Flanders: Rate of Job Growth Has Been Exaggerated

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Bloomberg Jul 7 23:52 · 10.8k Views

Stephanie Flanders, Bloomberg News Head of Economics and Government, tells us why she sees evidence of softening in the labor market and what that might mean for the Fed's policy decisions.

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Transcript

  • 00:00 So it's an interesting set of jobs numbers.
  • 00:01 On one hand, they increase the non farm payrolls by a goodly amount, but they also took revisions, taking them back down.
  • 00:07 So on net, net, what did we learn?
  • 00:09 You know, I think we've we learned quite a lot from this.
  • 00:11 And I think 1 of it was that actually something that our Chief Economist, Anna Wong has been talking about for a while is that they're
  • 00:18 had bit that the rate of job growth that we've seen actually for the last year or so
  • 00:23 was being exaggerated by the way that the
  • 00:26 Bureau of Labour Physics is including those business failures and, and successes in their, in their numbers.
  • 00:33 So she had estimated already that
  • 00:36 instead of the sort of 200,000 jobs additions every month that we've seen on average for some time now,
  • 00:42 it was actually going to be revised to half of that figure, more like 100,000 when you took business failures into account.
  • 00:49 And we haven't fully seen that revision yet.
  • 00:51 But I think that was one thing that certainly that in bond market investors were focusing on in these numbers that you had some big downward revisions in the past numbers.
  • 01:00 So even though the headline was was pretty close to what we had forecast, but there was was bit lower than expected
  • 01:06 by others
  • 01:07 even though that headline looked healthy.
  • 01:09 I think we are starting to see that deterioration under the surface which was emphasised also by the increase in the unemployment rate which is was again was higher than than expected.
  • 01:19 So I think all of that points to
  • 01:21 a slightly more, a
  • 01:23 more significant weakening or a more advanced weakening in the labour market
  • 01:27 than perhaps many had thought.
  • 01:30 Yeah.
  • 01:30 And that that having is terribly important.
  • 01:32 As I understand it, economists tell us that basically to sort of replicate the number of jobs you have now, it's around 100,000 a month.
  • 01:39 So if it's 200,000, that's really a growing job market.
  • 01:42 If it's 100,000, that's a lot closer to just break even flat.
  • 01:46 Yeah.
  • 01:46 And obviously, you know, we have seen, we haven't seen the recession that that, that the Bloomberg economics had expected.
  • 01:52 And that's it's, it's definitely been a stronger economy
  • 01:55 than we expected, you know, even 6 or 6 to 9 months ago.
  • 01:59 But it the,
  • 01:59 the, the sort of beneath the surface weakening and again pointing to that
  • 02:05 rising unemployment rate.
  • 02:06 I think all points to, you know, points are still towards
  • 02:11 rate cuts in
  • 02:12 September and then and maybe another one before the end of the year.
  • 02:16 I guess, you know, that's that's if we were in normal times.
  • 02:19 But of course, you know, there's a few other things going on in the next six months.
  • 02:22 And those are things that the bond market and indeed the Federal Reserve are going to have to pay some attention to as well.
  • 02:27 Well, let's talk about exactly that, Stephanie, because as you point out, there's sort of a push and pull going on here.
  • 02:31 On the one hand, there seems to be a slowing job market and you, as you say, the unemployment rate is ticking up slowly, which might indicate we really have to back off on the fiscal policy.
  • 02:40 On the other hand, we do have this little election coming up in November, and there have been some substantial developments this week
  • 02:45 on that, particularly about who the nominee is going to be for the Democrats as President Biden is really going through a tough time.
  • 02:51 We've seen some reaction from the bond markets to that phenomenon.
  • 02:56 Yeah, a lot of talk about the Trump trade.
  • 02:58 And I think we saw that particularly in the immediate aftermath of that disastrous debate performance
  • 03:03 a week ago by
  • 03:05 President Biden.
  • 03:06 You know, we had perhaps been in a situation where
  • 03:09 many in the markets and certainly in the betting markets thought it was more likely than not that President Trump
  • 03:14 would come into office in the November elections.
  • 03:17 But we sort of went from more likely than not to an
  • 03:20 apparent apparently unstoppable over the last week or so.
  • 03:24 Is a course of not just that deteriorating sort of prospects potentially for President Biden on the back of that performance,
  • 03:32 but a lot of people, certainly a lot of people sitting in congressional seats
  • 03:37 and and senators thinking on the Democrat side.
  • 03:39 Wow.
  • 03:39 Those not only is we not going to have coattails coming from an incoming, you know, re elected president,
  • 03:44 we could seriously be in trouble and we could be looking at a
  • 03:47 a clear clean sweep for the Republicans
  • 03:51 come November.
  • 03:52 If any of that is does come to pass, then I think people are looking down the track and saying, OK,
  • 03:58 that's going to mean more unsustainable
  • 04:00 fiscal policies
  • 04:02 and
  • 04:02 probably may be good for the economy sort of short term in terms of growth.
  • 04:06 But it certainly points to higher interest rates for longer on the long end, on the bond yield end.
  • 04:11 Yeah, this is a terribly important point.
  • 04:12 I'm curious about your perspective, not only from your time in London, also you spent some time in Washington in the administration.
  • 04:17 Actually, you've been watching this for some time.
  • 04:20 Do the markets basically favour a divided government in the United States?
  • 04:23 That is to say, they don't like it when it's all Democrats or all Republicans in both houses of Congress plus the presidency because a lot more can be done.
  • 04:30 I think there is a nervousness around that.
  • 04:32 And thank you for reminding me, David, that actually the last time when I was in the Treasury, unfortunately I only had a junior job, but when I was in the US Treasury was the last time we had a budget surplus in the US
  • 04:41 on the federal side.
  • 04:42 It's been a very long time since we have one of those.
  • 04:44 But I think it's also there's a Trump specific factor here, right?
  • 04:47 But he's he's talking about across the board tariffs that would add to inflation at a time when, yes, you're going to also have increased defense spending.
  • 04:57 And we're already in an economy, you know, this is an economy that.
  • 05:00 It's probably, you know, potentially at the peak of the cycle, certainly
  • 05:03 at full, close to full capacity that's been running at six or 7% of GDP budget deficits year after year.
  • 05:10 And if that's only going to go up or at least stay at that level as the cost of servicing that debt goes up,
  • 05:17 that is looking very unsustainable.
  • 05:19 I guess the key question is, even if you have a strong equity market in that context, you're certainly going to have
  • 05:25 a sort of longer term sell off on, on bond on the bond market and you're going to have trouble for the Fed potentially pressure on the dollar, but way down the road.
  • 05:34 So I'm so glad you brought up the equity markets as opposed to the bond markets.
  • 05:37 I mean, riddled me this, if you will.
  • 05:39 The bond markets are showing some nervousness now about where we're going in terms of deficits and inflation going forward.
  • 05:45 And yet the equity markets in the United States continue to March higher.
  • 05:49 Are the equity markets to some extent divorce from the real economy, the underlying fundamentals here?
  • 05:55 I think it's more that you're looking at you certainly if you, if you look at
  • 06:00 a very
  • 06:01 unsustainable boom in the US, well, an unsustainable boom is probably going to be quite good for equities for a significant period of time.
  • 06:07 So I don't think, and there is kind of a tradition when you have that kind of unsustainable mix and
  • 06:12 and often also with Republican governments coming in,
  • 06:14 you know, good for equities, but if they're borrowing a lot, it might be
  • 06:18 bad, bad for bonds.
  • 06:19 So I don't think there's too much of A Riddle there, but I think
  • 06:22 in the context of
  • 06:24 the big surplus economies that used to just plough a lot of money into treasuries,
  • 06:28 not being so keen to acquire treasuries.
  • 06:31 We're not just talking about China, we're talking about
  • 06:33 in the Gulf as well.
  • 06:34 A bit more nervous about going into treasuries
  • 06:37 and the role of the dollar may be declining a bit at the margins then that does I think, you know, that sort of twin deficit scenario and sort of runaway growth
  • 06:47 with potentially inflation problems.
  • 06:50 I I think there could be question marks about the dollar.