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Speaker 1: Unemployment ticking up slightly to four point two percent, Andrew
Speaker 1: Hollenhorst of City saying the unemployment rate is the better
Speaker 1: signal to watch. The report was now quite soft enough
Speaker 1: for the Fed to cut fifty basis points that we
Speaker 1: had projected for December, but a twenty five basis point
Speaker 1: cut appears very likely, followed by cuts in January and
Speaker 1: subsequent meetings. Andrew joins us now, and Andrew, I am
Speaker 1: so glad we get a chance to speak with you,
Speaker 1: because you have a contrarian view, and you have persisted
Speaker 1: in this contrarian view that this labor market has a
Speaker 1: great deal of weakness that people are not seeing what
Speaker 1: gives you that conviction. Now, even though it has been
Speaker 1: a while since we've seen really some of the confirmation
Speaker 1: in the headline numbers, it's.
Speaker 3: Been really noisy data, and so I think that's part
Speaker 3: of the issue with analyzing the labor market here. You
Speaker 3: have to make some decisions. You have to take a
Speaker 3: stand on which data are giving you the correct signal
Speaker 3: about where the labor market is going. To give you
Speaker 3: a sense of the contrast, if you look at the
Speaker 3: payroll survey, the Establishment survey of businesses, that's telling you
Speaker 3: we've added two point two million jobs over the last year.
Speaker 3: It sounds like a great number. On the other hand,
Speaker 3: if you look at the household survey, you call people
Speaker 3: at home and ask them if they're working, We're down
Speaker 3: seven hundred and twenty five thousand jobs in that survey.
Speaker 3: That's typically what you would see going into a recession.
Speaker 3: So which is the true signal? Of course, we don't know,
Speaker 3: and you have to put some weight on each You
Speaker 3: have to have humility in terms of analyzing this data.
Speaker 3: But if you look at that payroll's number, we know
Speaker 3: from the revisions that the business survey Establishment survey, payrolls
Speaker 3: are being overstated. So every month and we get that number,
Speaker 3: we should be subtracting something like seventy thousand jobs per
Speaker 3: month from that number. So that is the overstated number.
Speaker 3: The household survey, which we think is giving us a
Speaker 3: better indication where the labor market is running, is telling
Speaker 3: us that we may actually be losing jobs here. So
Speaker 3: we continue to have this softening trend in the labor market,
Speaker 3: the unemployment rate that's rising, and I think that's the
Speaker 3: trend we should be watching.
Speaker 1: If that is the case, how much can you discount
Speaker 1: the idea that the number of hours worked has actually
Speaker 1: inflected upwards, and that when you pair that with some
Speaker 1: of the wage gains that we've seen, that's when some
Speaker 1: of the inflation concerns start coming back in.
Speaker 3: Yeah, I'm not too concerned about inflation cyclically because of
Speaker 3: the softening that we have in the labor market. Now,
Speaker 3: what you're saying is correct that we have a strange
Speaker 3: labor market where businesses are hoarding labor right now. So
Speaker 3: we're seeing a hiring rate that's very low, but we
Speaker 3: don't have a layoff rate that's rising. Right, We don't
Speaker 3: have hours work that's plunging. It's come down, but it's
Speaker 3: not falling further. Wage growth which is slowed, but it's
Speaker 3: been a little bit stickier at a higher level. So
Speaker 3: this is a different labor market than what we've ever
Speaker 3: seen before. I think these things can be happening together
Speaker 3: where you have firms that are reluctant to higher firms
Speaker 3: that want to hold on to their current employees if
Speaker 3: they can, but when they lose those employees, they're not
Speaker 3: backfilling them. And what that means is you don't necessarily
Speaker 3: have a higher probability of losing your job right now,
Speaker 3: but if you do lose your job, you have a
Speaker 3: higher probability of not finding one again, and that's going
Speaker 3: to affect consumer behavior, that's going to affect the broader economy.
Speaker 4: Does that mean that there isn't really a number? I
Speaker 4: mean outside of what would be normal that we could
Speaker 4: get on Wednesday, That would mean that the Fed shouldn't
Speaker 4: be cutting. Should the Fed really be cutting regardless of
Speaker 4: the CPI figure we get on Wednesday?
Speaker 3: Yeah, I think we have to go back to an
Speaker 3: environment where the Fed central banks are balancing risk to
Speaker 3: inflation and risks to the labor market. So it was
Speaker 3: easy to say a year ago that, well, inflation's running
Speaker 3: very high. That should be the complete focus. And I
Speaker 3: think we're still fighting the last battle a little bit here. So, yes,
Speaker 3: inflation has been sticky. Inflation hasn't come down as nicely
Speaker 3: as some people thought that it would. But you also
Speaker 3: have to look to the labor market. So we have
Speaker 3: inflation that looks to be running maybe closer to three
Speaker 3: percent than two percent. I think it's going to continue
Speaker 3: to slow based on what I'm seeing in the labor market.
Speaker 3: But that's a projection, that's a forecast at this point.
Speaker 3: But you have to trade that off with looking at
Speaker 3: the household service Seven hundred and twenty five thousand people
Speaker 3: are not working.
Speaker 4: Now do you think the Fed has that message? It's
Speaker 4: this whole what they should do versus what they will do.
Speaker 4: Do you think that there is a number that for
Speaker 4: them would cause them to stop the cuts in December?
Speaker 3: I think December they're probably going to cut even if
Speaker 3: we get a strong CPI inflation reading.
Speaker 1: I think this would.
Speaker 3: Be more about what are they going to signal for January?
Speaker 3: Right now, I think we'll get a softer report on Wednesday.
Speaker 3: First course, CPI inflation. I think that's going to make
Speaker 3: the decision very easy. But if we don't, if we
Speaker 3: get a stronger reading, then what you would see them
Speaker 3: do I think is still cut in December, but say,
Speaker 3: you know, we might be at that point where we
Speaker 3: would slow the pace of cuts. They've been using this
Speaker 3: really open rhetoric of saying we're going to be cautious,
Speaker 3: We're going to be careful. Of course, every central bank
Speaker 3: is going to be cautious and care You can cautiously
Speaker 3: cut fifty basis points, right, It doesn't really mean anything.
Speaker 3: So we'll see what they say in December.
Speaker 1: Okay.
Speaker 5: Speaking of January, we're going to get a brand new
Speaker 5: Trump administration coming in a sweet Republican sweep, and Trump
Speaker 5: yesterday on Meet the Press was talking about immigration in
Speaker 5: the first one hundred days. You're talking about the fact
Speaker 5: that what's going on in the labor market. How tight
Speaker 5: could a labor market get if we do see things
Speaker 5: like mass deportations.
Speaker 1: Yeah.
Speaker 3: One of the things you talked about in that interview
Speaker 3: was that this is going to start with those immigrants
Speaker 3: that have a criminal history, and that that's going to
Speaker 3: be the focus, at least initially, So Lisa was talking
Speaker 3: about this idea of sequencing. What's the policy sequencing? So
Speaker 3: if that really is the focus, that's not something that's
Speaker 3: going to have a big effect on the domestic labor market. Now,
Speaker 3: we know that a large percentage of workers in this
Speaker 3: country are working without authorization, So if you had a
Speaker 3: large deportation program, then you could have issues where worker
Speaker 3: firms are trying to hold on to their native workers.
Speaker 3: That could tighten the labor market. So you do have
Speaker 3: that risk. I think we have to watch how that
Speaker 3: policy plays out, But based on what I heard over
Speaker 3: the weekend, that's not making me more concerned about an
Speaker 3: inflationary impetus from that.
Speaker 5: The other risk, of course is tariffs, and potentially the
Speaker 5: Fed might have to think about what that means for
Speaker 5: inflation next year. How are you thinking about tariffs? Are
Speaker 5: they negotiating tool? Are they blanket?
Speaker 3: I think they're on two tracks, and I think we've
Speaker 3: already seen tariffs as a negotiating tool. We saw tariffs
Speaker 3: floated from Mexico for Canada. Those tariffs are probably not
Speaker 3: going to come into effect. They're meant to be a
Speaker 3: start to negotiating things related to immigration and ventional right
Speaker 3: non economic issues across the board. Tariff is on a
Speaker 3: separate track. I think I think we will see some
Speaker 3: form of that. That would if you're increasing the cost
Speaker 3: of foreign goods, then some of those costs could pass
Speaker 3: through into consumer prices. But we've heard from FED officials
Speaker 3: is that they're going to be quite slow in terms
Speaker 3: of taking their time and watching how this plays through
Speaker 3: in the economy. And remember, from a central bank perspective,
Speaker 3: if you put that tearf in place, the first instinct
Speaker 3: of central bankers is to say, that's a one time
Speaker 3: rise in the price level. And we don't respond to
Speaker 3: a one time rise in the price level. So I
Speaker 3: don't think this is something that's going to make the
Speaker 3: central bank, make the FED a lot more hawkish.
Speaker 1: I guess one thing that amahs to try to get at,
Speaker 1: and I think it's the right thing to get at,
Speaker 1: is what would make you rethink the thesis if we
Speaker 1: do se say, an increase in inflation from policies, or
Speaker 1: just if CPI comes in hot earth and expected, what
Speaker 1: is it that would force you to look at a
Speaker 1: different set of considerations in your employment template.
Speaker 3: Yeah, if I see growth that's accelerating, if I see
Speaker 3: job growth that's accelerating, the unemployment rate that's coming down
Speaker 3: instead of coming up. We have wage growth that's picking up,
Speaker 3: and we're starting to hear firms say we have a
Speaker 3: lot of pricing power in this market. We can raise prices,
Speaker 3: And that's all the opposite of what we're hearing right now.
Speaker 3: Right we're hearing firms say, even when we cut price,
Speaker 3: we're not getting the kind of sales that we were expecting.
Speaker 3: So that's why I think we're in a down trend
Speaker 3: in terms of inflation. If those things inflected, then you
Speaker 3: would get worried about higher inflation.
Speaker 1: You still see a very big risk of recession.
Speaker 3: I think recession risk is elevated. It's certainly elevated, and
Speaker 3: so I would disagree with FED officials that it's not elevated.
Speaker 3: When you have the unemployment rate that's up by almost
Speaker 3: a percentage point and you have very low hiring rates.
Speaker 3: What you worry about is is this going to move
Speaker 3: over into layoffs. We haven't seen that yet, and that's
Speaker 3: a very good thing, and it looks like maybe this
Speaker 3: could continue sometime without getting that pickup in layoffs. But
Speaker 3: is that risk elevated? I think you have to say
Speaker 3: it's elevated, and I would also say very high valuations
Speaker 3: in equity markets. It doesn't mean that we have to
Speaker 3: have a sell off, right, but does that make the
Speaker 3: risk more elevated that we would get a correction in
Speaker 3: risk assets and that could drive somewhat of a slowing
Speaker 3: in the economy. I would worry about that also, Andrew.
Speaker 1: Andrew hollin Horst, always wonderful to speak with you. Thank
Speaker 1: you for being with us. Tim Adams at the Institute
Speaker 1: of International Finance saying this, we'll likely see burgeoning Emina
Speaker 1: activity with an improved deal making landscape, personnelist policy. Amory
Speaker 1: says that all the time. So we'll see who comes
Speaker 1: in at the regulatory agencies to learn more about the
Speaker 1: future of regulations. Tim joins us now, Tim, thank you
Speaker 1: so much for being here here. So do you see
Speaker 1: right now the banking sector is really driving a lot
Speaker 1: of the optimism in the financial space going forward.
Speaker 6: Sure, and they're hearing from their clients. Animal spirits are
Speaker 6: back in the US. The outlook is for the near
Speaker 6: term at least it's pretty bright. There's a sense of
Speaker 6: deregulation across Europe. In the US. We'll see how much
Speaker 6: of that actually happens. But you know, there's a sense
Speaker 6: of optimism that we haven't seen.
Speaker 1: In a while.
Speaker 4: Does that optimism is it mostly centered or should it
Speaker 4: be mostly centered on the largest American banks or the
Speaker 4: smaller ones?
Speaker 6: Well, I think it's across the board. I think Main
Speaker 6: Street Wall Street are going to do well over the
Speaker 6: near term, but Wall Street looks at the near term
Speaker 6: with great optimism. I think deal flow is going to
Speaker 6: pick up. We're going to see IPOs, We're going to
Speaker 6: see M and A activity, and that's good for our institutions.
Speaker 5: I know you're concerned though about the deficit, so you
Speaker 5: took kindly to the fact there's some deficit hawks when
Speaker 5: it comes to personnel's policy. But over the weekend, Trump
Speaker 5: said that he's not going to cut Social Security entitlements,
Speaker 5: not going to raise the retirement age. How are you
Speaker 5: supposed to get the deficit down?
Speaker 6: Yes, it's very hard because most of what you just described,
Speaker 6: you look at a social insurance and defense and net interest.
Speaker 6: Some of the debt is about ninety percent of what
Speaker 6: we spend. The rest is kind of a rounding error.
Speaker 6: We can grow and I think Scott Bessen to who's
Speaker 6: going to be the next Treasury Secretary is focused on growth.
Speaker 6: That's good, but we're going to have to find ways
Speaker 6: to find savings. Deficit hawks are gone in Washington. They
Speaker 6: don't exist anymore, and maybe you need the Marcus to
Speaker 6: send as a signal it's time to become more sober
Speaker 6: in our fiscal outlook.
Speaker 1: Tim, you've spent a lot of time focused on the
Speaker 1: structure of the financial system in the United States, and
Speaker 1: by all accounts, it's really strong and it's diversified. There's
Speaker 1: been a lot of discussion around mergers amongst smaller banks
Speaker 1: and how much we could see if there is an
Speaker 1: administration that is amenable to that kind of tie up,
Speaker 1: how much could we see.
Speaker 6: I think you'll see a lot. I think you ended
Speaker 6: up seeing a barbelling. The largest institutions get larger and
Speaker 6: the mid size become larger. It's a scale business. Look
Speaker 6: at JP Morgan spend seventeen billion dollars a year on technology.
Speaker 6: Jamie probably would spend trillion. But think about the tech
Speaker 6: spin that these institutions put in place and who they're
Speaker 6: competing with, and then you'll see smaller local institutions than
Speaker 6: know the local markets.
Speaker 1: So it's a bifurcation.
Speaker 6: The mid sized guys are going to get bigger.
Speaker 1: Well, you raise this question, who aren't the big competitors?
Speaker 1: Is it Apple, is it absolutely or is this an
Speaker 1: issue of say, the Apollos of the world. And this
Speaker 1: has been sort of the two sided barbell at a
Speaker 1: time where potentially fewer regulations for the largest banks could
Speaker 1: make them more competitive against both.
Speaker 6: Yeah, I probably mean two hundred CEOs a year. In
Speaker 6: the financial sector. We hear a lot about private credit
Speaker 6: and private equity. We hear a lot about Apple, Google
Speaker 6: and the tech platforms. And if you're Jamie, you're trying
Speaker 6: to compete with the tech platforms, right. And then if
Speaker 6: you're then then you maybe you can acquire or part
Speaker 6: and you're with private equity and private credit.
Speaker 4: I'm really curious what happens to Europe and all of
Speaker 4: this if you have this growing American banking system, if
Speaker 4: the biggest get bigger and they're not just eating the
Speaker 4: smaller bank's launch, they're taking it from Europe too, which
Speaker 4: has been really struggling and has tried UniCredit Commerce trying
Speaker 4: to get some sort of merger through. Do something need
Speaker 4: to change? But it finally start.
Speaker 1: To absolutely core.
Speaker 6: Europe is on this back politically and economically. German economy
Speaker 6: is really struggling. Periphery's doing much better, Spain, Greece, Poland.
Speaker 6: But euro needs banking, consolidation, the need capital markets, union, banking,
Speaker 6: and there's so much that this new Commission and this
Speaker 6: new Parliament needs to take on. They're saying the right things,
Speaker 6: but we'll see it's time for action across Europe.
Speaker 5: We saw uned Credit try to do that with Commerce
Speaker 5: Bank and the Germans really did not want that to happen.
Speaker 5: What could give the boost to these countries to say, okay,
Speaker 5: we should start consolidating.
Speaker 6: Well, you're hearing it from Christine Loard the ECB, she's
Speaker 6: signaling a unique consolidation. You need Brussels to say it's
Speaker 6: time to act as time to consolidate. I think this
Speaker 6: deal is going to go through over time, and I
Speaker 6: think we'll see more over time as well.
Speaker 1: Hold on a second, you think that the Germans are
Speaker 1: going to be okay with an Italian bank taking over
Speaker 1: one of their national champions.
Speaker 6: Let's underscore they already have The Italians have already taken over.
Speaker 6: They have no choice, right, These are great institutions I
Speaker 6: like Comerance Bank. The CEO Betina is wonderful. I think
Speaker 6: they all realize that to compete domestically and the nationally
Speaker 6: compete with US firms on the continent, they've got to consolidate.
Speaker 1: Tim You talk with a lot of regulators, you talk
Speaker 1: with a lot of elected politicians, and I'm curious about
Speaker 1: whether you've really heard a change in tone over in
Speaker 1: Europe that recognizes how different this moment is that they're in.
Speaker 6: I think the Trump shock has gotten their attention. I
Speaker 6: think they know.
Speaker 1: They have to do more.
Speaker 6: But Brussel's a challenging place. You know, it's a bureaucratic machine.
Speaker 6: So you need political leadership right now. That's missing in
Speaker 6: France and Germany. Hopefully in six months we'll have greater stability.
Speaker 6: Brussels needs to act, Frankfort needs to act. We need
Speaker 6: to see political leadership.
Speaker 5: Where is the political leadership right now? And you're at
Speaker 5: the G seven it felt like it was Georgia Maloney
Speaker 5: that was almost this central figure of Europe because everyone
Speaker 5: that showed up was either a lame duck or on
Speaker 5: their way out.
Speaker 6: Well, the polls have the rotating presidency the EU, they're
Speaker 6: very pro growth, and I like what they've done with
Speaker 6: their economy. I like where they want to go. Spain
Speaker 6: is saying, look at us, we're growing fast. In Greece,
Speaker 6: which was always sort of the stepchild of the EU
Speaker 6: for so many years, is now really putting in great performance.
Speaker 6: I think what you'll see over time core you're figuring
Speaker 6: out they need to lead and do more in Germany
Speaker 6: is the secret and the key to the future of
Speaker 6: European growth.
Speaker 1: So you've done on this whirlwind tour of the whole world.
Speaker 1: You're coming to an end. I'm sure you're very happy
Speaker 1: to be going home. What's your big tic takeaway, Tim,
Speaker 1: after meeting with international leaders of finance around the world.
Speaker 6: Yeah, there's an enormous optimism about the US, but there's concerns.
Speaker 6: There's just so much we don't know about what this
Speaker 6: new administration is going to do. The economic leaders that
Speaker 6: have been put in place, that personnel's policy have really
Speaker 6: boyd that outlook. But ultimately, how will these different policies
Speaker 6: be put in place?
Speaker 1: Will we see tariffs?
Speaker 6: Is it selective, incremental or is it much broader? We
Speaker 6: just don't know.
Speaker 1: Tim Adams of the IIF thank you so much with
Speaker 1: us a key question of how tied the hands are
Speaker 1: of the FED to the fact that inflation might be
Speaker 1: the surprise card here heading into the end of twenty
Speaker 1: twenty four.
Speaker 7: Right, So, when you look at last week's jobs report,
Speaker 7: you get a bit of a riddle for twenty twenty five.
Speaker 7: You get very strong job growth, a uptick in the
Speaker 7: unemployment rate, and importantly for the FED, really robust wage growth.
Speaker 7: Where does that lead to sticky inflation? So the riddle
Speaker 7: is an H for hiring or an H for hiking.
Speaker 7: We don't know in twenty twenty five, but the wage
Speaker 7: growth is putting pressure on inflation, and that's something the
Speaker 7: FED has to keep in, you know, in the rear
Speaker 7: rear mirror as they're trying to support the labor market pause.
Speaker 1: You've said recently that it seems like this job's market
Speaker 1: is on a knife edge. It could go one way
Speaker 1: or another. Are you saying that we're at that tip
Speaker 1: point where we could see whether the solidity of the
Speaker 1: labor market is actually contributing to an increasing likelihood of
Speaker 1: stickiness and even a rate hike.
Speaker 7: Yeah, we're in the stasis period, this really quiet period
Speaker 7: in the labor market where there's very low layoffs and
Speaker 7: now pretty you know, average hiring. If you take the
Speaker 7: last three months of the BLS data, you get something
Speaker 7: a little bit less than one hundred and forty thousand
Speaker 7: jobs created every month on average. So that's solid. But
Speaker 7: I don't think we stay in this equilibrium. I think
Speaker 7: there is a tipping point that is coming, and I'm
Speaker 7: not quite sure whether it's a tipping point lower or
Speaker 7: tipping point higher. So I'm watching wages and what wage
Speaker 7: growth suggests. Both in the BLS data and in the
Speaker 7: ADP payroll data. It suggests that wages are still robust,
Speaker 7: they're still growing. That suggests there's still a bit of
Speaker 7: tightness in the labor market, and I think that's tied
Speaker 7: to longer term trends, not something that the FED can
Speaker 7: fix right away.
Speaker 4: Is there a possibility that when that equilibrium shifts, if
Speaker 4: it does shift towards sticky inflation, that it's not just sticky,
Speaker 4: but wage growth also translates into reacceleration of inflation.
Speaker 7: And that's the problem for the FED. It depends on
Speaker 7: what they do right now. It seems like they're on
Speaker 7: track for a cut in December that could be followed
Speaker 7: by a pause early next year. We're all hoping that
Speaker 7: it's not a hike, because that would imply an acceleration
Speaker 7: of inflation much higher than the Fed's projections right now.
Speaker 7: But given how robust wage growth is, remember before the
Speaker 7: pandemic that ten years of expansion, waste growth was between
Speaker 7: two and three percent. We're now at four percent, So
Speaker 7: there's no consistency of a four percent average hourly wage
Speaker 7: growth with two percent target inflation.
Speaker 4: Is there a risk though, that if the FED is
Speaker 4: cutting in December and they continued with some cuts at
Speaker 4: least in the first half of twenty twenty five, that
Speaker 4: they allow that reacceleration to happen, that they create the
Speaker 4: environment where the animal spirits can continue, hiring can continue
Speaker 4: with a hopium of what a president Donald Trump presidency means,
Speaker 4: and that's what creates it.
Speaker 7: Well, decades of FED policy teach us one thing that
Speaker 7: monetary policy is risky business. I mean, usually that's how
Speaker 7: the economy falls into a recession. The FED rates hikes
Speaker 7: rates to contain inflation, and that tips the economy into recession.
Speaker 7: That did not happen this time. Interest rates went higher
Speaker 7: and the FED and the economy kept growing, So we
Speaker 7: really don't know in the context of the current economic
Speaker 7: environment exactly what's going to happen to the economy. When
Speaker 7: you look at the consumer, when you look at the
Speaker 7: labor market, it's still very solid and resilient. So there's
Speaker 7: some that's I guess the hope for the Fed. They
Speaker 7: still have some wig overroom.
Speaker 5: Following the jobs number, we saw these bets for December
Speaker 5: cup go up. Was that too premature or given the
Speaker 5: fact that we don't have CPI.
Speaker 7: Yet, Yeah, I think the seed is waiting for CPI.
Speaker 7: We're seeing a three point three percent core CPI right now.
Speaker 7: We're seeing a month over month that we're not going
Speaker 7: down to a point two or a point one percent
Speaker 7: monthly range. That is a nervous period for the FED
Speaker 7: because if we keep going up a month after month
Speaker 7: ato point three percent, that is not going to drag
Speaker 7: us back down to that two percent. So it's not
Speaker 7: just wages here now, it's shelter costs in housing that's
Speaker 7: driving up inflation.
Speaker 5: Well, we heard from Mickey Bowman on Friday following that report,
Speaker 5: and she says, we have so much growth right now,
Speaker 5: it's hard to think that the level of the interest
Speaker 5: rates is restrictive at this point.
Speaker 1: Are we restrictive?
Speaker 7: That's a question for the FOMC, and we're starting to
Speaker 7: see that there's a lot more disagreement on that FOMC
Speaker 7: than there was previously. Look, you know, when inflation was
Speaker 7: unspeakably high, it was easy to get everyone on agreement,
Speaker 7: and it was easy to see the path. As we
Speaker 7: get closer and closer to that two percent target, I
Speaker 7: think you're going to see the FOMC opinions start to
Speaker 7: diverge on where is that neutruarate and how to get there,
Speaker 7: And that's what you're going to see in these public
Speaker 7: comments now.
Speaker 1: Neila Richardson of ADP, thank you so much.
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