Sahm on the Soft Landing

Episode Summary

Executive Summary: The episode centers on the June jobs report, arguing that labor-market growth remains strong despite some blemishes in household data and participation. Guests Claudia Sahm and Ryan Sweet debate recession risk, inflation’s supply-side roots, the limits of Fed tightening, and why GDP’s first-quarter decline may be misleading versus GDI. The tone is cautiously optimistic on jobs but worried about inflation and policy overreach.

Main Topics: June Employment Report: Solid but Less Clean (Priority: 5/5): The panel says June payroll growth was strong overall, but the report had more weaknesses than prior months, especially in household employment and labor-force participation. They view the labor market as still near full employment, though momentum is moderating. Paywalled Survey Differences and Labor-Market Interpretation (Priority: 4/5): Ryan and Claudia discuss the establishment vs. household surveys, emphasizing that first prints and small household samples can be noisy and should be interpreted cautiously. The payroll survey gets more weight, while participation trends and prime-age employment remain watchpoints. Wage Growth and Inflation Expectations (Priority: 4/5): The conversation focuses on whether wage growth is truly driving inflation or merely responding to it. Claudia argues wage growth has moderated and that fears of a wage-price spiral are easing, while Ryan notes wage metrics are converging near 5% growth. Recession Debate and the Sahm Rule (Priority: 5/5): Claudia explains her recession indicator, the Sahm Rule, and argues the economy is not currently in recession despite two weak GDP prints. The guests emphasize that recession calls should rely on broad indicators, not one-quarter GDP anomalies. GDP vs. GDI and Statistical Noise (Priority: 4/5): They contrast the first-quarter GDP decline with stronger GDI growth, suggesting the GDP signal may be distorted by inventories, trade, and other measurement issues. The large GDP-GDI gap is treated as a sign that the real economy is stronger than headline GDP implied. Inflation’s Supply-Side Origins and Policy Response (Priority: 5/5): Claudia argues inflation is mainly a supply shock driven by COVID disruptions and the Russia-Ukraine war, with demand and fiscal stimulus playing secondary roles. She says the Fed cannot solve supply-driven inflation alone and fiscal/industrial policy should address energy and supply resilience.

Key Arguments: Payroll job growth remained strong enough to signal no immediate recession, even though labor-force participation and household survey data showed some softness. The household survey and first payroll prints are noisy; analysts should place more weight on broader trends and revised data than on one-month moves. Wage growth appears elevated but is moderating and does not look like a classic wage-price spiral. The economy is still near full employment, so some slowing in job creation is desirable to cool inflation without triggering major labor-market damage. GDP is a poor standalone recession signal when inventories, trade, and measurement error distort the figure; GDI and labor-market indicators tell a more consistent story. Inflation is primarily supply-driven, with COVID-related disruptions and the Russia-Ukraine shock at the top of the list, so the Fed can only do part of the job. Energy policy, strategic reserves, and longer-term supply investments are needed because gas prices are a major household pain point and a threat to the expansion. The Sahm Rule remains a reliable real-time recession indicator, and it was not triggered after the June unemployment data.

Data Points: Net payroll jobs added in June: 372,000 - June employment report discussed on Jobs Friday Unemployment rate: 3.6% - Held unchanged in June; cited as near full employment Prime-age employment-to-population ratio: around 80% - Used as a benchmark for full employment; noted as having slipped below 80% in the report Labor force participation: fell in June - A blemish in the household survey, with particular concern about men Job openings per unemployed worker: around 2 - Evidence of continued strong labor demand Average hourly earnings (all workers): about 5.1% y/y - Used to characterize wage growth as still hot but moderating Average hourly earnings, private non-supervisory workers: 6.4% y/y - Ryan’s statistics game clue; higher wage growth among non-supervisory workers Industry wage growth low end: 1.2% y/y - Ryan’s statistics game clue; identified as information Industry wage growth high end: 11.9% y/y - Ryan’s statistics game clue; highest among the referenced industries Quits rate: 2.8% - Claudia’s statistics game clue, tied to job quality and continued labor-market strength Nonfarm payroll revisions: -74,000 net - Downward revision to prior employment estimates GDP, Q1 2022: -1.6% - Used in recession debate; first-quarter GDP decline GDI, Q1 2022: +1.8% - Alternative income-side measure suggesting stronger underlying activity Statistical discrepancy between GDP and GDI: largest ever as a % of GDP - Argued to indicate measurement problems in GDP CPI inflation through May: 8.6% y/y - Referenced while discussing high inflation and policy response University of Michigan inflation expectations: preliminary 3.3% then revised to 3.1% - Debated as a Fed concern and example of noisy expectations data Fed rate hike: 75 basis points - Last meeting’s increase; discussed as a potentially aggressive move Recession odds (Ryan, 12 months): 65% - He says this is driven mainly by Fed tightening risk Recession odds (Mark, 12 months): 40% - Mark’s estimate in the closing probability game Recession odds (Claudia): roughly 50-60% overall risk, with small odds of severe recession - She shifted upward after hawkish Fed messaging People not in labor force but wanting a job vs. pre-pandemic: about 700,000 higher - Ryan cites this as evidence some workers may still return Daycare employment change: up more than 10,000 - Viewed as encouraging for labor-force reentry, especially for women

Pivotal Quotes: "If you look at the level and levels don't lie, it's moving sideways." — Ryan Sweet: On labor-force growth and why monthly volatility should not be overread "You just can't have this kind of job gains and unemployment and be in a recession. That's just not consistent." — Claudia Sahm: On why strong labor-market data argue against an active recession despite weak GDP "COVID is a supply disruption, right?" — Claudia Sahm: On the root cause of inflation and why supply-side shocks dominate the story

Implications: Listeners should see the labor market as strong but gradually cooling, while inflation remains the bigger policy risk. The episode suggests the Fed may over-tighten if it treats inflation as purely demand-driven, making energy and supply-side policy crucial to avoid a recession.