baseline forecast.

Key Arguments: Payroll growth is slowing from earlier in the year, but 261,000 jobs is still strong by historical standards and does not alter the near-term Fed path. The rise in unemployment is partly driven by weaker household employment and a declining labor force, which may be a “bad news is good news” signal for inflation. Wage growth appears to have peaked near 5% and is no longer accelerating, which supports the case that inflation pressures are starting to cool. Labor force growth is unusually strong, in part due to immigration, which raises the level of job creation needed to keep unemployment from rising. The household survey has been flat since the start of the year, suggesting labor demand is weakening even if payrolls still look healthy. The Fed is likely to continue hiking because inflation remains too high, and officials may prefer to over-tighten rather than under-tighten. Marissa and Mark argued the labor market and inflation data look like they are moving onto the Fed’s intended script, but Chris remains more worried about recession risks and financial conditions easing. Forecasting a recession via a shock is difficult because shocks are hard to time and specify, but Chris argues the economy is vulnerable enough that a shock should be part of the baseline.

Data Points: Payroll jobs added: 261,000 - October nonfarm payroll gains in the jobs report. Unemployment rate: 3.7% - Rose in October alongside weaker household employment. Labor force change: -201,000 - Labor force declined in October, contributing to the unemployment rate increase. Prime-age employment-to-population ratio: 78.8% - Mark cited this as the biggest drop since 2017 and below the 80% full-employment threshold. Wage growth, month over month: 0.4% - Average hourly earnings increased faster than the prior month’s 0.3% pace. Wage growth, year over year: 4.7% - Annual wage growth is slowing but still elevated. Jobs revisions, August and September combined: +29,000 - August revised down by 23,000 and September revised up by 52,000. Leisure and hospitality job gains: 35,000 - One of the stronger sectors in the report, though still below pre-pandemic employment levels. Warehousing job change: -20,000 - Only notable sector decline, tied to prior overhiring and demand shifts. Construction job gains: 1,000 - Very small gain, with losses in some subcomponents. Rental vacancy rate: 6.0% - Q3 2022 rental vacancy rate rose from 5.6%, still below the estimated equilibrium rate of about 7%. Homeowner vacancy rate: 0.9% - Still very tight, though up from a record low in the previous quarter. Recession probability, Marissa: 60% - She said she has become a bit less pessimistic recently. Recession probability, Chris: 70% - He kept his forecast unchanged and said the risk is still skewed to the upside. Market terminal rate expectation: 4.75%–5.25% - Chris said futures implied a higher terminal funds rate than the Moody’s baseline. Moody’s baseline terminal rate: 4.50%–4.75% - The hosts described their forecast as another 50 bp hike in December and 25 bp in January.

Pivotal Quotes: "I think this is a bit of a cloud employment report. You can see what you want into it." — Chris Dorites: Opening take on the October jobs report: strong headline payrolls, but mixed subcomponents and a rising unemployment rate. "Bad news is good news." — Mark Sandy: Used repeatedly to describe why slower labor-market conditions may help the Fed reduce inflation. "Recession risks are uncomfortably high." — Mark Sandy: Mark summarized the baseline view near the end, emphasizing lingering upside risk even as the script appears to be unfolding as expected.

Implications: The labor market is still resilient, but cooling enough to support disinflation. Expect more Fed tightening, slower job growth, and continued debate over whether recession comes from policy overreach, an external shock, or a gradual slowdown.