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