00:00Well, we already felt the economy was doing just fine. And you've heard me say many times America needs workers,
00:07not jobs. And this is a good report of that. But I really appreciate, Tom, how you frame this. You
00:12say it's not about this one report. Exactly. It's about what this report and the labor market is telling us
00:19about the broad economy.
00:21And there's so many interesting stories within this May job report that are really synonymous with other trends that we're
00:28seeing. So, for example, there's some cyclical momentum forming underneath. The gains that we saw today were pretty broad across
00:35all the sectors, not just about health care. There are signs the consumer is OK. So leisure and hospitality having
00:42a big number.
00:43We watch that not because we're trying to forecast the next leisure and hospitality number, but because we want to
00:48know what the consumer's doing. We're looking for evidence of tariffs impacting the job market. And so far, that seems
00:56OK as well. Looks like businesses are passing on those price pressures through the inflation channel, not through the jobs
01:02channel. And we still got a hearty support from those health care added jobs.
01:06So when I put that story together, you know, for a long time, the goal of The Economist was to
01:11get that nonfarm payroll number right. You know, you were sort of measured by how well you could forecast that.
01:17I don't know if it's just because I'm getting older, but now I use the NFP number to help me
01:21forecast where the economy is going to be in six to 12 months.
01:23And when I do that, it tells me that our view that we're going to come in around 2 percent
01:27growth this year is right on track.
01:29Hey, Francis, the marketplace here, and I look at the work function and Bloomberg had this red headline pricing in
01:36a 25 percent hike in rates by the end of this year.
01:40Does that how does that drive with you?
01:43Well, I can't help but think about all those dissenters at the last Fed meeting who said, hey, we should
01:49not have an easing bias in this statement.
01:51I have to believe that they are smiling this morning that they were indeed right.
01:55Right. Let's start by removing the easing bias, which when you're looking at, you know, stable employment, an unemployment rate
02:02of 4.3 percent.
02:03And if you go out the double or triple decimal improving on that front and inflation, that's probably on headline
02:10basis is going to come in about 4 percent this month.
02:12There's no reason for an easing bias. The data is simply not providing that.
02:17However, a hiking bias. I'm just not there yet. There's no wage spiral evidence in the data and core inflation
02:24is still OK.
02:25So that gives them some time to wait out another few reports. But if you're asking me where our bias
02:30is, it's absolutely a hold or hike conversation as we think through what the next move from the Fed will
02:35be over the next six to 12 months.
02:37But the dissenters got it right is the headline to me this morning.
02:42Francis Donald with us with the RBC Capital Markets Office big jobs reported, of course, right into next week.
02:48So if I got two percent real GDP. OK, let's say you're wrong.
02:53Two point two percent, whatever the number I add on an inflation.
02:57Do I have a banana republic nominal of five or dare I say six percent nominal GDP?
03:07Well, that's the math of it. This is an economy that's really hard to bet against.
03:14Now, up until now, it's been hard to bet against it because of structural factors.
03:19And there's been these three heavy pillars, AI, government, and then sort of that health care sector that's providing support
03:28underneath the U.S. economy.
03:29And it was really hard to see those shaking. What's moving now in the last two to three weeks is
03:34that structural support overlaid with some cyclical momentum.
03:38Now, Tom, it's still early. I'm not going to make a big, bold call here.
03:41But when you layer in structural guardrails with some cyclical support coming from slightly better consumer than maybe we were
03:48expecting, some relief on tariffs, then you start to get towards a different sort of paradigm.
03:54And yet I say it's early because there's still some things we need to be watching.
03:57We need to see how much inflation producers can pass on to consumers.
04:02Real wages are going negative for the second month in a row.
04:05Looks pretty clear from today's average hourly ratings.
04:08So there's going to be a limit to that.
04:10And we are in temporary relief with tariffs.
04:13I know we don't talk about tariffs anymore, but it's very clear to us that this is producing pressure on
04:17businesses in America.
04:18We got that IEPA hold.
04:20Now, just this week, you've seen Section 301 tariffs coming through.
04:23So we got to be a little bit cautious here.
04:25I, of course, have been optimistic, as I say, really hard to bet against the U.S. economy.
04:29But we also have to manage the risks.
04:31And there are risks on both sides right now.
04:34It's just that we've spent so long talking about the downside risks, we've avoided talking about the upside risks.
04:38And clearly, there are some of those as well.
04:41I'm glad you called out the wages here, Francis, because we did have average hourly earnings rise 3.4 percent.
04:47That was lower than last period.
04:49But I look ahead to next week in CPI and the core year of year is 4.2 percent.
04:54So it looks like the consumer vis-a-vis inflation is struggling.
04:57How do you think about the consumer these days?
05:00Yeah, it's such a great point.
05:02For years, you know, when you were taught as an economist to look at the U.S. economy, you were
05:07told the U.S. economy is the U.S. consumer.
05:10And the U.S. consumer is do they have jobs or not?
05:13And as long as the job market was doing well, then the U.S. consumer was doing well and the
05:17U.S. economy was doing well.
05:18And that's why I said earlier the whole goal of the economist was to predict the nonfarm payrolls number.
05:23The challenge now is that if you're an American and you want a job, you probably have one, especially if
05:29you're over the age of 25.
05:30It's not if you have a job in America that matters anymore.
05:32It's whether it pays you enough to afford the cost of living.
05:36And that's not just a wages story, Paul.
05:39It's also an hours worked number.
05:42So today what I was looking at most closely wasn't just the average hourly earnings, which is decelerating.
05:47It's did we see any decline in the amount of hours of employment worked?
05:50And no, we didn't see that.
05:51We actually saw a nice stable element of that.
05:54So for me, we really have to shift our perception away from what's the unemployment rate that's going to stay
06:00low to is it providing enough?
06:02And we know from the numbers it's not.
06:04And there'll be a limit to how long the consumer can hold on.
06:06A gift to you across the nation.
06:08Francis Donald with us.
06:09We continue with Francis Donald of RBAC here.
06:12Off the jobs report, all you need to know is a massive shift in the Sweeney yield.
06:18The two-year was up 10 basis points.
06:21It is up now in explosive 13 basis points, 4.13, excuse me, nine basis points, 4.13 percent on
06:31the two-year yield, 30-year bond, 5.01 percent.
06:36Francis, I think the cacophony of news and, of course, the war and all that, we're looking at the algebraic
06:44function.
06:44And there's a lot of stuff we're not talking about.
06:47Like, we're not talking about the massive changes in immigration.
06:51We're not talking about this massive delta of declining government employment as well.
06:58Do you have clarity out into 2027?
07:04We never know what policies will be around things like immigration or even what government employment will look like.
07:12But we do spend an enormous amount of time, Tom, talking about retirements.
07:16You've heard me talk about this before and how critical they've been to the decline in labor force participation rates,
07:23which has sharply declined through 2026.
07:25And just what this means for the general state of the U.S. economy.
07:29So our estimate of breakeven employment in the U.S. is 20,000.
07:33The U.S. only needs to add 20,000 jobs per month now to keep the unemployment rate stable.
07:39And that is largely driven by retirements more than changes in immigration policy.
07:44But it so clearly contributes to our view that, again, America needs workers, not jobs.
07:49But, Tom, it also impacts income.
07:5220% of income in the United States right now is government transfers, money from Washington into households across the
07:59country.
07:59And the larger that becomes, the less cyclical the U.S. economy will be.
08:04Because if you're getting a paycheck every month that's inflation-adjusted and doesn't matter if there's a recession in play,
08:09the economy operates differently.
08:10See, like if Francis, if the Canadians had gone to the finals, Francis would be on her way to Las
08:15Vegas.
08:16Yes, she would.
08:16Neil Dutta is living large.
08:19He's down in Spurs country seeing back-to-back Knicks games.
08:24His screen, his Bloomberg terminal tells me he's working.
08:27I know, I'm not buying it.
08:28With Jeff DeGraff this morning.
08:29I'm not buying it.
08:30I think it's massive work from San Antonio.
08:32Francis, I love this single sentence from Neil Dutta of Renmack.
08:36I want you to comment on this.
08:39Stagflation is bad for stocks, and inflationary boom is not.
08:44So the ambiguity here is there can be a good side stacks up to a quality boom economy, right?
08:55So the way that we think about that is that think about growth and inflation like a two-by-two
09:01matrix.
09:01You've got growth up or down, inflation up or down.
09:05Now, when you have growth down and inflation up, that's one quadrant.
09:09We call that stagflation.
09:11But when you have growth higher and inflation higher, that's a heating up economy that we typically call reflation.
09:18There's an enormous amount of work coming from the sell side on where we are in those four quadrants and
09:23just how different an environment they are.
09:26But one of the big challenges is reflation, very clear Fed response.
09:30They know what to do in that type of environment.
09:32Usually your labor market's getting real tight and inflation is high.
09:35You can hike rates, which is why you get different market responses to early rate hikes.
09:39But when you have a stagflation environment, that's the Fed's dual mandate pulling in opposite directions.
09:45Not only does that create a bad environment for businesses, just everyday folks operating on the ground trying to run
09:50their companies, it's also enormously challenging for central banks.
09:54So even though right now probably new Fed chair Warsh is sitting there saying, oh, my goodness, I probably can't
09:59cut, at least he doesn't have the mandate pulling in opposite directions.
10:03That would be a much harder first meeting this one, at least from a traditional lens, excluding the politics of
10:09it, is fairly straightforward.
10:10Really well said versus New Zealand and a few other choice geographies.
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