Fed May Not Need to Cut Solely Due to Labor: Slok

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00:00So this is the game that we're all playing, right? Trying to take these alternative pieces of data,

00:05since we don't get the U.S. official government data, and piece together a picture of the labor

00:10market, which prior to the shutdown we knew was weakening. So when you take a look at what you're

00:15seeing at Apollo, when you take a look at those alternative sources of data, what's your current

00:21read on where we are? Well, your table really speaks for itself because there is actually quite

00:25some variation already in what we have seen in the data for September. So the answer is that we

00:30just don't really know. Otherwise, we would obviously have a very strong number that we got

00:34last Friday. But now that that didn't come out and we're not even getting jobless claims, it does mean

00:39that there's just a lot more uncertainty about where we're going. But we do know, as you're saying,

00:42Katie, that we did go in to the shutdown with some slower job growth. And that is, of course,

00:47the conversation in the market, namely the run up to where we are now, is that job growth has been

00:51slowing down. Yeah. And you asked the question in a note this morning, basically, why are we seeing

00:56that slowing in job growth? If you do have GDP, that's still humming along here. And I'll just

01:01turn that question over to you. Well, this is a very, very important issue, because if job growth

01:06is slow, simply because there's less immigration, simply because we have AI implementation, or for

01:11example, also because we have less government workers, that means that then it is the answer is

01:16that there's just labor supply is lower. In particular, immigration has slowed down dramatically

01:21from where we were for the last several years. And if immigration is slowing down, and therefore

01:26there's less job growth, then the Fed can't do anything about that. The Fed shouldn't really

01:30be cutting just because of labor supply slowing down. If, on the other hand, labor is weakening

01:35because there's less labor demand, if companies are hiring fewer workers, if companies are seeing

01:40less consumption, less cap expending, then, of course, the Fed can lower interest rates in order

01:44to try to offset some of that. And given the divergence we're seeing between what's happening

01:48with GDP numbers, GDP for Q2 was 3.8. The Atlanta Fed GDP now, as we speak, is also 3.8 for Q3.

01:55Where is the slowdown outside of the labor market? That brings you to the conclusion that maybe

01:59the labor market is mainly slowing because immigration is slowing. And that means that maybe it's not

02:04necessary for the Fed to cut a number of times, because this is really just because there are fewer

02:09workers coming into the country.

02:11You know, it's interesting when you phrase it that way. I hear what you're saying. But at the same time,

02:15it feels like everyone has a ton of anecdata at this point of knowing people who are looking for a job right now,

02:21whether they're a mid-career professional or they're fresh out of college. And it is just really brutal out there.

02:27It is hard to find a job.

02:28I think also the labor market is stagnant because still of the uncertainty that came after Liberation Day.

02:33It sounds a little bit weird. Well, why are we still talking about something that's now six months ago?

02:37Liberation Day was six months ago. Are we still seeing the negative effects of that?

02:40But maybe companies are beginning to realize that this is a more permanent shock that they are facing with higher tariffs.

02:47And therefore, they are not hiring, they're not firing, and people are not quitting.

02:50So it is a stagnant labor market, while at the same time, there's less immigration.

02:54So that brings you to the conclusion that if the Fed starts cutting rates just because there's less immigration,

02:59while at the same time, all the data on my Bloomberg tree for consumption is still strong,

03:03the Red Book weekly data for consumer spending is still strong.

03:06You also look at the daily data for Open Table, how many people go to restaurants is still strong.

03:10The data for Star, meaning how many people are staying at hotels,

03:13how many people are also going around to Broadway shows, to the movie theaters.

03:17You still see that economic data is still quite solid, combined with data center spending also being strong.

03:22I still come to the conclusion that maybe it's a little bit too early to declare that the economy is slowing down

03:27because it is really only weak in the labor market because of the slow immigration.

03:32But it really is very strong almost everywhere else.

03:35Well, let's translate that into a view on what the Fed is actually going to do,

03:39because I hear what you're saying.

03:40If they're cutting rates because supply is basically going down, maybe that's not a great reason.

03:45But we are in a situation where the Fed has restarted its rate-cutting cycle.

03:49Two more rate cuts are expected this year and then a whole bunch next year.

03:53And, Torsten, it sounds like what you're saying is that when you look at the balance of this economy,

03:57that isn't necessarily the right move here.

03:59That's exactly right.

04:00And the minister just came out here a few hours ago.

04:02They clearly said that now the FOMC is also worried about the upside risk to inflation.

04:07So the Fed's dual mandate is the labor market and inflation.

04:10And now we have just concluded that the labor market might actually just be slow,

04:14but this is probably mainly because immigration has slowed so much.

04:17There's data that showed that under the last several years, 2022, 23, 24,

04:22nonfarm payrolls should have been around 200,000 because immigration was very high.

04:26Now, according to Wendy Edelberg and Tara Watson and Stan Voyker at the AEI,

04:29they're saying it should be around 50,000.

04:31So we have a fairly sharp decline in the equilibrium level of nonfarm payrolls.

04:36So if the labor market is actually still weak, mainly because of immigration,

04:40well, now the Fed is, with the minister today,

04:42beginning to turn their attention to the other side of the dual mandate,

04:44say, well, there is some upside pressure on inflation coming from tariffs,

04:48also coming from a weaker dollar.

04:50So that's why maybe the Fed should, and that will be our view,

04:53begin to focus more on inflation and not forget that there's still some impulse coming on inflation.

04:57The consensus expects that inflation over the next 12 months will be three,

05:01which is still way above the Fed's 2% target.

05:04So the answer to your question, Katie, is I do absolutely think that the market is now

05:08beginning to turn more towards saying, hey, maybe the labor market is slow,

05:12but inflation is actually still here, and we still need to deal with that problem.

05:16It's funny to hear you say that because I feel like we just switched off the baton.

05:19We were worried about inflation, then it was the labor market that was really at the forefront,

05:23now maybe inflation again.

05:25There's so much to dig into and not enough time,

05:27but I do want to get the government shutdown into this conversation,

05:30because markets so far don't look that concerned.

05:33We're not getting the economic data that we love to dig into,

05:36but I am curious what this means for the Federal Reserve.

05:39We have a policy meeting coming up on the 29th.

05:43It looks like we're not going to get the CPI release that we were,

05:46or the inflation release we were expecting next week.

05:49We know the jobs market has been delayed when it comes to that official NFP release.

05:54When it comes to making policy, it feels like it just got a lot harder to do.

05:57Well, with this shutdown, the Fed really is flying blind,

06:00and the consequence, of course, of that is that they do need to look at all these other data sources.

06:04There are other things to look at,

06:06but none of these can be mapped directly one-to-one into the government jobs data.

06:11So that's why both on CPI and on non-farm payrolls and a broad range of other indicators,

06:15when we look at retail sales, durable goods, we just don't know literally at the meeting on October the 29th

06:21what truly has happened to the economy since the meeting that we had in September.

06:25So this is a very, very important conclusion.

06:28There's even been some debate around, okay, but how do you then communicate?

06:31Do you start talking about the private sector indicators?

06:34There's a broad range of things you can begin to look at.

06:36What do you put weight on?

06:37That debate at the press conference will become very, very important

06:40because if he begins to put weight on consumption,

06:43is it certain inflation indicators, is it certain labor market indicators,

06:46that will be very revealing for what they think is going on truly in the economy.

06:50So that's why it is a very problematic situation

06:53to make a decision on the back of very, very weak information.

06:57And just under a minute left here,

06:58but I also wonder about the different elements of this shutdown

07:02where possibly we're not just talking about furloughs,

07:04we're talking about layoffs, we're talking about government workers

07:06potentially not getting back pay.

07:09What does that mean when you think about the long-term effects of this shutdown?

07:12Yeah, because that then implies that suddenly we could have,

07:15that there could be weaker labor demand,

07:16and maybe it could be that the labor market now also starts to weaken

07:19because government jobs are going to weaken further.

07:21So it's just making the picture incredibly complex for the FOMC.

07:25And on top of that, we already had some dissents at the last meeting,

07:28so now they need to debate, well, what is the true state of the economy,

07:31and most importantly, how do we set and calibrate the Fed funds rate

07:35in response to the data that we think that we have?

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