Jaw Dropping January Jobs (Redux)

Episode Summary

Executive Summary: The episode centers on a blockbuster January jobs report, a steady but still-tight Fed outlook, and Moody’s Analytics’ 2024 election model. Speakers argue the labor market remains healthy despite noisy January data, wage growth is still too firm for comfort, and the Fed likely won’t cut in March. They also discuss whether productivity and the neutral rate are rising, and project Biden narrowly winning 308 electoral votes.

Main Topics: January jobs report surprise (Priority: 5/5): Payrolls rose more than expected, with broad industry gains, large prior-month revisions, and mixed signals from hours worked and the household survey. The hosts emphasize seasonal distortion and benchmark effects make January unusually hard to interpret. Wages, hours, and labor market cross-currents (Priority: 5/5): Average hourly earnings accelerated sharply while average weekly hours fell to a low level historically associated with recessions. The panel treats these as conflicting signals rather than proof of a turning point. Fed policy and the timing of rate cuts (Priority: 5/5): The Fed held rates steady and signaled caution about a March cut. The hosts debate whether rates need to fall quickly later this year or whether the economy can tolerate restrictive policy longer. Neutral rate (r-star) and how to think about equilibrium (Priority: 4/5): A long discussion examines whether the economy is already close to equilibrium or whether the neutral funds rate is higher than current estimates. The hosts frame r-star as dynamic over the next 1-2 years rather than a fixed long-run number. Productivity outlook (Priority: 4/5): Chris highlights strong productivity growth as key to sustaining wage gains and easing inflation pressure. Dante remains cautious about whether the recent strength is durable, while Mark leans toward a possible technology-driven improvement. 2024 presidential election model (Priority: 4/5): Moody’s Analytics projects Biden with 308 electoral votes, but the result is highly sensitive to turnout, third-party candidates, gas prices, mortgage rates, and household income trends. Other labor and sentiment indicators (Priority: 3/5): The panel reviews Challenger layoffs, UI claims, JOLTS, and consumer sentiment. Most signals are consistent with a still-solid economy rather than imminent recession.

Key Arguments: The January payroll gain is probably a head fake in a seasonally noisy month; the underlying pace of job growth still looks closer to 175K-200K, not 353K. The economy remains healthy, and one strong jobs report does not change the expectation that 2024 job growth will slow versus 2023. Average hourly earnings are too volatile to overreact to, and the employment cost index provides a better read on wage pressures. The Fed is unlikely to cut in March, but if inflation continues toward target, cuts later in 2024 remain likely. If the economy can sustain low unemployment and decent inflation without the funds rate falling, then the neutral rate may be higher than current estimates. Alternatively, if r-star is still around 3%, the Fed may need to cut more aggressively and sooner than markets expect once easing starts. Productivity growth is the central swing factor for how much wage growth and labor-market strength the economy can sustain without reigniting inflation. The election model’s Biden advantage depends heavily on economic conditions, especially gas prices and mortgage rates, not just the level of unemployment. Challenger layoffs and UI claims may be understated or distorted by eligibility changes, low joblessness, and reduced incentive to claim benefits. JOLTS and sentiment data broadly support the view that the economy is slowing from strength, not collapsing.

Data Points: January payroll growth: 353,000 - Headline nonfarm payroll gain in January, far above expectations. Consensus / own forecast miss: About double expectations - January job growth was roughly twice consensus and the podcast's forecast. December + November revisions: More than 125,000 combined - Upward revisions over the prior two months added to the strong report. 3-month average payroll growth: 289,000 - Three-month average after revisions, up sharply from 165,000 previously. Unemployment rate: 3.7% - Held steady in the household survey. Labor force participation rate: Steady - No meaningful change in January. Average hourly earnings, monthly: 0.6% - Biggest monthly gain since early 2022. Average hourly earnings, year over year: 4.5% - Reaccelerated from around 4% a few months earlier. Average weekly hours: 34.1 hours - Down 0.2 hours, the lowest ex-pandemic level since mid-2010. ECI private industry, YoY: 4.3% - Fourth-quarter 2023 employment cost index reading, viewed as less noisy than AHE. ECI quarterly annualized pace: About 4% - Implied pace for the quarter, consistent with moderated wage pressure. March 2023 benchmark level: Adjusted to QCEW census data - Annual BLS benchmark revision tied payroll levels to near-universe QCEW counts. Average 2023 benchmark impact: About 20,000 jobs per month lower - Small downward revision by historical standards. January 2023 payroll gain: 517,000 (revised to 482,000) - Used as a comparison to show January upside surprises can be misleading. 2023 average payroll growth: 250,000 - Showed that the prior January surge did not persist all year. 10-year Treasury yield: Just over 4.0% - Market reaction after the jobs report. Fed funds target: 5.5% - Current policy rate discussed as well above estimated neutral. Fed’s implied long-run r-star: 2.5% - Referenced from the Summary of Economic Projections. Moody’s forecast r-star: 3.0% - Analysts’ working assumption for the neutral rate. 2024 election model projection: 308 electoral votes for Biden - Just above the 270 needed to win. Biden 2020 electoral votes: 306 - Benchmark for comparing the model result. Gas price threshold: $4 per gallon - If sustained for a few months, could swing the election toward Trump. Mortgage rate threshold: 8.5% - If sustained, could also swing the election against Biden. Current gas price mentioned: $3.15 per gallon - Used as the starting point in the election discussion. Current 30-year mortgage rate: Below 7% - Down from 8% earlier, but still politically salient. Challenger layoff announcements: Over 80,000 - January total, highest January since 2009 except for the prior year. Job openings (JOLTS): 9 million - Still solid, signaling labor market resilience. Michigan consumer sentiment: 79 - Improved materially from 61.3 in November. Michigan sentiment in November: 61.3 - Low point used for comparison. Michigan 1-year inflation expectations: 2.9% - Survey expectation moved lower. Productivity growth, latest quarter annualized: 3.2% - Used in the stats game to illustrate strong productivity. Average annual productivity growth since Q4 2019: 1.6% - Back-of-the-envelope estimate discussed on air. Average annual productivity growth in the four years before the pandemic: 1.7% - Used as comparison for post-pandemic productivity.

Pivotal Quotes: "The economy is still obviously doing well." — Dante D’Antonio: Bottom-line assessment of the January jobs report despite conflicting signals. "I don't think this changes my expectation of what happens in the labor market in 2024." — Dante D’Antonio: He argues the strong January report does not alter the broader slowdown outlook. "If that really was the equilibrium, then yes, by definition it would suggest it has to be higher." — Chris Dorites: On whether a still-strong economy implies the neutral interest rate is above current estimates.

Implications: Listeners should expect continued labor-market resilience, but with the Fed cautious on cuts and markets repricing timing. The key watch points are productivity, inflation persistence, and whether election-sensitive costs like gas and mortgages shift materially.