Surprises, Scenarios, and Spirals

Episode Summary

Executive Summary: The episode centers on the unexpectedly strong January jobs report, which showed robust payroll growth despite Omicron, revised up prior months, and stronger participation. The hosts debate labor-market tightness, wage pressures, inflation, housing shortages, and what the report means for Fed policy and financial markets. They end with differing soft-landing vs hard-landing probabilities.

Main Topics: January Jobs Report Surprises to the Upside (Priority: 5/5): The panel expected Omicron to produce a weak or negative payroll print, but January added well over 400,000 jobs and prior months were revised up sharply, suggesting resilience in the labor market. Labor Market Tightness and Wage Pressures (Priority: 5/5): Discussion focused on record-high job openings relative to unemployed workers, rising compensation among small businesses, and whether wages are beginning to drive inflation or merely react to it. Data Quality, Revisions, and Seasonal Adjustments (Priority: 4/5): The hosts emphasized benchmark revisions, population controls, seasonal adjustment, and the gap between household and payroll surveys, warning against overinterpreting one monthly print. Housing Supply Constraints and Inflation (Priority: 4/5): A low homeowner vacancy rate and rising house prices/rents were tied to persistent inflation pressures, while construction employment weakness was noted as a puzzle. Fed Policy and Financial Conditions (Priority: 5/5): The report pushed bond yields higher and raised market expectations for a more aggressive Fed path. The panel debated whether a 25- or 50-basis-point March hike is likely and how the Fed should manage expectations. Soft Landing vs Hard Landing Scenarios (Priority: 4/5): The conversation closed with probabilistic forecasts for the economy: one scenario of gradual normalization and another of policy-induced recession, with the speakers assigning different odds to each.

Key Arguments: January employment strength suggests the labor market was far more resilient to Omicron than expected. The unemployment rate rose for a good reason: more people entered the labor force, not because of labor-market deterioration. Record job openings and rising compensation indicate historically tight labor conditions. Much of the wage acceleration appears to be a response to inflation, not its primary cause, though a wage-price spiral remains a risk if inflation persists. Household and payroll survey discrepancies, plus benchmark and seasonal revisions, make first prints unreliable; later data may show a different January picture. Housing supply remains extremely tight, reinforcing rent and shelter inflation. The Fed likely needs tighter financial conditions—via rates, stocks, credit spreads, and housing—to cool the economy. A soft landing is possible, but the probability of a hard landing/recession is meaningfully elevated if inflation stays hot and the Fed has to tighten aggressively.

Data Points: January payroll employment gain: 467,000 - Jobs report for January, far above expectations. December payroll revision: Up to a little north of 500,000 (from around 200,000) - Large upward revision to prior months discussed on the podcast. Average monthly job growth in 2021: 550,000 - After revisions, annual job growth looked more consistent and steady. Unemployment rate for people with less than a high school degree: 6.3% - One demographic group that saw a rise in unemployment in January. Unemployment rate for people with less than a high school degree in December: 5.2% - Compared with January’s 6.3%. Unemployment rate for college graduates: 2.3% - Rose from 2.1% in December. U6 unemployment rate: 7.1% - Broader labor slack measure discussed in the game. Job openings per unemployed person: 1.73 - From JOLTS and January unemployment data, indicating extreme labor tightness. Small businesses raising compensation: 50% - NFIB survey, highest in 48 years. Average hourly earnings growth: 5.7% y/y - Reported in the January jobs release. Labor force participation rate: 62.2% - Household survey measure, affected by population controls. Prime-age employment-to-population ratio: 79.1% - Rose from 79.0%, nearing the 80% full-employment benchmark. People out of work because of their own illness: 3.6 million - Household survey count in January, up from 1.6 million in December. People unable to work due to COVID/fear/care obligations in Census Pulse: 12 million - Mid-January survey result cited as a new pandemic high. Homeowner vacancy rate: 0.83% - Lowest on record since census data began in 1956. Rental vacancy rate: 5.6% - Also very low by historical standards. Home price appreciation: 18.5% y/y - CoreLogic house price index cited as evidence of housing inflation. 10-year Treasury yield: 1.93% - Rose about 10 basis points after the jobs report. Payroll employment level relative to pre-pandemic peak: Down 2.9 million jobs - Panel noted the labor market was still below its pre-pandemic high. Excess household savings since pandemic start: $2.6 trillion - Used to discuss future spending and inflation risks. Inflation rate referenced: 7% - Consumer price inflation through December discussed in relation to wages. Soft-landing probability (Ryan): 40% - Ryan assigned a lower probability to a smooth landing. Hard-landing probability (Ryan): 60% - Ryan saw recession risk as more likely. Soft-landing probability (Marissa): 60% - Marissa was more optimistic about a gradual slowdown. Hard-landing probability (Marissa): 40% - Marissa saw recession risk but not as the base case. Soft-landing probability (Chris): ~67% - Chris expressed the most sanguine outlook. Hard-landing probability (Chris): ~33% - Chris’s downside scenario was less likely in his view.

Pivotal Quotes: "there's not a lot you can complain about in this report" — Ryan Sweet: Ryan’s overall assessment of the January employment report. "the labor market's getting small businesses are getting, are starting to raise wages" — Ryan Sweet: Discussion of NFIB compensation plans and tight labor conditions. "I think the probability of that happening is rising" — Mark Zandi: Mark’s view that a wage-price spiral and harder landing risks are increasing if the Fed falls behind.

Implications: The labor market remains remarkably strong, but inflation, housing scarcity, and Fed tightening risks make 2022 volatile. Listeners should expect more market sensitivity to every jobs print, wage report, and inflation release.