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We continue to expect another slight increase in the unemployment rate to four point seven percent in December. Veronica joins us. Now, Veronica, thank you so much for being here, Thanks for having me holiday. Wondering from your perspective how much the data that we got earlier this month was actually valid and that people are discounting it too much.
Yeah, I think there's a lot of that going on. And if we saw the unemployment rate next Friday, the first week back back to work, if we saw that at something like four point seven, I think people will believe it a lot more, because, yeah, there's a lot
of issues with the November October data. We don't know how much the government shut down affected new measurement of those months, but December should be relatively clean, and if it stays pretty high, I think that's a more concerning sign for people.
How Come this labor market is weak? I don't get it, because you've got incredible earnings growth, right, so corporate the mayor is doing very well, and there are no new people coming into this country, right, there's no immigration. The demographics trend like everyone's old. There are no young people like it should be companies are fighting for employees.
Yeah.
Yeah, I mean there's been this issue of you know, is it labor supply is it labor demand. We've been dealing with us for a couple of years now. You know, back in twenty twenty four, when we saw the unemployment rate increase, the excuse was also, it's more immigration. I don't think we can use immigration to explain the bad data. You know, different sides of immigration to explain bad data.
But I think what's happened is that labor demand has just weakened more than labor supply, and that's why you've seen the unemployment rate rising. It's this low hiring still low firing dynamic. But I would be worried that low hiring can only last for so long before maybe you do see some layoffs.
Is that because technology and AI have made the few employees that companies hold on to more productive.
I'm a little hesitant to conclude that that's what's happening now. That might be part of the story, absolutely, and we could see larger productivity gains from AI longer run. But this really started a couple of years ago. This really started maybe summer of twenty twenty three when we saw this pullback and hiring, and I do worry that it started in more rate sensitive sectors like manufacturing small businesses.
The pullback has really been there. And so yeah, it doesn't necessarily matter if equities are doing well in earnings or find small businesses are going to be more rate sensitivenfacturer.
I thought we're bringing manufacturing that we have.
Been losing manufacturing jobs I think every month this year, but that predates this year also, and it is a rate sensitive sector.
Well, this sort of speaks to the question of is the FED restrictive and this is the big debate restrictive for who? Because on one hand, you do see companies filing for bankruptcy at the fastest clip going back to twenty twenty. On the flip side, you see AI companies screaming ahead, digital Bridge being purchased for four billion dollars at a fifteen percent being. So can you square that?
Yeah, I mean there's this fifurcation across all parts of theomy. And I think there's a lot you know that has already been said about the k shape economy for consumers. You know, higher income consumers are spending, but We definitely see that in sectors also, and you know, the smaller businesses who are more rate sensitive. I think rates are are restrictive here, so.
You expect a significant number of rate cuts. Let's just postulate that we do see an increase further in the unemployment rate to four point seven percent as you expect. What does that mean for January twenty eighth.
Yeah, I think they're going to be cutting really Yeah, so we are penciling in another cut in January, another one in March. And it's just this kind of idea that you've clearly gotten more concerned on the labor market side of your mandate. If the unemployment rate is something like four to seven that we think we'll see in December, we will have hopefully more inflation data by March that we trust again, you know, early twenty twenty six data.
If you're seeing inflation slowing and data that you believe again, and you're less concerned on the inflation side of the mandate, you're more concerned on employment, why wouldn't you be at the midpoint of neutral, which would be cuts in January in March to get either.
The counter argument is if you get rate cuts, potentially two by the end of March. At the same time that you have the one big beautiful bill, the tax refunds and potentially an additional two thousand dollars stimulus or whatever else might be coming down the pike, Don't you risk reigniting inflation that never died.
Yeah, I'm not so concerned about that right now. You know, the inflation driven by lower rates more stimulative monetary policy, you'd expect to see it first in a sector like housing, and you definitely don't see that yet. You don't see those signs yet. Home prices have been slowing, new rents have been slowing a lot. We already know that in the inflation data. There is this lag issue of shelter inflation that's going to I think, be slowing all of
next year. All of the potential fiscal stimulus, you know, maybe larger tax refunds, the business tax incentives that were part of the bill from the summer. Those can help support growth. But I would worry that the main determinant of if people are spending or not is if they have a job and what their labor income is, and that we have seen slowing already, and you would think consumption with Slothan.
Too, Veronica Clark, Thank you so much for being gared for holding down the fort for the economics team at Citigroup. Veronica Clark of Citygroup Global Markets