Near Perfect, New Probability

Episode Summary

Executive Summary: The hosts and Dante D’Antonio judge July’s jobs report as “near perfect”: payroll growth remains solid at 187,000 while clearly slowing, unemployment eased to 3.5%, wage growth is no longer reaccelerating, and broader labor-market indicators suggest cooling without collapse. They also discuss strong productivity trends, a better-than-feared Q3 GDP tracking estimate, and lower recession odds, though sticky wages, rising oil prices, and data revisions keep some caution in view.

Main Topics: July employment report: strong but moderating (Priority: 5/5): The panel views 187,000 payroll gains as a healthy, near-perfect report because job growth is slowing from earlier levels without signaling broad weakness. Wages, inflation, and the Fed’s comfort zone (Priority: 5/5): Discussion centers on whether 4.4% average hourly earnings growth is still too hot, with debate over whether 3.5% or closer to 4% is the more realistic sustainable benchmark. Signs of labor-market easing beyond unemployment (Priority: 5/5): They point to lower hiring, lower quits, shorter hours worked, and reduced temp help as evidence that firms are adjusting without resorting to layoffs. Participation, labor-force growth, and demographics (Priority: 4/5): The conversation explores why labor force growth remains strong even as the participation rate is flat, including prime-age participation, possible population growth effects, and data-measurement issues. Productivity and the Q3 GDP tracking estimate (Priority: 4/5): Moody’s Analytics’ early Q3 GDP tracking estimate at 4.1% annualized and productivity running at 1.5% are cited as signs the economy may be stronger than recession calls implied. Recession odds and macro risks (Priority: 4/5): The hosts lower recession probabilities but remain cautious due to sticky inflation, potential government shutdowns, and rising gasoline/oil prices.

Key Arguments: Payroll growth of 187,000 is a clear slowdown from recent months, but the breadth of the report remains constructive and not recessionary. Wage growth at 4.4% year over year is the main lingering concern, though some argue the Fed could tolerate something near 4% if inflation and productivity assumptions shift. A 3.5% unemployment rate is not necessarily evidence of an overheated labor market if participation is stable and labor supply is still expanding. Businesses appear to be cooling labor demand by reducing hiring and hours rather than by laying off workers, which is typically less recessionary. Quits have normalized, temp help has weakened, and layoffs remain very low, supporting the view that the labor market is easing in an orderly way. Productivity growth around 1.5% suggests the economy may be capable of sustaining moderate wage growth without reigniting inflation. The early Q3 GDP tracker at 4.1% annualized argues against an imminent recession and supports the idea that the economy is still expanding robustly. Benchmark revisions and survey measurement issues could later show the labor market was somewhat weaker than currently reported. Recession probabilities were trimmed because the data no longer fit a sharp-downturn narrative, though risks remain elevated until inflation returns fully to target.

Data Points: Nonfarm payroll gains: 187,000 - July employment report, described as near-perfect and consistent with a slowing but still healthy labor market. Unemployment rate: 3.5% - July household survey unemployment rate, down slightly despite expectations for it to rise over time. Average hourly earnings, m/m: 0.4% - Monthly wage growth in July, seen as still firm. Average hourly earnings, y/y: 4.4% - Stuck at roughly this pace since the start of the year, the main concern in the report. Healthcare job gains: 87,000+ - Healthcare continued to lead sector hiring in July. Construction job gains: almost 20,000 - Construction hiring held up despite housing-market headwinds. Government payroll gains: 15,000 - Public-sector hiring remained positive but slower than the second-quarter average. Temporary help employment: decline - Viewed as a warning sign that labor demand is cooling. Labor force growth: over 3 million in the past year - Used to argue that labor supply is still expanding enough to absorb job gains. Participation rate: 62.6% - Flat and roughly in line with pre-pandemic expectations after aging effects. Prime-age employment-to-population ratio: highest since early 2000s - Cited as evidence prime-age labor force attachment remains strong. Productivity growth since pre-pandemic: 1.5% average annual growth - The panel notes this matches the recent post-pandemic period and supports a 1.5% assumption going forward. Moody’s Q3 GDP tracking estimate: 4.1% annualized - Initial real-time estimate based on incoming hard data. Atlanta Fed GDP tracker: 3.9% - Mentioned as roughly aligned with Moody’s initial Q3 estimate. Job cut announcements (Challenger): 23,697 - Used as evidence layoffs remain very low. Job cut announcements y/y: down 8.2% - First year-over-year decline in 2023, reinforcing the low-layoff theme. Recession probability, Chris: 45% - Chris lowered his 12-month recession probability from 50% to 45%. Recession probability, Dante: about one-third - Dante lowered his estimate from roughly 40% to around 33%. Recession probability, Mark: about one-third - Mark also settles around a one-third chance over the next 12 months. Gasoline price reference: about $3.60 to $3.96 per gallon - Regional examples used to discuss inflation and consumer sentiment risk.

Pivotal Quotes: "I dare call it a near-perfect employment report given the current world that we're in." — Dante D'Antonio: Opening assessment of the July jobs report. "We are in the, if we've got a hand, three handle on whether it's 3.9 or 3.5, good enough." — Chris Drides: Discussion of whether wage growth needs to be 3.5% or whether something closer to 4% is acceptable. "Hard to see a recession, right? Because I think you need those layoffs to really spook people, consumers, have them pull back on their spending." — Mark Sandy: Explanation of why low layoffs support the no-recession view.

Implications: The labor market is cooling in a healthy way, reducing recession risk for now. But sticky wages, higher fuel prices, and future data revisions could still shift the outlook and keep the Fed cautious.