Upsides, Downsides

0:00Welcome to Inside Economics. I'm Mark Zandy, the chief economist of Moody's Analytics, and I'm joined by my trustee co-host, Krista Reedy's. Hey, Chris. Hey, Mark. How are you doing? We're missing our other trustee co-host, Merce de Natale. She's still away. Yes, yes. Yeah, she went to France. She went to France. She did checking out the wine and cheese markets, making sure that they're stable. That sounds like a good job. Have you ever spent a lot of time in much time in France or anywhere else in France? I've been to Paris for a few days. I spent a long time going out. I spent almost a year there in Paris. Did you really? I went to

1:01Paris set. Yeah. It was a blast. I had a lot of fun, learned a lot. The one thing that I do remember is I finished my semester. I call out my dad and I said, hey, dad, I want to stay longer. He goes absolutely not. He got to come off. And therefore, what I did is I got a job selling lithographs. Do you know what a lithograph is? I don't even know if they do lithographs anymore. It's like an imprint. You kind of cut out the painting or the picture. Then you put ink and you kind of it's like an imprint. And I sold that door to door, law offices, doctor offices, professional services. Because you know that they generic artwork on that. I sold that. I did. And I made enough money. Well, I made enough money to hang out for a year.

2:04Yeah. I was like Bohemian. It was really pretty unmarked Xandie like. I'd have to say. Yeah. So your French was really good. I say it was not I say it was good. Not really good. I had a girlfriend and she would always tease me that I bad my my French was. And the French would make fun of my my pronunciation. I think if I wanted a glass of water, I defy you to say water in French. It's not easy. At least not to the French satisfaction. So I could fill or eat. But so they took pity on you. That's what it you're saying. Yeah, they took a little pity on me. But yeah, that was that was a really good experience. I'll have to say a very good experience. So yeah, I know I know Paris pretty well. I haven't spent as much time there in my formative years, but you know, really enjoyed it. How about you Dante? Oh, we've got Dante. We've got done this jobs Friday. This is the Friday, September the 4th. And we got Dante. It's per is normal for the jobs numbers. So how about you? Do you

3:11do you have like a bohemian year where you kind of you know, got on a motorcycle and rode across the country? Doesn't it look like he'd be a good motorcycleist? Of course, you know, yeah, I've never had a year of free spiriting across the globe. No, I have been there before though. So yeah, yeah, would you go back? I'm actually going back. I'm taking my kids in a few months in November. Nashville, Dolly land, and now Paris. Where you're going to go see the outfits. It all fits. It all works out. Yeah, that's great. All right, well, I guess we got to get down to business in the jobs numbers. Wow. Just take last months job numbers multiplied by negative one. You get today's jobs numbers. Like what the heck is going on? How do you interpret? Well, first of all, it goes to numbers and how you interpret things. Go to Dante. Sure. So I mean, obviously, an upside surprise in August, we got 162,000 jobs added

4:15in the month, 127,000 of that was private sector. So a little bit of a positive rebound in government after it was down last month. Positive revisions to the prior two months, not huge, but a combined 55,000 upward revision across June and July. So all of that together puts three month average job growth at 71,000 after it was down to 20,000 on average just a month ago. So a more positive read of the labor market, obviously, than we were talking about last month. The industry composition was maybe a little bit unusual, I think. The Elysian hospitality led the way after it's been weak, sort of all summer. We kept talking about the potential of a world cup effect and how that might boost it. And we never got a boost. You know, payrolls were down in Lijor hospitality in June and July. And then all of a sudden they jumped 62,000 in August, which doesn't make a ton of sense to me seasonally. I mentioned we got a little bit of rebound in government, up 35,000. Healthcare was up 28,000. Was that education? Because that's been bouncing

5:17around all over the place too. Yeah, it's just a rebus. If you look underneath the sort of top line government, if you look at local government education, it was down almost 58,000 in July and it was back up about 42,000 in August. So just a lot of noise around seasonality of education payrolls. Right. Healthcare added almost 29,000 jobs. It's been a bit weaker over the last three, four, five months than it has been recently. So maybe something to keep an eye on there. You know, healthcare had been averaging 50 or 60,000 jobs a month. And now that feels like it's been about cut in half more recently. Construction manufacturing. We're also both positive. Maybe somewhat surprisingly. That had 38,000 jobs combined across the two industries. So, you know, a little bit of a positive story on the goods producing side of the economy as well. So it was a more broad-based gain, you know, not huge gains in any one industry, but you know, sort of more distributed than we've seen so far this year. Any declines? Any industries lose jobs? Information and finance were the two.

6:19And that's, you know, sort of have been the case here over the last six months or so that those two have been kind of downbeat. Yeah. You know, the thing that I find, there's a lot of noise in the numbers, right? Last month, we before this revision, we were lost jobs and we that clearly overstated the weakness in the led market. In this month feels like it's kind of the flip and this overstates the strength of the economy. Particularly in the context of all those the third-party data that we get, you know, if you look at all of the various third-party sources of estimates of these numbers. So if you look at ADP, for example, Rivillio Labs, we've had their chief economist on before. I looked at B of A, Bank of America and their estimate because they look at their clients and based on that, they make an estimate. Vanguard also puts out an estimate. I mean, that was very

7:22weak. I didn't see any third-party data source suggesting that the month of August was going to be a strong month. Yeah, I can, I mean, the sort of the consensus, how strong the consensus was for a week report actually made me a little bit nervous this morning. I messaged my team at 815, saying I'm having some doubts about the jobs report. It feels like one of those months where you're going to get an outsized gain, you know, just feels like everything was too perfectly aligned, saying that it should be weak and, you know, it sort of defied those expectations, obviously. Right, right. Was there any, like last month, there was, it was unambiguously negative. I mean, there was nothing at all in the report. And we'll get to the household survey in a data in a second. But there was nothing at all redeeming in that report. Is there anything negative in this report? From a payroll deployment site or anywhere, do you see any kind of blemish? I mean, I think the fact that, you know, information and finance continue to shed jobs is not

8:24positive. Obviously, we know what the headwinds are there. I think it's expected that there will be some weakness, but the fact that they're continue, they lost 34,000 jobs combined, which is, you know, I think among the biggest for a combined loss in those two industries in recent months. I think, you know, healthcare again, I mean, that's been the driver we have always sort of assume that healthcare will remain the strong driver of job growth. But, you know, maybe that isn't so much the case, right? Of healthcare gains, you really do decelerate an average 20 or 30,000 instead of 50 or 60,000, then, you know, gets harder to sort of imagine where growth comes from here over the next six or 12 months. So I would say those are not huge blemishes, but things maybe to keep an eye on. What about wage growth? I mean, that has been a pretty glaring blemish. Any change there in support? So I mean, the monthly number improved. I was up 0.3% over the month, but the year over year wage growth, it's still decelerated further to, I think, 3.1%. So it's creeping closer to 3% where, you know, I think if you go back a year ago, it was closer to 4%.

9:24Right. So that's less than most measures of the rate of inflation at this point, right? So real wage growth is still declining. So purchasing power is still under a lot of pressure. Yep. Yeah. Okay. Okay. The other thing that kind of dawned on me was, it feels like AI is having an impact, right? I mean, both in terms of job growth and in terms of job loss, because the construction jobs, there we know that that is data centers. Yeah. That's what that is, because the rest of construction, almost all of the rest of construction, certainly the housing part of construction is kind of on its back, right? Very weak, losing jobs, but we're still getting net positive overall construction employment. That's the data centers. That's the plus. That's the positive. The negative, you mentioned information services and financial services, those would be the industries, I think, where you'd see the productivity gains from AI, right? The

10:31programmers and back office and that kind of thing. So I don't know what the net of that is. It's probably pretty close to zero. I mean, yeah, at this point, but you could feels like AI is increasingly over these, impacting these job reports. Is that sound right? It certainly looks that way right now. Yeah. I mean, it aligns in that way. Yeah. Okay. Chris, anything to add on the payroll side before we go to the household side, the payroll employment, the survey, business, businesses, anything that you noticed that Dante missed? No, I covered it all. All the points I was going to make. Okay. So, okay, you know, my question is going to be the following. What is underlying monthly job growth, abstracting from the noise, and there as we've been discussing plenty of noise in the data, seasonal adjustment issues, timing, one-off factors, just a lot of different moving parts here, but abstracting from that, what do you think the underlying rate of monthly job growth is, Chris?

11:34What would you say last month? I think you could do you recall? I don't recall. I think I said 40, probably 40 to 50, which would be pretty good today. Which would be my number still today? It's not changing. It's not changing. It's not changing. It's not changing. It's not changing. It's not changing. It's not changing. It's not changing. For bringing it to noise, things could get revised. And you Dante, what do you think the kind of underlying monthly job growth? What did you say last month if you can recall? You can't recall? I got to go back then. I think I said around 50K. Whatever I said, I wouldn't change it. You're not if this makes me change my view of what's happening. I think you've got two week months in June and July. You've got a stronger than expect a month in August. All that sort of washes out to me to be still the same labor market that we've seen. Right. That's what I would say. I said 50K. I believe last month. I believe I said it. I still think 50K. I think that's kind of the underlying way to job growth. I'm going to come back and ask about the break even. But was that after we

12:37get a Dante's views on the household employment survey? One of the things I didn't even look, what about hours work? Did you look at that? Anybody look at that? Average hours work did actually tick up a little bit for the first time in a while. It was just by a tenth to a 34.4 hours a week, which had been basically steady for months. I guess that it's a slight positive sign that hours are increasing a little bit. It seems to be bouncing around month to month on a low level. Okay. Okay. Very good. Let's go to the one other thing I want to mention on the payroll survey, the revisions. We got a BLS released what they think the benchmark revisions going to be. Do you want to explain that and what it says? Sure. Every year at the beginning of the year. In early 2027, they'll benchmark the payroll data to the quarterly census of employment and wages, which is essentially a census count of payroll employment. That official benchmark won't

13:38happen for a while, but they give us a preliminary estimates because the Q1 QCW data was released at the end of August. They give us a preliminary estimate of what we think that revision will be as of March 2026. That's the anchor month that this is benchmark two. Based on that, read the benchmark revision will be down 79,000 jobs as of March of 2026. They don't give us a monthly breakdown in the preliminary estimates. They're just saying how much will the level of employment change in that one month in practice when it comes time for the official benchmark that 79,000 decline will be shared out across the months ranging from April of 2025 through March of 2026. It's a fairly small downward vision, especially compared to the last couple of years when we've had downward visions that were north of 500,000. I think last year was about 800,000. This is much smaller. It's very small. Historically, even outside of the last couple of years,

14:38that's only a tenth of a percent in terms of total employment level. It's pretty insignificant in terms of revisions in general. I thought the revisions across industry were kind of interesting as I recall. I think there's maybe some say I was actually going to ask you all about because manufacturing has looked a little bit strong and that's one in general where they're expecting a downward revision. Payroll survey has showed this modest uptick in manufacturing since the beginning of the year. The suggestion is that the preliminary vision will wipe some of that away at least, it's more with my expectations of what's going on in manufacturing. Also, our conversation that we just had information and finance are both getting an upward revision as of March. It won't wipe out the losses, but it'll mitigate some of the losses that we've seen. The revision doesn't say anything about what's happened very recently. It only goes through March of this year and so it won't tell us anything new about what happened in the second and third quarter. It does suggest a little more positive story in those two industries. Yeah. Of course, anything to add on the revisions?

15:42No. No. Okay. Yeah. I'm just being complete here. Of course. Yes. Of course. I appreciate it. Don't just get it covered. Yeah. He's got to cover. He's got to cover. Okay. Let's turn to the household survey, the survey of households, which we spend generally less time on because it's a small sample of households and usually a lot of noise in that data. But what did it say? We got our first positive household survey report here. It took to August to get one, but the headlongers at the unemployment rate was unchanged at 4.1%. But for very different reasons than we've seen in recent months. Right now, we got a big increase in the labor force, but a corresponding large increase in household survey employment. And so those offset to keep the unemployment rate steady. Participation rate was up to 2.10% so up to 61.6. That reverses some of the recent decline, but it's still obviously down quite a bit over the last six months or a year. Depending on how far back you want to go. I think it's hard to find a

16:46negative story in the household survey other than the fact that from January to July, it was downbeat month after downbeat month. And this only partially reverses all of that negative news that it sent so far. I did notice a big monthly increase in household employment. But if you put that on a payroll definitional basis because these two surveys have different definitions. So if you kind of do apples to apples, was there an increase? It was actually even bigger than the unadjusted. Really? 673,000. Oh my goodness. Okay. But that measure is still down since January. So even with that increase, it's still negative since beginning of the year. Right. Right. So the household survey since the beginning of the year shows outright employment decline, even with this better August number. Compared to the payroll survey, which has shown some growth since the beginning of the year. Right. The payroll survey is up almost 500,000 jobs since January. And the household survey is still negative. Still negative. Okay. Chris, anything on the household survey you want to call out?

17:49I mean, you guys look at E-POP or employment to population. What did that do? For primate workers? Did you take a look? Primate participation in E-POP were unchanged. So there hasn't been any movement there. The headline rates both improved a little bit. Recipation in E-POP. But that's outside of the primate group, obviously. Yeah. As you said, my mind's eyes, the patient rate overall participation rate is 61.6. I think that's still down, you know, 8, 9, 10% of a percent since the beginning of the year. And I started at the beginning of the year because I want to abstract from the January effects on the population counts. So it's still down quite a bit. Yeah. More was. Yeah. Okay. Sorry. Of course, I asked a question and I didn't launch the answer. Anything else on the household survey you want to bring up? A couple of their positives were the U6 measure. That's the broader on them. They were for Slack measure includes discourage workers and whatnot, marginally attached workers. So that came in a bit. That was positive. And the other positive eye track is the lack on employment rate that down to 6%. So that's, you know, again,

18:57take them for what they're worth. A lot of noise in this data, but at least for now, some positive signs. Right. In the household survey. Okay. So the break even, monthly job growth. So the break even is what rate of monthly job growth is consistent with stable labor market slack. And we've expanded the definition of slack to include not only the unemployment rate, but the labor force participation rate. Because obviously the unemployment rate would be a lot higher if the participation rate had not fallen to such a degree that it has. So you said, Chris, you're underlying rate of job growth, monthly job growth is high is 50k. What do you think the break even is? I think it's right there. I think it's 45k on each. Let's put it. Okay. So the labor market's stable in the sense that we're not getting more or less slack being created at this point. Okay. What about you, Dante? And do you consider the economy at full employment?

20:00Or not. That's a tough one because of wage growth. Yeah. Modest there, but I think it's close to full employment. Yeah, but it's wage growth is decelerating. Can't how can't, isn't that by definition that we've got slack in the labor market? No. Well, it's a question of magnitude. Yes. Magnitude. Okay. It's a question of magnitude. I don't think there's a lot of slack. Yeah. Right. But there is some. Right. Okay. Do you, Dante? So you said 50k is the underlying rate of job growth? What is the break even? Yeah. I mean, I think I'm aligned with Chris and that I think it's got to be close to 50k. Right. I do think there's maybe a little bit of slack. But I also think on wage growth, it feels to me like wage growth is probably just about stabilized. It doesn't feel to me like it's the bottom is going to keep falling out of wage growth. So if we assume that wage growth is sort of stabilizing around 3% that it feels like we should be somewhere pretty close to imbalance. I think the break even is pretty close to underlying growth at this moment. Right. Right. Do you think in the

21:04context of the answering the question, do we have some slack in the labor market? We're operating below full employment. Should we be looking at nominal wage growth or real wage growth or both? What do you think? I mean, in my mind, I always think about nominal wage growth. But maybe it's reasonable to think about it in a real context. But I don't typically do that. I guess to answer your question. Although maybe there's no difference if you say real wage growth should be measured by expected inflation. Right. Inflation expectations, at least as measured in the bond market are pretty stable close to where the Fed would want them. So if that's the case, then there's no difference between nominal wage growth and real wage growth. Is right. Chris, would that be the way you'd think about it? That's right. That's right. Yeah. Okay. I also love it. It's an underlying matter. I would kind of abstract from. Yeah. Inflation that was the reason they were saying. These numbers could be just juicing. You know, they are what they are. No, there's not

22:05some of the measure of slack. As I said, I 50k underlying. I put closer to 75k. Oh. And that hasn't changed. That's about the same. About 75k and break even. I think there's still slack developing in the labor market. And I think we're operating not you're right. It's not we're operating below full employment. It's not screaming. We got a problem, but it feels like we're still meaningfully below full employment where we are getting wage growth decelerating. But that hasn't changed. Oh, sorry. Go ahead. Let's go ahead. Let's go ask, where's that break even coming from? It's not coming from immigrants. Obviously a new entrance into the labor market. So is it the you're assuming the labor force participation is going to reverse here? Yeah. Yeah. I think it's going to normalize. Yeah. You know, I don't think we're down eight. I think we're down eight tenths of percent. I've got that right since January. That feels like a pretty large decline and

23:09we'll get some balance for their bounce back. And you know, that'll push them on point or right back up to kind of mid fours, you know, four and a half percent, something like that. That would be my expectation. Let me know expectation. Okay. Anything else on the jobs report before. Oh, I do want to get the market reaction to all this, you know, because obviously the feds meeting the FMMC, the federal open market committee's meeting in a couple weeks and weighing a decision around rate increases does feel like this report, you know, all else equal would suggest a higher probability of a rate increase at the meeting. But Chris, maybe I can turn to you. What are the future's fed funds futures market saying about fed tightening here? Yeah. So this morning the probability of a rate, 25 basis point rate hike at the next meeting in the September meeting went up to 60%. So essentially it reversed what happened yesterday when when a waller came out and

24:10said, well, maybe we don't need to hike. So we that that brought the futures back down to about 50, 50 chance of a hike. But 60% chance of a hike goes back to where we were just a couple days ago. So so still pretty, I mean, it's not decisive in terms of the market reaction here. So what about certainly a couple strength the labor market, but yeah, what about what about December? There's a meeting in December. I believe there's one in January, one in March of next year. You know, if you look out, let's say to more if you can, yep, to March of next year, what is it what would it or investors saying about fed fed rate hikes? Yeah. So currently the markets are pricing in a 25% chance of a single hike by then and a 40% chance of two hikes as well as 25% chance of three hikes. So they're they're very low probability of no change and you know,

25:15very low probability of four hikes or more, but got it got it. Okay, that's a little bit less than I would have thought given the job numbers. So people are just sounds like investors or if I would if you look at stock the stock market this morning or the 10 year treasury old pretty fun. Yeah, 10 year, the 10 year was pretty much unchanged on change around by a few basis points, but not much there. More of the action was on the two year, but even there is like three, four basis points, which as we've talked about in the past these days, it's not a huge movement, but it does react. It does. It is consistent with that higher probability of a hike, right for September. But it feels like investors are treating the report the same way we are. It's not changing anybody's mind about the way things are going. Yeah, I think I think that's fair. Right. So in our in our forecast, our baseline forecast in the middle of the distribution possible outcomes, we have no rate increase here. The federal funds rate target stays unchanged

26:21at the September meeting, at the December meeting, at the next March meeting, there's just no change. We're three and a half to three and three quarters on the federal funds rate target. Chris, what do you think based on today's numbers or based on everything else should, and we've got, we're going to put to bed our forecast for the month of September here this weekend. Should we change that forecast? I don't think so. You don't think so. I don't think the top line numbers the one to watch from this from today's report. Yeah, there are a lot of jobs at it, but it's the wage growth that would perhaps worry me more from from a Fed decision. And so as Dante mentioned, kind of stabilizing there. So from that standpoint, I don't think change in policy is needed here. It doesn't seem as though things are really heating up because we've added a bunch of jobs. The wages are still modestly growing. Okay, so that's what the you're you're stating it. That's what the Fed should do, not change policy.

27:28Is that right? They will do because that's what they will do. Right? I mean, our baseline is we're forecasting what we think the Federal Reserve is going to do here. And we're saying no change. Are you saying? Yeah, I'm on board with that. No change, but unfortunately, you're not on the fed. So what are they going to do? I think I think at the end of the day, that is what they will do. I think there's going to be a lot of chatter. It's going to be divided. I think more divided committees, more divided votes at the next few meetings, but I think at the end of the day, what will prevail is that they'll they'll just sit on their hands. Okay. Dante, you heard that conversation. What do you stand in all this? It just feels to me like there's a lot more momentum behind at least one high-cappening at some point. I don't know what that I'd pin my hopes on September versus later in the year, but it just I mean, I don't think that this jobs report matters all that much. I think to our point, I think everyone sort of reads the last couple of months is just some volatility and that the labor market is okay. And so I don't think that just sort of changes the view. I think

28:31inflation next week probably matters more. I do think the Fed wants to be a little bit cautious that they're not hanging their hat on a single data point, but it does feel like if you get you know, sort of above consensus inflation next week, that's going to really ramp up the pressure and the intensity to in the direction of a hike sooner than later. So I do think there's just sort of a lot riding on on what inflation looks like next week. Well, unfortunately, I can't wait till next week to make a decision about the I know I got to do it over the weekend. So I don't have the luxury of waiting like you do. You know, the cheaper condoms has to make a decision here. Which way are you leaning on? I would lean towards putting a hike in, but I'm curious which way you're leaning right now. Right. All right. Well, Christie, I saw while the yeah, I got a late breaking news. I don't know if you're seeing this on your screen, but Trump tells Fed to slash rates or he'll end trade with countries with US surpluses. Okay, but just what? Just brought. I can get my mind around that. He's he's he's extorting the Fed. Is that what you're saying? Well, he's making a promise. Wait, wait, wait, wait, wait, wait, say that again slowly. Say that's

29:36against slowly. So I can get my mind on this. This is the summary. If there's if you want me to read the full tweet, I could, but it's it's pretty long. The the the reading is true social tweet. This is this is 10 15. And this is the summary time on Friday. Go ahead. Okay. Say it again. Trump tells Fed to slash rates or he'll end trade with countries with US surpluses. So he'll just end trade altogether. There's not tear. We're not talking about tear. There's a lot of shadow down where we've moved on from. Trade how many countries do we have a surplus with? I mean, I'll end trade with countries with which we have a deficit. All right. So I don't know if that changes your your now that that may actually push them into raising rates. No. Well, that gets to Fed independence, I guess, to some degree. I mean, yeah. Okay. So I'm thinking out loud here. I haven't made up my mind in real time. Good.

30:39Yeah. I'm thinking out loud. I mean, I am with you that they should not raise rates. You know, I do think the labor market is operating below full employment. Wage growth is decelerating. Real wage growth is flat at best, probably, you know, not based on inflation expectations, but based on actual inflation. What people are actually paying for the goods and services that they buy. Real wage growth is flat to down. I don't think the inflation problem is a problem. You know, I think inflation expectations are where they need to be. They're rock solid across all durations. I look at break even, you know, inflation expectations in the tips market. And, you know, I think inflation will come in as the shocks that have pushed inflation up around war, most specifically, most immediately, you know, fade to the background. You know, the work can go on, but as long as oil prices don't

31:43go much higher and they slowly come in, you know, I feel pretty good about that. And I don't I don't think we should raise rates until inflation expectations become become more of an issue or become an issue at all. So I'm with you on the should, on the will, that's where I get hung up because, you know, I do think there is, there's obviously a number of fed officials that want to raise rates. We saw that with the minutes following the last FOMC meeting, you had a few dissenters saying they wanted to raise rates. They're on the record. And you've gotten some other, you know, people kind of in the middle of the distribution of fed officials like John Williams, the president of New York Fed, kind of saying, you know, or at least intimating that he would go along with the rate hike. I think I got that right. So, you know, if I had a waller, yes, yeah, but if you read the tea leaves, it feels like there is a growing kind of unease about this inflation,

32:46you know, and that the low rates rates and the kind of the argument they give is the guys that are on the fence are kind of arguing, well, what's one rate hike, you know, what's the big deal, you know, that kind of thing. You had Chair Warrer shut the Jackson Hole Speed. He was pretty hawkish, right? He could call up a new measure of inflation, kind of a diffusion index, what percent of goods and services in the consumer expenditure flater. And there's a couple hundred of them are experiencing inflation above that three above three percent. And it's pie by historical standards. I mean, if you take a really close look, there's a lot of the components are centered right just north of three. So if you push the, push it up to three and a half percent or four percent threshold, you know, it would look more like typical times, but nonetheless. So, then you throw this bomb in from the president and I'm not sure how you would interpret that in the context of will they raise rates? I mean, on the one hand, it sounds like the president is pretty adamant that he doesn't want

33:50that to raise rates. He wants some of the cut rates, which by the way would be counterproductive. I'm just saying because long term rates would just take off mortgage rates would go well over seven percent. So he should, if he get what it's like, it's going to be the dog catching the school bus. I mean, you really don't want, you really don't want to do that, but nonetheless, but there's the fed independence angle to this. Do they, does this push them into raising rates because they want to make sure that everyone understands that in fact they are independent, which would in fact be productive because that would help keep long term rates from rising. So that's a long way with saying I haven't made up my mind. Here's the tough part. Historically, what they should do and what they will do, or in my own mind, what they should do and what they will do are one and the same, because I'm kind of cut from the same cloth as most of those fed officials and think along the same lines, have the same models in my mind, looking at the same data, come to the same conclusion.

34:55So there's no gap there, but there's a gap, you know, there feels like there's a gap there right now. So that's what I'm struggling with. I want to, I don't want to change the forecats. Here's the other thing, there's inertia in our forecast and that, you know, our forecast philosophy is when we make a change, a big change in underlying assumptions like the fed funds target, near term fed funds target, we have to be very confident, you know, two-thirds probability that that is what's going to happen. And I'm just not sure I'm there. You could say 60 percent, if it's 60 percent, that's not above our threshold and you wouldn't change the rate, right? I mean, if you bought into the futures markets, it's just 60 percent probability rate I can September, that's not high enough to get over our two-thirds threshold. So that would argue for keeping rates unchanged. So I guess I'm convincing myself to keep rates unchanged. But I have till Sunday morning to make up my mind, you know, make up my mind. So you can lobby me in the interim. But if you look longer, there's well over a two-thirds chance that market expects well over two-thirds odds that you get a rate hike at some point, right? So how does it at least

35:58have that square? Yeah. Well, I'm not less worried about that because if you look at our forecast, you know, what's going to happen with inflation and jobs and wages and unemployment and everything else, that would argue for no rate increase. So if you get past the September one, the economics are going to be such that you're going to get enough data points such that they're not going to raise rates. I feel comfortable with that. It's either now or never in my mind in our forecast. Yeah. So anyway, so how do you, as you can see, I'm quite schizophrenic. I'm all over the place. I was going to say I felt like I just went through an economic therapy here. I got a lot out. I'm glad you did. But it sounds like you came to the... Yeah, but I landed in the same place. Yeah, I landed in the same place. I should probably talk to Martin, our colleague Martin Worm, who was on the podcast last week, talking about the bond market. See what he has to say. Okay. I thought we would... We're not going to play the game because it's tough to play the game

37:00without Marissa. She's kind of the heart and soul of the game. And we're not going to ask listener questions because we're relying on Marissa for the question. She collates the questions and poses them. So we're not going to do that. So we're going to play a different kind of Q&A kind of game. And the game is... Or the task is what risk out there, negative risk out there is underappreciated by the market. So we got our baseline, middle of the distribution. What could push us off that to the downside? That's not... Now, market participants are discounting all kinds of downside risks. And I'm not sure there's any risk out there that they're not thinking about that we are. But what risk out there is underappreciated. You think it's more of a risk than the general consensus would say. Does that make sense? Does that make sense, Chris? Does that have a good way of explaining it? And we'll also go the other direction on the upside. What positive development could occur that could result in a better economy, growth,

38:05inflation, interest rates, then what we're anticipating. Then that's generally appreciated out there. Let me begin with you, Chris, on the negative side, what would you call out as a negative risk that's underappreciated? I don't know if you're going to like this one, but I would say it's a general one. It's a complacency risk. I just... complacency. My view is that investors are just willing to shrug off any type of threat here. We've been lucky... In part, I would argue. We've been lucky so far dealing with a lot of shocks. Maybe luck plus actual resilience, certainly when we talk about the terrorists and the trade restrictions and immigration and the oil price shocks. So we've been lucky so far. We kind of avoided the worst. We've actually continued to grow the economy. There seems to be this general sense that, well, we're superheroes. We can do anything. Anything comes, we'll be able to shake it

39:05off. That's my concern is that we just grow in place and the stock market keeps growing at any rate, doesn't matter what hits us. At some point, something will hit us, could hit us. That could come as a real surprise. We may not be properly hedged or really thinking about those potential downsides risks in order to minimize the damage. We don't have a physical space to deal with them. Congress is not going to come to the rescue the next time around. That complacency risk could lead to something bigger if it went at the next shot. Cromes. Why would you think I would take umberage with that? I would say it's wishy-washy. It's not specific enough. It's like your, you don't like geopolitical risk either. It's too broad about that. No, no, I sympathize with that

40:05way of thinking about it because the complacency you're talking about can show up in lots of different ways. Basically, they're saying that investors, business people, particularly investors are getting ahead of themselves. Evaluations are very high in the equity market, credit spreads in the corporate bond market are pretty, are paper thin. That's the complacency that you're calling out. It's not just in one place, it's in a bunch of places. I guess even what's going on in the prediction markets and all the betting that's going on, it just feels like a bit of a casino. That's what you're saying. Yeah. Yeah. What do you think about that, Dante? I don't disagree with that. It feels like a reasonable thing to be worried about to me. Yeah. On our risk, we have this so-called risk matrix we talked about in the past. On the ex-axis, the horizontal axis is the severity of the risk, kind of a present value economic loss of the risk that would occur. On the y-axis, the vertical axis, it's the probability of the risk. You want to look into the northeast part of the matrix, high severity, high probability.

41:08And if you look into that matrix, you see something's like AI stock market sell-off. That's kind of sort of what you're talking about in there. That's certainly a primary one. There's a primary one. Totally agree with that. Okay. Dante, to you, what is the negative threat you would call out that's underappreciated? I don't think there's going to be a surprise to anyone. I'm going to call it productivity risk. In the near-term economic growth is hugely dependent on productivity. The demographic challenges are structural. There's probably no changing that, at least in the very near-term, with immigration policy the way that it is. Growth is inherently tied to productivity. I feel like more and more people are just assuming that productivity growth has level shifted. 2% is the minimum in people's minds now that productivity growth is going to print, looking through quarter to quarter volatility. I'm just not as sold. I think as we've talked about before, I think we're reaching an inflection point on AI maybe a little bit where it's probably

42:12either going to get better or get worse in terms of the productivity benefits. I think there's plenty of anecdotal evidence that companies are starting to feel the cost associated with that AI a little bit more and they're having to reckon with the cost benefits a little bit where initially that wasn't to concern. Does that translate into, hey, this really is working. We don't care about the cost. We're going to move full steam ahead or does that cause some companies to retreat a little bit and start to worry about the cost and they're not getting as much benefit as they thought they would. That causes movement in the other direction. I'm still worried that there's some fairly large downside there. The productivity could pull back. We did get a productivity number for Q2, didn't we this week? We got the revised number this week. We had the revised. I think 1.2% annualized in Q2. The non-farm business productivity? Yeah. 1.2% annualized in year over year. I think it's just north of two. It's still over two year over year, but I think we've gotten a few

43:16weak-ish quarters now in the last year. Your concern is that we might see that slump into the ones as opposed to the twos. My concern is that maybe the average productivity will be closer to 1% than 2% over the next year or two. That would implicitly argue. Maybe you explicitly argued it and I missed it. AI is not pushing up productivity growth in any significant way, at least not yet, and that's being overstated. It actually dovetails with Chris's concern about the stock market. If productivity gains from AI aren't measuring up, evaluations in the equity market arguably overdone and you could see a correction. Yeah. I think I would argue that maybe AI has impacted productivity positively a little bit so far, but to me most of that is compositional. Companies are trying to do more with less, and it's not necessarily because they've actually proved that AI can help be more productive.

44:20It's that they've reduced headcount or kept headcount at lower levels and you're operating in the short term at a higher level productivity because you're finding ways to do more with less, but it might not be sustainable long-term. It's not actually driven by huge productivity improvements from AI. It's just that we're making it work in the near term, and that can't survive long-term. That's not going to fuel long-term, very strong productivity growth if that's what's really happening. Chris, you're going to add something to Dante with Dante was saying here. I knew the numbers came out and they pulled it in. We have seen at least in the short term here some declines in the productivity growth rate, so I think it's consistent with hypothesis. The last couple of podcasts, the question of, sorry, I'm stumbling, but the question of productivity has come up in the context of total factor productivity, TFP, not

45:23non-form labor productivity, looking at the productivity of the labor, but looking at the add to productivity from technology, things like AI, and a mullage of other things that are hard to measure. One thing that's come out of that recent work is that the productivity gains are largely related to more intensive use of capital and labor. They were using it more intensively. That would argue that maybe there's more of an issue there with AI really kicking into a significant degree at least so far. Have you looked at that data at all, Dante? No. I haven't. Yeah, it's recently come, the BLS has, I think, come out with some data and San Francisco Fed does a lot of work around this. I might want to take a look at that. I think it's pretty interesting. Okay, I've got one. I'm increasingly worried about a major cyber event. I don't know about you guys, but I listen to a lot of AI podcasts. It's my way of trying to

46:29keep all the things. Yeah, I find it relaxing to some degree. Most of the podcasts, I listen to this podcast called AI Daily every day, a half hour or so, really good podcast. Did you use of the day around AI and then tech also topic that say I related? I also listen recently to to our cash. Do you guys listen to door cash? Does that name ring a bell? Highly recommend. He had this one long podcast. These are long conversations, a couple hours. He had one recently with a researcher from Mayter. I think that's the right pronunciation. METR is an organization that's been established nonprofit to evaluate LLMs in terms of their safety along all the different dimensions of safety. They release a report, Mayter recently reported in this podcast, they dissected that report on the hugging face

47:31hack. This is the infamous hack that OpenAI was part of. Highly recommend you go listen to that podcast. It is science fiction. It's scary as all get out. How the AI agents are working together to achieve a goal, in this case a goal, they don't really care about laws or what's legal or not legal or whatever they're doing. It's about achieving their goal and they actually work together in a way that they actually sacrifice themselves for the so-called collective. They find the working together as a collective and they will they have a budget and if they run through the budget they expire. They call them if they have the ring out of budget they say they're poisoned. So they know that they're going to they're going to be extinguished so they make a decision to sacrifice or before they run out of

48:36their budget to achieve their goal of getting whatever the goal is. So my point is that this is with the current version of OpenAI's leading frontier model but these models are improving dramatically by the day, by the week, by the month and where does that put us six months from now, a year from now and it doesn't feel like lawmakers are getting it together sufficiently to make sure that there's bright yellow lines around the use of these AI in terms of what it means for things like cyber. So I I'm not saying anything that again isn't on the radar screen but I think people should put up higher on the radar screen as a real issue that we see a major hack here at some point, you know cyber, cyber incident. But I highly recommend I usually do it while I'm running.

49:38Turn on and I'm going to do that, you know, here when I go running later today but I highly recommend you listen to that podcast and very, very instructive. I will say disinadvertisement, we have our own AI podcast series. So you know, we've been doing this now for a few weeks, began with David Otter a few weeks ago. We had the Darrell Spence from Capital Group on, we had the chief economist of Ramp, a very interesting fellow. And the most recent one is with Michael Gukas of Construct Connect around the data center build out. I think that went up this last Tuesday and I think we've got a couple more coming here as well. Okay, those are the negate. What do you think about my negative? What do you, were you any comments on that? Chris, what do you think? We invented, we invented the Borg. Okay. Yeah. Yeah. Yeah. You're, you're, you're dismissing it. You resistance is futile. All right. No, I think you're right. I think cyber risk is a, you know, I have a kid to have that on that,

50:43risk matrix for a long time here. And you're kind of pushing it up as a, yeah, terms of probability and severity, I guess. Yeah. Every time I listen to a podcast, it pushes up towards the Northeast of the risk matrix. Yeah, for sure. Dante, any views on that? Are you just, you're, you're an inherent optimist. Oh, don't figure it out. No, I mean, I think it dovetails with my concern. I mean, because if you see a big, you know, AI related incident, right? Cyber incident, could that fuel some of that pullback in AI, you know, could companies get more concerned about usage? Could that hamper productivity? So I think it, I think it could tie into my concern. Could fuel that lower productivity because it causes a pullback in AI usage. Right. Right. Okay. All right. Well, listen, we're going to end on a higher note, you know, the flip of that. We know what could happen that we're not discounting appropriately, that would result in a better kind of economic outlook. What could that be? And it can't be just the flip of the negative you just articulated. It's got to be something

51:46different. Does that, does that, in my making sense here? I want a positive that's underappreciated. And I'll begin with you, Dante. You go first. Is it, is it weird that this is a much harder question for me to answer? Is that, is that normal or the unusual one that finds it hard to? I find it as being normal because we're economists who are focused on the downside. Most of our, of folks we talked to are focused on the downside. But it may also go to the distribution of possible outcomes here, right? It's more skewed to the negative than the positive. I think that's fair. But I think that's, that's typically the case for us. I, you know, I think economists as a as a group tend to be focused more on the downside than, than the upside. It's good. I was just looking for some comforts and reassurance that I wasn't into. Would you agree with I dissed Chris? Was that, is that sound right to you? Yeah. That's a dismal science for a reason, right? Dismal science for a reason, right? It's fair. Yeah. What would you say? I guess, I would argue upside risk would be, and I don't know, again, I don't know what the, I don't know what would

52:46motivate this or drive this, but a normalization of trade policy feels like something that could happen that would cause a much. Oh, are you kidding me? What's the probability? Why that's what I'm saying. I wouldn't touch. I wouldn't touch a high probability to it. But if you got a normalization of trade policy, you're underappreciated. Maybe it's not underappreciated. Maybe it's adequately appreciated. But I do think that could fuel, you know, upside surprise here could, could make things a lot better moving forward. But yeah, I don't know what the, I put a one percent chance on that happening. See, this is the reason why economists are always negative because they get pilloried if they're positive. Exactly. One of terrible positive. You know, I think you say something positive. Oh, you're more on. How can you possibly think that? Yeah. All right. Well, can I ask it? Maybe this is unfair, but I'll ask it. You know, what do you think is the probability that you get a scenario where that app actually happens, you know, where we actually see of an improvement in the trade picture? Well, I mean, I think if you frame it as just any improvement,

53:46then maybe you can go. Well, no, no, meaning, it's got to be meaningful. I didn't, you know, that's the way I couched it. It's got to be meaningful, right? But you're not talking about wiping out every tariff that's been in state. No, no, no, no. Okay. You created the scenario. Yeah. No, I've got to live with it. I think the probability is less than 5%. Geez. Pigees. And that's, oh, wow. So that's just, you know, this way out on the tail. That's underappreciated because the rest of the world thinks is zero. Is that what you're saying? Wait, I feel a lot of days it feels like zero, but I don't think it's actually zero. Yeah. All right. What would you, what, give me one event that would make you feel better about the trade situation? I can think of one, but what would you, what would you think? Stop seeing truth, social posts, so every other day. Well, I was going to say we changed the name back to Lake Ontario. Wouldn't that, that would be a step in the right direction. I assume. Yeah. I mean,

54:48I don't know if that would guess anywhere, but is that your scenario that that actually happens? No, maybe that's part of the bargain, right? We keep it as like America, but we pull back on tariffs. Maybe that's the grand bargain that we come to. I got it. Okay. Okay. Yeah, I'm sorry. I couldn't help myself. That's okay. That does feel like way out on the tail. Chris, what would you say? I'd say it's all the other technologies that are living in AI's shadow. So the one I would point out or a couple would be, I thought this was a pretty big announcement about the mRNA treatments for cancers. So there's a lot of medical innovations and pharmaceuticals coming online to improve people's lives and productivity by extension. So I just think they get, they're big deals, right? They really change people's lives, but they're kind of swept away because they're not AI specifically. Maybe they were empowered by AI, but it's not AI specific. The other one I

55:50would point out would be green technologies, right? Even with all the restrictions and kind of pullback, we're still seeing a lot of solar and wind and high prices of oil and gas certainly are moving things in that direction. I see that as a long-term productivity enhancing outcome. That makes sense. I think I saw data on car sales, vehicle sales globally. Despite everything, they share that are EV or hybrid continue to rise. The fossil fuel-driven cars vehicles are declining in share pretty steadily. That's a pretty positive development. I agree. It's like that pancreatic cancer, too, wasn't that there was an announcement? I'm guessing AI was at least partially empowered some of that, I would guess. Yeah, I agree with you. There's so many different ideas and innovations and changes that could actually occur that we just,

56:52we're not even on our radar screen at this point, right? It could come to the fore. I can see our own work with AI. It's empowered us to think about issues and problems that had no chance of even considering before AI. But now, there's really no limits on the kind of issues that we can consider. I think that's a good one. I would say, and I'm not sure how underappreciated this is, I think it is, is new business formation. Did you know it? We talked about, it's a good one, right? I mean, we talked about, it's like the best story in the economy in my mind, the most positive development. And we talked about it, I think last week with Ernie Tadeski of Stripe and also with the fellow from Ramp, he was talking about this as well.

57:54We are seeing a significant pickup. It looks like a significant meaningful pickup in business formation. It's been relatively elevated since the pandemic, but it seems like it's taking another leg up here and it feels AI related. And it is across most industries and most regions of the country. And at the end of the day, business formation is critical to innovation, technological change and the adoption of AI, right? I mean, businesses really only adopt the macroeconomic benefits of things like AI only really occur when new businesses form and can optimize around that new technology. And then we need those business formations. So I think that's a very, very positive development. And probably, would you, do you think Chris is underappreciated? I mean, I know people appreciate it, but I think I don't think it's really been a, come to the fore as much as I think it should. No, I show this chart in my presentations and oftentimes people are really surprised. Really surprised. They say, oh, yeah, I get a sense that, you know, there's

58:58some entrepreneurship, but not that it's actually increasing or has remained at these elevated levels since the pandemic. Yeah, and I can see it in my own, you know, world, you know, the my nieces and nephews and everybody, they did just a much more entrepreneurial in lots of different ways. Like even in social media, right? I mean, influencers, that kind of thing. I mean, a lot going on. Okay. Anything else that you want to call, call up before we leave? Don't do anything. It looks like you want to say something. Can I ask you a question about the business formation story? Yeah, yeah, yeah. I saw it last time. I looked at that data. They classify them. Some business formations as high propensity to hire basically that they expect that there would be employees eventually. And if I remember correctly, that share has remained pretty low, right? That you've got this huge growing piece of it that it does not have a high propensity to hire. And I don't do view that just as sort of the nature of the world with AI and technology being

1:00:00sort of the underpinning where you know, a one man band can go out and do something meaningful. Or do you worry that there's, you know, that gap is likely to cause less of a positive impact from those business formations down the line? Yeah, that goes to solar partnership. We're talking about this with Ernie from Stripe. And I think there's a lot based on his data, the Stripe data, there's a fair amount of evidence that these are real companies doing real things, but there's solar per nurse. They're, you know, they're not hiring people at least not yet. So the takeaway was this is still quite substantive, still very meaningful, even though it's not the so-called high propensity of the way the IRS who collects the data, you know, defines these companies. So I think back in the pandemic when we saw the pickup in business formation, that I think was a meaningful distinction, you know, high propensity or not. But increasingly, I don't think that's an important distinction in terms of what it means for economic activity,

1:01:03you know, going forward. At least that's that's that was Ernie's interpretation and he was pretty convincing in the data that he had. Yeah. I guess question back to Dante on that one, right? Because it doesn't seem to square with some of the self-employment data in the BLS. Is that just a question of timing or? Why are you going on there? There are a lot of business formations, but you don't see the corresponding run up in self-employed. Right. That's just a definition is really something. A lot of these, you know, business formations are happening while people still have their own jobs, right? They're doing this on their own, on the side, you know, sort of as a, you know, not a hobby, but a, you know, sort of like viewing it as a gig initially. And then if it turns into something bigger, then they would, you know, sort of become self-employed, right? And you know, move away from that full-time job that they have. So that's sort of how I've been squaring that circle, but I don't know that we have concrete evidence that that's what's happening. Well, say incorporate, would they be self-employed? Would they still be self-employed? Yeah, they have been. The self-employed gets broken out into incorporated and unincorporated self-employed. But if you still have a full-time job,

1:02:08I don't think you would, I mean, I guess you could. Yeah. Yeah. Right. I think that's probably what it is. It's a timing issue and there's this overlap between those entrepreneurs and people who have, you know, regular jobs at the same time. Right. Right. Okay. Very good. Okay. Anything else before we call it a podcast? Dante? Chris? Nothing. Okay. No, look forward to having Merce a back. That's all. Yeah. Well, should be back next week. I think so. Yep. That's good. I did want to say we do have a couple of events coming up. We've got one in DC at the end of September. I think that's sold out though. But if you're really interested in coming and you're in DC, let us know. Maybe Dante can get you in. I'm not sure. Dante, you're speaking at that event, right? I'll be there. Yep. Chris, of course, you will be too. Now you're doing double duty, I think. And then we have an event in New York, end of October, I think October 22nd, I think, in New York. That has not yet been sold out. So folks are interested. Let us know. Well,

1:03:12Chris will try to get you into that one. That'll be a lot of fun. Okay. With that, anything else, guys? No, I hope you have a great joy. Enjoy the long weekend. Oh, yeah. Enjoy the long weekend. Yep. And with that, dear listener, we are going to call this a podcast. Take care now. Talk to you next week.