Healthy Job Market, Unhealthy Hosts

Episode Summary

Executive Summary: The episode assesses the March 2023 jobs report as a “sweet spot” outcome: payroll growth cooled to 236,000 but the labor market remained resilient, with unemployment at 3.5% and wage growth easing. The hosts also interpret rising jobless claims, falling openings, and slower hours as signs of moderation, while warning that the banking crisis and tightening credit could create recession risk later in 2023 or into 2024.

Main Topics: March 2023 jobs report: moderation without collapse (Priority: 5/5): The panel agrees the report was largely in line with expectations and showed a slowing labor market that still remained healthy. Payroll growth moderated, but joblessness stayed low and the household survey looked firm. Industry shifts and labor market composition (Priority: 4/5): Construction and manufacturing softened, retail cooled after prior strength, while healthcare and leisure/hospitality remained key growth engines. The panel noted some interest-rate-sensitive sectors are beginning to weaken. Claims and JOLTS as confirmation of cooling (Priority: 5/5): Initial jobless claims were revised higher and now show a rising trend; JOLTS showed openings falling below 10 million. Together, these indicators suggest labor demand is easing and layoffs are slowly showing up. Banking crisis and credit tightening (Priority: 5/5): The hosts discussed the potential economic fallout from the March banking turmoil, focusing on lending standards, business credit, sentiment, and delayed effects that could hit hiring and investment in coming quarters. Inflation, Fed policy, and the 'threading the needle' problem (Priority: 5/5): The group debated how the Fed can slow inflation without triggering recession. They argued the Fed has blunt tools, with rates and communication doing most of the work, while inflation is likely to keep easing. Recession probabilities for 2023 vs. 2024 (Priority: 4/5): The conversation broadened into whether recession is more likely later in 2023 or in 2024. Most saw higher odds in 2024 than 2023, but not enough to make recession the baseline forecast. Why sentiment is weak despite strong jobs (Priority: 4/5): They explained the disconnect between a strong labor market and poor consumer sentiment through inflation’s erosion of purchasing power, survey design, political mood, and lingering economic scars.

Key Arguments: The jobs report was a “least surprising” and relatively clean read: payroll growth slowed but stayed positive, suggesting a cooling rather than collapsing labor market. Household survey data were stronger than expected, with labor force participation and employment rising, indicating the labor market remains robust even as it loosens. Initial claims now show a rising trend after seasonal-adjustment revisions, making the data more consistent with widespread layoff announcements. JOLTS openings fell to their lowest level since mid-2021, signaling weaker labor demand even though quits and layoffs were noisy month-to-month. The banking crisis may not yet be fully reflected in hard data; tighter lending standards and weaker business credit are expected to hit with a lag. Fed policy is constrained by blunt instruments: raising rates can reduce inflation but also risks pushing unemployment higher, while other levers are limited. Inflation is expected to fall from roughly 6% toward 3% by year-end, reducing the need for aggressive additional rate hikes. Recession risk is higher in 2024 than 2023 because monetary-policy and credit effects take time to work through the economy. Consumer pessimism is partly a real income story: inflation has reduced purchasing power even though employment is strong. Survey differences matter: Michigan sentiment looks worse because it emphasizes inflation/personal finances, while Conference Board sentiment is more tied to jobs.

Data Points: Nonfarm payroll growth: 236,000 - March 2023 payroll gain in the jobs report Three-month average payroll gain: 345,000 - Average monthly job growth over the prior three months Average monthly payroll growth in Q1 2022: better than 550,000 - Comparison showing how much labor growth has slowed from a year earlier Unemployment rate: 3.5% - Ticked down from the prior month after the household survey improved Average hourly earnings growth, month over month: 0.3% - Monthly wage growth in March, described as similar to recent months Average hourly earnings growth, year over year: close to 4% - Wage inflation easing to its lowest pace in a while Average weekly hours: 34.4 hours - Hours worked fell back to the pre-pandemic level Change in average weekly hours: -0.1 - Monthly decline in average weekly hours worked Initial jobless claims: 228,000 - Latest weekly claims reading after seasonal-adjustment revision Prior claims level referenced: just under 200,000 - Old claims estimate before revision; revised data now show a higher trend Four-week average of claims: about 240,000 - Dante’s estimate of the current trend Break-even claims level: around 270,000 - Rough level Dante said would align with labor-market break-even JOLTS job openings: 9.9 million - February openings fell below 10 million, the lowest since mid-2021 Peak job openings: about 12 million - Approximate peak in early 2022 Pre-pandemic job openings: just north of 7 million - 2019/early 2020 comparison Labor force increase: over 400,000 - Household survey labor force growth in March Prime-age employment-population ratio: 80.7% - Cited as evidence the labor market is near full employment Household labor supply growth year over year: 2.43 million - Marissa’s labor-supply estimate versus labor-demand growth Labor demand growth year over year: 2.05 million - Estimated from employment plus openings, using JOLTS through February Permanent job losers increase: 172,000 - March over-the-month rise in people permanently losing jobs Two-month increase in permanent job losers: nearly 300,000 - Combined February and March increase; noted as unusually large Diffusion index of payroll growth breadth: 60.2 - Share of detailed industries adding jobs in March Prior month diffusion index: 57.4 - Lowest level in a long time before March rebound Q1 annualized wage growth: 3.75% - Mark’s statistic comparing wage growth to pre-pandemic norms Q1 corporate bankruptcies: 183 - Chris’s statistic; highest in 12 years Bankruptcy comparison year: 2010 - Last time corporate bankruptcies were this high, after the financial crisis Probability of recession starting in 2023: 40%-50% - Range discussed by the panel, with most leaning below or around 50% Probability of recession starting in 2024: 50%-67% - Higher than 2023 for most panelists, but not unanimous Consumer spending pressure from inflation: $372 per month - Average extra monthly spending estimated for households due to inflation in February

Pivotal Quotes: "It feels to me like it's in the sweet spot." — Mark Sandy: Assessment of the jobs report as slowing enough to help inflation without signaling recession "Threading the needle here ... we want the job market to kind of throttle back here a bit so that wage and price pressures moderate, get inflation back in." — Dante Maragioglio: Explaining the desired balance between labor-market cooling and avoiding a downturn "The Fed is the firefighter here, right? They do what they can with these very blunt tools to deal with the situation, but they're going to cause damage with these very blunt tools." — Chris Doriedis: Responding to questions about what else the Fed can do besides rate hikes

Implications: Expect slower hiring, rising claims, and tighter credit to keep building pressure through 2023. If inflation keeps easing, the Fed may pause soon, but recession risk likely rises in 2024 as lagged policy and banking effects work through the economy.