Surveillance: US Payrolls Surprise

now from Washington. Now, Marty, did you have to edit your notes once you saw that job's number in the last twenty four US Well, I looked at my economists and I said, you were way off to that. You know. It was you know, and I was on a call with some folks from the White House earlier and they said, what do you think about the jaws of points? It was good, straight jaws are pointed. And Jack Berncy made a joke, he said, you never change your tone. You know.

It was a great report. I mean when you look at areas of that, I think a really important business grew, healthcare grew, education grew, and we saw in strong steady growth and construction. I mean, so those are areas that obviously you you would know better than I would as far as signs for the economy and concerns about economy. But right now, certainly I'll take this jobs report for any day of the week. Well, Secondly, Wesh, I said it to you now two months running. I mean you've

been right. I've tried to push back, but ultimately we're seeing this job's growth without that inflation re impulse, with that wage is picking up, We're seeing participation start to climb. Secondly, Welsh, what are the dynamics underpending that do you think? Why do you think that can continue? I mean, I think we're still going to be assessing that and evaluating that

for years to come. I think what's happening at this moment in time is something that economists and folks like you and me and all of us will be talking about down the road. I don't think there's really an answer other than you know, the President did lay out an agenda to get people back to work, and then

he laid out an agenda to tackle inflation. Obviously the FED is doing the thing as well, and I just I think we're living in a very different time right now, economic times, and you know most economists or people who are business people won't really kind of might not agree with what I'm about to say, But I just think that this these are times we've never really experienced in this country, and we just literally have to take this month a month to see as long as we can

move forward and and avoid a recession and avoid a downtourn the economy and try and create as many opportunities both for employers and employees in this country. Well, the sitist speaking to that right now, and the President has some fresh numbers to put into that side of the union address next week. Secly. Well, so now you've got to run. So I want to work through a couple of issues with you. Here's one. You usually give us an update on what's happening on the West coast with

the dot workers contract. Where are we now? Have they asked for your involvement? So? No, I mean I've been I've been in city contact this week. I talked to all sides. Uh. They were able to to work through some some of the more tricky issues out there. Uh, they have not asked, per se for me to come out and talk to them. I did go out January second, h to sit down and talk to the companies and some of the union guys out there, union people out there,

they're moving along certainly. As I said to you a long time ago, I wish this negotiation was done, but there's a lot of a lot of issues out there that they want to go through. But so far, hopefully we don't have anything that will will hold this contract up. But certainly it's something i'd like to get done sooner, Ran and later. You've been pretty calm about it, and often ask you when does the red lights start to flash?

Are we getting closer to that point for you? No, it will flash to me if there's an issue that I think is going to be one of those make up break issues, you know, like in the railroads when we talked about right right, you know, the negotiations weren't really going on as they're moving forward. When sick time came up, paid sick time came up. I kind of knew that that was one of those red flashing problems.

I haven't seen that yet in the ports negotiations, and I think that you know, the way they work is a lot of these the unions work uh and negotiate with individual ports, but there is a master contract. I don't know if that's the technical name for it, but right now I'm not concerned about that yet. I mean, listen, you could change on the dime, obviously, but right now I feel good. It's likely West. Usually, Tom Kine and I like to talk about football, real football, the stuff

that happens outside at the United States. I'm tell you're a massive Bruins fan, is that true? I like the Bruins, I like the Patriots, I like the Celtics, and I also like me and United. Oh you do as well. The reason I bring up the Bruins is because there's some interest in perhaps maybe you go into the NHL Players Association. Any truth to that. Secondly, Walsh, there was

a report from Politico this week. I don't have any personal news to make today today and focused on a job report that that is shown since the present BUYD has taken off, as twelve point one million people have either gone back to work or job has been at the economy. And you know, certainly this is such an honor being Labor secretary and being on a daily today. I feel even better about it being able to be on TV. That sounds like, you've got some news to

make tomorrow. I live my life a day to time, so figure see what happens. Secondly, Marty Welsh, I think we can read between the lines there. It's gonna catch up, sir as always the Labor Secretary there money Welsh, that is a monster upside surprise five D seventeen thousand. The only big economist on Wall Street that him anywhere near with City and Andrew Holland Horst a little north of three hundred k neil data looked for an upside surprise, Well here it is. This is what City said earlier

this week. Pal's hopefulness must now confront the data. The devish market reaction to Chairman Pal's relatively neutral comments implicitly assumes inflation will continue to call faster than the Fed expects, even absent a further tightening of financial conditions. Tom here's a question for you. If Chairman Pal had this report in hand on Wednesday in the news conference with the press conference had been any different, would have been different? Yeah?

I think so. I think that what what? What what I see here? John? It's so important with the men's respect all. Mike McKee owns this story is you wonder does the rest of the world begin to trust the data of so many people are getting this wrong? Have we got the person to Jack Welch and his criticisms of Washington economic data the late Greek Jack Welch, And

you just wonder do you trust the data? Why don't you bring in the optimist nil to the head of US economic research, every nice Lince Macro And now you seats it or you're running around the room. I just got back to my seat. You look, time, I trust a lot a lot of you know, just going to Tom's point, you know, I think for for your audience, it's not about trusting the data, it's about trusting the people interpreting the data, just in the same way political polls, right,

I mean all the polls are off. No, the polls aren't really off. What's off is the people's interpretation of those polls. Um, And that's what's going on here. I mean, keep an eye on part time employment. Uh, you know, on part time employed for economic reasons. Everyone who talks about that, it's a it's a t because it went up, Neil, just because the time I want to go in this, I think it's absolutely historic here I'm gonna I'm gonna fold.

And there's other names as well, folks. Neil Data along with the great Jim Glassman at JP Morgan with his decades of decades of study how the labor economy, he owned the study of teenage employment years ago. And John just mentions Neil Holland Horst overt City Group who came within the vicinity here. What are we getting wrong about the fabric of American labor when it's staring us in the face, with large parts of America with two and three point zero percent unemployment? Why are we getting us

so wrong? Well, I think it starts with, you know, the underlying economic momentum in the country, which is picking up. I mean it could well be that, you know, conditions are picking up. Employers had positioned for an alternative outcome for things to be slowing down. Now they find themselves having to play catch up to that stronger economic growth. I mean, look, the underlying rate of employment is not five I mean that is true, but it's probably higher

than where where where the consensus believes. UM. And you know, given what we know about their trajectory going forward, UM, you know there's risk that employment will remain strong. And if you're talking about two thousand, let's say it's half the rate. Let's say that's the real number, half the rate of what we got today. So it's two. That's more than enough to continue pushing the unemployment rate down over time. UM. And so you know, look, I mean,

I I've said this, the onus is on the economic bears. Um. Frankly, I don't I don't think the this is going to really change the FEDS calculus. I mean, guys, it's not like they're gonna come out and say, oh, we gotta go back to fifty. You know. All they can do at this point is just sort of extend out. Um. But Neil, how much were we looking at people who are getting multiple jobs because they're trying to deal with inflation. How are we looking at one person accounting for three

of these jobs that have been created? I mean, I have to look at the multiple job holders as a share of employment that's in the household data. I haven't looked at that yet. Um. But it doesn't look to be abnormal. UM. And Look, I mean, if you don't believe the BLS, what about consumers? Look at what consumers are telling you about the jobs market. Okay, the labor differential from the concert sport also a January data point that was out earlier this week, I believe it rose

to a three month high. And it's at a very very strong level, certainly, you know, more or less word was before the pandemic, if not a little higher again. Uh, consumers are telling you that things are okay in the labor market. And consumers uh, and this is drawing on research from the New York FED. Consumers have a habit of spotting changes in their own local economies before the data because they know the places that are, you know, putting up help wanted signs, They know the places that

are handing out pink slips, and they see it before. Uh. You know, the survey collectors of the BLS do and so um. You know, consumers are telling you that the labor markets are fine, um and that, and that unemployment is low. So if you don't want to take the BLSS word for it, maybe we can just take the American consumers word for it and get on the phone and tell some pay Plata side no doubt to that. Every Nissons Macro Fantastic to catch up with Neil Jeffrey

Rosenberg joins us right now. He's portfolio manager Systematic Multi Strategy at black Rock. Jeff Rozenberg does this adjust a fixed in CONFUW of black Rock. Yeah, that you have to understand this is a big pushback to the to the slowing and it's a reminder of what Powell tried to say to the market, though the market wasn't listening that their main concern is they're not yet seeing, uh,

the impact of their tightening in the labor markets. And so this is a very clear message and and a really kind of important warning that perhaps the interest rate sensitivity put housing to the side, put the interest rate sensitivity of the economy to the FEDS tightening. To date, yes there are long and variable lags, but we haven't

really seen that degree of tightening. And when you take the financial conditions easing, the combined is perhaps what we're seeing here is the inability of the Fed to really get to its goal, which is to rain in the inflation pressures from a market palace. Set it again on Wednesday, it's still a labor market that is too hot, given that we're not seeing wages Jeff increased to the degree that some people might expect. It's such a headline blowout number.

Do you take comfort from that or do you disregard that as a compositional effect of what jobs are getting created right now? Yeah, it's you know, the a h G number in terms of giving us a read on wage inflation, is probably the most distorted because of the mixed shift earlier this week. We've got e c I, you've got a DP, and you've got probably the best

measure of the Atlanta Fed wage tracker. At least those latter two are still pointing to an elevated level of wages and sorry, wage inflation that I think is still very concerning to the Fed. Again, Powell was explicit when he said that earlier this week the market wasn't listening. This report is a reminder that the hot, tight labor market is still going to be an issue for the

inflation outlook and for the FED outlook. How would you play this then, Jeff, if you really trust the headline number more than you trust the wage number, why would you buy ten year treasuries where they are if you believe that this Fed could be that far behind the

curve maybe later in the year before it's apparent. Well, you're you're it's a good question, Lisa, and you asked about ten year treasuries, and I think you have to be a bit cautious here on the degree to which we've seen the rally in back end yields uh and and and you know you don't have to buy those yields here. You can buy the shorter end of the market.

The curve is at a historic level of inversion. Uh And I think there's more vulnerability as a result of that and today's report and what we're seeing not just from today but for a long time in the data. The degree of tightness in the labor market may really challenge the ability that fed to to deliver that pivot at the bond markets pricing into the second half of year. Jeff, it's a little bit off your remap, but I'm gonna go there because I know Ellen Meltzer and Marvin Goodfriend

beat it into you at Carnegie Mellon. And that is I wanted you to link in here the shock of five seventeen thousand and the forty eight other numbers that indicate this job boom that some few have called for, and the Biden stimulus, it just seems are we underestimating Jeff trunche I. Maybe this is for Glenn Hubbard's coming up as well. Are we underestimating Jeff Rosenberg? Trunch one, Trunch two, and Trunch three, Which can be summed up, as Blanchard says of the Biden stimulus, is that what

we're getting wrong. Well, what we're getting wrong and where the confusion is at is a tremendous dish portion in the economy from COVID, both the COVID impact and the COVID stimulus. And so we're seeing the backside of that. And really what you take out of today's report is really the strength and services and this is the handoff from the goods economy to the services economy. But we're

also seeing those distortions in our read of inflation. The deflation that we're seeing from the good side is pushing down the headline and the core measures of inflation. It's making it look like we've made a lot better progress. Again. Pell talked about this on Wednesday when he pushed back against the market inflation forecast to highlight that we shouldn't expect that goods deflation to persist, and you're gonna start

to see some of that come out. So this confusion from COVID and the fiscal stimulus is part of that. Is also what we're seeing in the makeup. The surprise numbers that Mike McKee highlighted is all from the services side of the economy, highlighting the transition and the strength that we'll continue to see their Jeff Frozenberg, thank you so much. Particularly thank you through this Historically Glenn Hubbard, director of Columbia's Chasen Institute for Global Business, and steeped

in the underestimation that we have of the American economic experiment. Hubbard, I want you to speak of the micro cosm, the initiative, the way we go out on a micro basis and find growth in America that pushes against traditional caution, traditional gloom. You've owned the high ground on that for decades. Are we underestimating the American business spirit spirit? Well, I think

we are to. And importantly, as we said before, we're underestimating how hard it is to forecast in the recovery from COVID as we change in the mix of consuming goods and services, how firms suggests, how industries. Sudjust I thought we would see an upside surprise and nothing like this, I confess, but it tells me the jobs market is much more robust than markets had bought uh and certainly a worry for the federal Reserve. I look, Glenna, at the fiscal stimulus of this, and let's go to your

public service for the nation. Typically with those of the Republican persuasion Olivia Blanchard, who you and I agree, knows the math. Olivia Blanchard calls this the Biden stimulus. Are we still witnessing stimulus effect that leads to these shock numbers? I think we're witnessing two things. One is the hangover from excessive aggregate demands stimulus, so I agree with that.

But we're also seeing a lot of adjustment as the economy comes out of the COVID pandemic, the goods boom, and now our recovery and services which are very labor intensive. So I think when people forecast jobs, they have to do so at a more micro level given both of those factors, and I think the job market is likely to remain hot, posing a real challenge for the beet. Remember the j Old stata we're pointing in the same day.

I'm just keep thinking about what Alan Ruskin Over at Deutsche Bank said in response to this Job's number, saying, more broadly, one has to think in terms of higher equilibrium rates in this cycle, given very unique labor market resilience and therefore less expenditure sensitivity to rates. Glenn, how high do neutral rates have to go if this labor market is as strong as it seems. Well, keep in mind, while the FED has adjusted, one could hardly describe monetary

policy as overly restrictive given where inflation is. So I think there are two challenges for the FED. One is figuring out how high. And I agree that FED is not likely to revert to very large rating increases, so more gradual rating creatures, but probably into the fives. But they may have to hold it for longer than market participants think. The fan, of course, has been signaling that,

but the market doesn't believe it. Do you think that this kind of strong data makes the the idea of a soft landing more likely or less likely because of how long the FED will have to hold rates high. I'm gonna give you the classic economist answer both. Uh, it could make it more likely in the sense that we obviously have a very robust underlying economy, giving the

FED some room to move. On the other hand, the possibility of a policy error here is quite significant, So I think this is a tough going moment for the FED. It's not easy for the FED, and markets by occasionally loosening financial conditions make it even more challenging. F Good, Glenn. I look at the path forward here and I think one of the surprises underreported in the three tumultuous days we've had is productivity lifted unit labor costs came down.

Are you an optimist that out of this horrific pandemic, all the shocks, all the once in a lifetime events we've add, that we can find a new productivity Well, let let me start longer terms. That's always safer for economists. I am an optimist about productivity growth future in the US, given techno logical advance and now it's penetrating through. I'm also optimistic that the recovery from COVID is leading to

some reallocations that may raise productivity. That's said, of course, we've seen a lot of productivity fluctuations positive and negative in recent years, and one swallow does in a spring make Glenn, We're talking a lot about trying to understand a very uncertain economic moment as the world recovers from a pandemic. There's a larger question that the FED has to deal with as well, which is what is the implication of looser financial conditions and getting them further away

from their goal of an ongoing disinflation. We've heard from a number of wonderful economists this morning saying it doesn't really matter at this point because of all the tightening from last year. Do you agree, well, again, I'm gonna have to prodgate and standard econ way Milton Friedman taught us years ago about long and variable lags of monetary policy. So there is reason to be cautious. Is that you suggest?

That's said, there's a lot of momentum in the economy, and the way to tighten financial conditions is to tighten financial conditions, And so I think the FEDS still has more work to do than the markets. Thing. Do you still think that this federal reserve should go above five? And decidedly so? I do so, I do think so? Uh, And thoughts before this report on one final question are We've got just a stream of news this morning, and and I just wanted you to talk to me about

the return of the risk free rate. You've got the truck on your hand, like Professor Joseph Cohen up at Columbia Business School, and you gotta like a lot of bright young people that have never known actual cost of money. What do you tell them about this new world that's the old world us, you and I and Abby used to know. Well, I think it's a matter of reminding

people of basic discounted cash flow math. It's whip sawing technology prices, stock prices, whip sawing prices of other goods producing sectors as well, and then also that higher returns for savers can be a good thing. Uh on the other side. So I think we're learning the risk free rates and equilibrium an zero in an economy that's rowed. Very good, Glenn Hubert, thank you so much, Glen Hubbard

with Columbia right now. Pre Miser, Global head of Race Strategy at TV Securities Prayer, You've had three calls and thanks for being with us. And the three calls went as follows. It was raised, three yield curve inverted all year, and recession in the back half of the year. And those three calls still the three calls. We still have that call. Yes, Um, you know, I think the FED is telling that. I think the reaction function of the FED has actually changed a little bit. The urgency to hike,

the urgency to take rates more restrictive. I think that's a lot less. They are more convinced for soft landing. We're actually not. You know, the data strong h the labor market data is always lagged. I think it's going to be more lagged right now. You know, the service sector is slowing, but in our view is going to slow a lot more in the second half of the year. So you know, we're still looking for a recession. I think the FED right now is is saying, we don't know.

We don't know if this immaculate disinflation, which is what we're calling it, will continue. You know, there has been some disinflation clearly in our view, for that to get for inflation to get to two percent, you're going to need that pain in the labor market. And I think that's what the FED is saying, we don't know. You know, they're gonna hike twenty five We think they're going to literally live meeting by meeting. We're looking for another twenty

five in March, then another one in May. I would say there's risk of another one in June. If inflation doesn't continue to decline at the same pace, there's risk of them going up to five and a quarter and then staying there all year, because they really need that inflation to get back to two percent. The really you know, UH don't want to let inflation expectations get unanchored and the economy is going to slow down. So you know,

we're looking for that recession still. But I have to say the the case of a soft landing is high today, and I think the FED is sort of banking on that. And the vanilla two tents spread the difference in year between the two year and the ten years, the ten years, the benchmarkts, what the media watches, What is your two years study? What will be the dynamic of the important two year yield? I think the two years largely about that terminal rate, and then what happens afterwards. It's all

going to come down to inflation. You know, I have clients saying, why would the fact that this year, well, if inflation continues to decline, if inflation is at two percent, the FED is likely to cut this year. Now Our view is no, inflation is going to get really sticky. I mean, it's easy to get that first couple of percentage point decline. You really for inflation to get to

two percent, we need pages around three percent. So if if inflation is going to be sticky, I think the FED is really going to struggle to cut trade so that two years has not only the end point of the hiking cycle, but all the cuts that are priced, and we're pricing in two D basis points of cuts between the middle of this year and and you know, essentially two years out there's that. What happens to that, I think it's to be a function of inflation. Our views,

the FED is going to hold still. You know, they're not going to cut rates until they see wages close to three percent, until they see PCE close to two percent. You know, the exhaustion everybody's voice today after this week is notable, it's palpable. And you said that this is the most confused FED end markets that possibly you have ever seen. Where do you get conviction in any trade at a moment like this, It's hard. I think you

have to keep you know, risk positions light. Um. You know, I think the FED has stepped down clearly, so volatility will be a little bit lower. But where is that endpoint? What do they do after that? All that is is up in the air. I think we're going to have to go back to models, and a lot of people have less including the FED, I think, have less faith in models. You know, the Phillips curve? Does it exist? Why has inflation declined? So I think we're actually looking

more at our models. We're looking at how do you get service inflation down with wages staying high? How do you get wages to come down? Can they does the unemployment rates stay here? So we're actually going back to chon one on one. But I can see for the market that's been used to forward guidance from the FED and the ECB, we're getting no forward guidance. So they

think the market is going to be whippy. You have to have these strategic trades, perhaps like being long duration for example, but have to be you know, have to be nimble around it. I think interest rates in the near term can rise because you talked about I s M services that goes above fifty. The consumer is still strong, you know, consumption of services is still strong. Then interest rates look too low, So I think you know, we're trading it more tactically in the near term and having

an eye on that strategic recession. Does the FED cut rates, I think you sort of have to plate it. You have to be nimble because the FED is number I prayer wanderful to get your fear. As always, prayer mused for that. That's a d. Subscribe to the Bloomberg Surveillance podcasts on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Easter bloomber dot Com, the I Heart Radio app tune In, and the Bloomberg Business app. You can watch as live. I'm

Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Tom Keene, and this is Bloomberg