Slowcession and Sticking to Script

Episode Summary

Executive Summary: The episode dissects the December 2022 jobs report and concludes the labor market is cooling in a controlled way: payroll growth slowed, wage growth eased, hours worked fell, and layoffs remain low. The hosts frame 2023 as a likely “slow session” rather than a classic recession, while debating revisions, labor supply, and whether weaker hiring alone can tip the economy into recession.

Main Topics: December 2022 jobs report: solid but cooling (Priority: 5/5): The panel views the report as broadly consistent with their baseline: job growth moderated, unemployment dipped to 3.5%, and wage growth slowed without signs of a sharp labor-market break. Labor supply vs. labor demand (Priority: 5/5): Discussion centered on why unemployment remains low despite slowing hiring: labor force growth is being supported by population growth and immigration even as participation stays flat. Wage growth and inflation dynamics (Priority: 5/5): Speakers argue wage growth is easing toward a level more consistent with the Fed’s inflation target, helped by lower energy prices and fading inflation expectations. Revisions and benchmark methodology (Priority: 4/5): The hosts explain the BLS benchmark process and debate the Philadelphia Fed’s analysis suggesting payroll employment may be revised down materially for parts of 2022. Layoffs, hiring, and recession risk (Priority: 5/5): They argue recession would likely require a meaningful rise in layoffs, not just slower hiring, and that current low layoffs make a downturn less imminent. Early signals from ISM and GDP tracking (Priority: 4/5): A new services ISM reading and internal GDP nowcasts were interpreted as evidence that growth is slowing but still positive in the near term. Listener questions and the ‘slow session’ framework (Priority: 3/5): The team distinguishes slow session from stagflation and discusses whether a downturn could be confined to housing or tech, concluding broader inflation and policy risks remain the main threats.

Key Arguments: December payroll growth of 223,000 shows moderation from earlier in 2022, but the labor market remains resilient and above consensus expectations. Unemployment fell to 3.5% for the right reason: labor force participation rose and household employment jumped, rather than a collapse in labor supply. Average hourly earnings are slowing toward a pace more consistent with the Fed’s 2% inflation target plus productivity growth, implying easing wage pressure. The labor market’s key adjustment is likely to come through weaker hiring before layoffs rise, which could reduce job growth without immediately causing recession. Labor supply is still growing because working-age population growth and immigration are offsetting flat participation. Benchmark revisions may show 2022 payroll growth was weaker than currently reported, but the national January benchmark will only cover through March 2022, so the biggest revisions may appear later in state data. The ISM services report below 50 and weak supplier deliveries reinforce the view that growth is decelerating and inflationary pressures are easing. A recession typically requires significant layoffs and outright payroll declines; merely slower hiring may be insufficient on its own.

Data Points: Nonfarm payrolls (December 2022): 223,000 - Establishment survey job growth for the month, down from a revised November figure. Nonfarm payrolls (November 2022 revised): 256,000 - Prior month payroll growth after revision. 3-month average payroll growth: just under 250,000 per month - Shows moderation from the prior three-month average above 350,000. Prior 3-month average payroll growth: north of 350,000 per month - Illustrates the slowdown in labor demand. Unemployment rate: 3.5% - Edges down from 3.6% in December. Household employment change: up over 700,000 - Large increase in the household survey helped push unemployment lower. Average hourly earnings, month over month: 0.27% - Wage growth slowed on a monthly basis. Average hourly earnings, year over year: 4.6% - Back below 5% after briefly exceeding that level in the prior month. Average workweek: ticked lower again - Interpreted as a sign of softer labor demand. Long-term unemployment change: -147,000 - Decline in people unemployed 27 weeks or more. Temporary help services: -35,000 - Fell for a fifth consecutive month and is seen as a leading labor-market indicator. ISM Services Index: 49.6 - Below 50, indicating contraction in services activity. ISM Services prior month: 56.5 - Shows a sharp drop in the services index. Non-manufacturing supplier deliveries: 48.5 - Down from 53.8, interpreted as easing inflation pressures. GDP nowcast for Q4 2022: 4.1% - Moody’s Analytics-style current-quarter estimate discussed on the podcast. Monthly GDP estimate for November: 1.4% - Internal monthly estimate used to build the quarterly nowcast. JOLTS layoffs (November 2022): 1.35 million - Still well below historical norms. Typical pre-pandemic monthly layoffs: about 1.9 million - Used as a benchmark for normal labor-market turnover. Employment-to-population ratio, prime-age workers: 80% - Presented as near a full-employment threshold. Market odds of February Fed hike: roughly 75% favor 25 bps - After the jobs report, markets shifted toward a smaller Fed rate hike.

Pivotal Quotes: "we came up with this slow session term" — Chris Doriz: Explaining the team’s preferred label for 2023 growth: slower than expansion but not a classic recession. "I don't know that you could design a better picture of the labor market given everything that's happening" — Dante D'Antonio: Summarizing why the December jobs report matched the team’s desired soft-landing trajectory. "Slow session, not great, but obviously much better than recession, stagflation." — Mark Zandi: Distinguishing the baseline forecast from more severe downturn scenarios.

Implications: The panel sees a soft landing as plausible: slower hiring, easing wages, and low layoffs support disinflation without an immediate recession. But inflation, Fed policy, and possible data revisions remain the main risks to watch.