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Investors assessing the market impacts consumers and businesses already readjusting torson Snock of Apollo, writing, this is a weight and see economy. Consumers are more reluctant. The bottom line is that this eventually needs to a slow down in the hard data, and markets should prepare for that scenario. Towson joins us now for more. Tourston, good morning.
Good morning.
We've seen the shift and the soft data. The last time we spoke, you raise the issue are believe Lisar asked the question, with that soft data bleed into the hard data, do you sense inevitability now toward that?
We are beginning to see that if you look at high frequency data, so over the last several weeks, we have seen and I know some of these indicators are a little bit special, but we've seen the number of people who are going to movie theaters, a number of people going to Broadway shows. If you look at the TSA data for how many people flying airplanes, even if you look at how many people are visiting the Statue
of Liberty here in New York City. All that has actually started weeken and now we get another soft data print here at ten with the Michigan centiment for consumers. So overall it is still a little bit too early, but given that we have this weight and see situation both for consumers and for corporates, it does make sense that the soft data should eventually begin to spill over to at least some weakening in the hot data.
One feature of this cycle that I think a lot of people underestimated, you not included is the resilience of this economy. What is our capacity to absorb sharks now has that been reduced?
Well, that's a very important question because that depends on the nature of the sharks, and we're facing two sharks at the moment, name the DOGE, which is laying off government workers. Estimates suggests that will be around three hundred thousands workers that might be losing their jobs. Remember that for every federal worker, there are two contractors, according to Brookings.
So Brooking starties show that in total, true employment in the federal government is roughly around nine ten million people. So if you now think about total above households one hundred and thirty million, and someone in the federal work or contract that lives together with someone in the private sector.
You get that as much as ten fifteen percent of all households in some way or another is being impacted from a sentiment perspective by doose A loan and tariffs of course, also in particular impacts anyone who is associated with trade with Canada and Mexico, and you have that that is also a particular of course across the border to the north and to the south, playing a significant role in a number of states. So the bottom line
is is not only terriffs and trade warm. It's also the combination of the risk that government workers and contractors potentially losing their jobs. That are the main reasons why the soft data is weakening the way it is. And it's not only consumer soft data is also corporate. If you look at the CAPEX planning from the regional feds Dallas FED, Field, Delpha FED, New York FED, that's showing that businesses in those districts are saying we're beginning to
cut back CAPEX plans. Likewise, NFIB also roundtable surveys KAPEX planning is also moving lower. So both consumer confidence moving lower corporate confidence moving lower. It is a precursor for slow downcoming in the hot data.
There's an argument being made that if what was propping up the United States economy was goverm meant spending, it wasn't that strong to begin with, And this is actually somewhat of a withdrawal from a sugar high from an incredible amount of fiscal spend in the direct aftermath of the pandemic.
Do you buy that there is some truth to the detox argument in the sense that if you look at hiring in nonfound payrolls over the last two years, twenty five percent of jobs created in twenty twenty three and twenty four were government jobs. The previous years it was like five ten percent much months or less, So a very significant part of jobs in the last two years
had been coming from the government sector. So it is true that job growth has been slowing in the private sector, even going into these shocks that we're looking at the moment.
Heading into twenty twenty five, you are pretty clear that you think that the inflationary shock was going to be maintained and that it was going to create a real problem for the FED to actually offer response to that kind of weakness in the economy. Do you continue to see that even though the shocks that we're seeing right now to policy might have a bigger ramification on growth than you'd previously expected.
Well, the real challenge is that going to tariffs, we had that inflation unfortunately was still too high at around three percent, and most calculations suggest that you will add roughly half a percent's point to core PCE as a result of terriffs. So it makes a huge difference where you start. If you start with inflation at three and you add half a percent, of course, the risk is that you will have too much upside and we're way
above the FETs target. Whereas if inflation had started at one and a half, which is where we were in twenty sixteen, and you add half a percent, then inflation will move up towards the FEEDS target. So the problem was really that the starting point for inflation when these policies came along was that it was unfortunately well above
the FETs target. So the risk is in this situation that you have inflation moving higher and growth flowing down, which of course is a definition of as deflationary shock.
We were talking to Mohammad Olarian earlier this week and he made the point that given these dual shocks, the FED should probably allow inflation to run a little bit hotter for a longer period of time and address the growth issues and cut rates at least once this year. Do you agree that that's more prudent at a time where there are these stagflationary forces starting to loom?
Absolutely, because the FED has the dual mandate. On the one side, if growth is slowing is saying the fat should be cutting. If inflation is going up is saying the feature should be hiking. I think the FED will look at if growth starts to slow, and if we're with the next several weeks, begin to see that unemployment begins to go up. Let's not forget that non farm payroll is always done in the week of the twelfth means this week, so this is the week when they
do the survey for the employment report. And if we do believe that this week was somewhat intense on the policy front, then there is of course a chance that non farm payrolls for March could be on the weaker side. And if that's the case, then in the next seven weeks and particularly going into April and with the April
second deadline also from Trump, with a reciprocal tariffs. We come to the conclusion that the risk is that we might begin to see growth slow down, and the FED will say, well, as long as inflation expectations are anchored, yes, actually inflation may be higher. But if inflation explctiations are anchored, they will be focusing on growth slowing down, and therefore the risks are that markets will be pricing in more
cuts at the time. By the way, it looks like from stock markets that they are almost saying, well, the fit should be cutting many more times, whereas race markets are saying, no, no, we only need two more cuts. So there's almost an inconsistency between the messaging from stocks that are now in correction territory and race markets saying no, no, we only need two more cuts.
In the news conference on March nineteenth, next Wednesday, how does Chairman Pound address those issues? What are you looking for?
So I'm looking very much for how much he's focusing on the soft data slowing down. He did do that at the USMPF last Friday here in New York City, where he was in his prepared remarks saying, ah, everything is generally okay. But when he was sitting down with Andrew Cashev and asked questions. He was more saying, hey, something is going on that has some downside risks that
we maybe should be putting more weight on. So I do think that he will begin to talk about, well, there's softness in the soft data, but maybe we're also worry about softness in the hot data.
We have seen this incremental shift from the November meeting into December. We don't assume, we don't guess, we don't speculate. Then in December there was some assumption, some guessing, some speculation, and then I agree with you the recent address we had from Chairman Power, there was another subtle shift. Just started to tackle policy issues head on in a way he hadn't done in the previous few months.
And on some level he kind of has to, because there is a sort of scenario analysis that has to come from the FED for them to even be relevant about how they're measuring some of these aspects. And that's probably why the statement of economic projections, which could be a darkboard, but it is sort of a messaging tool about how they're going to potentially respond to what is transpiring in policy and how it's transpiring and data even if it doesn't necessarily come to full pass.
The difference now, I guess is we're actually getting the policy. They don't have to speculate about it anymore. But that policy comes with a lot of volatility and tours, and they've got to manage interest rates through the cycle. Maybe Chairman Power steps down in the next couple of years. I imagine he will. I don't know for sure, but I think we all think he will. I want to
understand from that perspective. You sit there and you acknowledge the risks right now, but also you've got to think about tax cuts, the potential for looseid regulation further down the road. How do you manage through the cycle with that in mind.
Well, that's why this did betabout is it policy dependent? Is it data dependent? Becomes really really important because of course the policy that's in place suggests that well so far, the two things that we have seen from the beginning is those which is putting the unemployment rate up, and also terrorists, which is putting inflation up. So if that's the case, they need to deal with that shock as
the first thing. Even as you say, if there are other policies coming on deregulation, on lower taxes and potentially also more energy production.
Toston Clinic has always got to say, sir. Looking ahead to next week March nineteenth for Federal Reserve next Wednesday for that meeting, including a news conference and forecast for the Chairman J. Powell tosson slock of Apollo