Noisy Data and New Variants

Episode Summary

Executive Summary: The panel dissected a noisy November jobs report: the establishment survey disappointed, but household data, unemployment, participation, and hours worked all pointed to a still-strong labor market. They argued seasonal adjustment, low response rates, and churn likely distorted the payroll number. The discussion broadened to Omicron, inflation, productivity, and how pandemic-era policy and labor-market scarring may explain current mismatches.

Main Topics: November employment report: weak payrolls, strong labor market underneath (Priority: 5/5): The panel agreed the top-line payroll gain was disappointing, but emphasized that household survey data, unemployment, prime-age employment, and hours worked suggest underlying strength rather than deterioration. Survey methodology and data noise (Priority: 5/5): A major focus was the difference between establishment and household surveys, low response rates, revisions, and seasonal adjustment. Speakers repeatedly warned against overreacting to a single monthly print. Omicron and macro outlook (Priority: 4/5): They discussed how Omicron could affect growth, inflation, supply chains, travel, and sentiment. Consensus: likely less disruptive than Delta domestically, but still a risk to global supply chains and inflation. Labor market scarring and policy differences (Priority: 4/5): Mark argued the U.S. approach of letting workers separate from employers, unlike Europe and Japan's retention schemes, helps explain current labor shortages and elevated churn. Wage growth, inflation, and productivity (Priority: 4/5): The panel debated whether wage gains are fueling inflation. The view was that wage pressure is concentrated at the low end, with productivity gains helping offset cost pressures, though future risk remains if wages accelerate broadly. Full employment and Fed normalization (Priority: 3/5): They debated how close the economy is to full employment, noting prime-age employment is rising quickly and helping explain the Fed's faster tapering plans. Asset-market froth and gasoline prices (Priority: 2/5): Ryan flagged elevated margin debt and falling wholesale gasoline prices as important signals for financial stability and consumer sentiment, respectively.

Key Arguments: The establishment payroll number was weak, but the household survey, unemployment rate, and prime-age employment all showed meaningful improvement, implying the labor market is stronger than the headline suggested. Low survey response rates and an unusually large seasonal adjustment in November likely depressed the payroll number; a sizable revision higher next month would not be surprising. The monthly data are volatile and should not be overinterpreted because revisions are large and measurement noise is elevated during the pandemic. The U.S. labor market may be more disrupted than Europe/Japan because workers were pushed off payrolls and severed from employers, unlike retention-based policy models abroad. Wage inflation appears concentrated among lower-educated/lower-wage workers, not broad-based across the labor market, so its role in overall inflation may be limited so far. Omicron is a risk, but the panel expects the economy and consumers to adapt better than during Delta, though global supply chains could still be affected. Labor force participation gains were not broad-based, but prime-age employment and wage trends suggest continued progress toward full employment. Rising margin debt raises the risk that a routine market correction could trigger forced selling and amplify financial instability.

Data Points: Nonfarm payroll gain (establishment survey): about 210,000-235,000 - November payroll report, weaker than expected but still positive ADP model miss on prior appearances: 386,000 average miss - Ryan joked that Mark's podcast invites coincide with large ADP misses ADP forecast vs BLS private payrolls: 534,000 forecast vs 235,000 actual private payrolls - Illustrates model miss for this month Average monthly job growth during last expansion: 175,000 - Used as benchmark; November's gain was still above this average Underlying monthly job growth estimate: 500,000-575,000 - Panel's view of trend job creation after filtering noise Jobs still below pre-pandemic peak: 3.9 million - Mark's estimate of remaining gap from February 2020 peak Jobs shortfall relative to trend: 5 million - Gap if pandemic had not interrupted pre-existing job trend Household survey employment change: up over 1 million; adjusted household employment up 1.9 million - Strong contrast to weak payrolls; adjusted series used for apples-to-apples comparison Unemployment rate: 4.6% to 4.2% - Household survey showed a sizable decline in unemployment Prime-age employment-population ratio: 78.8% - Rose sharply and is getting closer to historical full-employment levels Prime-age full-employment benchmark: 80% - Historical reference level used by panel Labor force participation rate: 61.8% - Still below pre-pandemic level but improving Response rate to establishment survey: lowest since 2008 - Suggested the payroll print may be especially vulnerable to revision Average annual revision to employment this year: 107,000 - Revisions remain substantial Seasonal adjustment/unadjusted gap in November establishment survey: 568,000 - Largest November difference in series history; unadjusted gain far exceeded adjusted headline Unadjusted November employment gain: 778,000 - Compared to seasonally adjusted 210,000 headline Less-than-high-school unemployment rate: 5.7% - Dropped from 7.4% the prior month; fully back to January 2020 level People unable to work because employer closed/lost business due to pandemic: 3.6 million - Evidence supporting labor-market scarring and severed employer-worker ties People unable to look for work because of the pandemic: 1.2 million - Still significant in the household survey ISM non-manufacturing index: 69.1 - Record high reading for the services sector ISM supplier deliveries index: 75.7 - Signaled continuing supply-chain congestion Wholesale gasoline price forecast: could fall to about $3/gallon - Based on a two-week lead from wholesale to retail prices Q4 GDP tracking model: 8.7% annualized - Moody's real-time tracker remained very strong despite weak payrolls Monthly GDP estimate for October: 2.2% - Non-annualized monthly growth, indicating strong underlying momentum Margin accounts at brokers and dealers: $595 billion - About twice pre-pandemic levels, raising concern about asset-market froth CPI outlook for November: just under 7% y/y - Ryan's expectation for the next inflation release Core CPI two-year annualized pace: 3.1% - October 2021 vs October 2019, above the Fed's target but not alarming in isolation

Pivotal Quotes: "It's essentially the tale of two surveys: establishment survey, very, very disappointing. Household survey suggests the economy is booming." — Ryan Sweet: Summary of the conflicting messages in the November jobs report "The unadjusted number was 778,000 adjusted was 210. So in November, the adjustment is always negative, but this adjustment was particularly large for some reason." — Dante D'Antonio: Explaining why seasonal adjustment likely depressed the payroll headline "We basically said... let workers lose their jobs and go on to unemployment insurance... Whereas in Europe and Japan... they decided to pay employers, businesses to hold on to their workers and not lay them off." — Mark Zandi: Argument that policy differences helped create current labor-market mismatch

Implications: Listeners should expect more volatility in monthly jobs data, possible upward revisions, and continued strength beneath the surface. Omicron may slow some sectors, but labor demand, inflation risks, and Fed tightening are likely to remain central themes.