Lots More on the Growing Risks to the US Labor Market

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0:40Giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform. All while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. Bloomberg Audio Studios. Podcasts. Radio. News. Tracy, did you read our newsletter contributes this week from Neil, Dutta, and Skanda? It would be terrible if I didn't. Not only did I read them, I lightly edited them. That's right. You did. You did. You did. I think I uploaded the text of them and then you edited them.

1:28I did a deadlift. I am both the most popular trader and most successful trader at Citadel. Fed is going viral. Uh, barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Black gold! These are the important questions. Is it robots taking over the world? No, I think that, like, in a couple years, the AI will do a really good job of making the Odd Lots podcast. One day, that person will have the mandate of heaven. How do I get more popular and successful? We do have the perfect guest.

2:03Welcome to Lots More, where we catch up with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have the perfect guest.

2:17I have to say, though, they were both great. And I'm not just plugging our newsletter. Those were outstanding contributions and they sort of build on something that Scanda pointed out earlier in the newsletter about how embedded or how important AI is becoming to the U.S. economy. Yeah. And like this idea, like there are signs of slowing. Oh, yeah. I feel like we're in a moment where actually there just aren't really many people talking about the economy because we're either so transfixed by the goings on in Washington or certain big tech stories like AI that we're in a period where there is this lull of like just the meat and potatoes of like what's happening with initial claims?

2:58What's happening with housing starts? What's happening with the jobs report? And there's actually signs of a slowdown. Yeah. And there's also signs. Well, there's also signs of inflation picking back up. And so that kind of raises the question about what's the Fed's reaction function here? We thought it was sort of skewed towards preventing a recession a little while ago. But now, like, maybe they start caring about inflation again. I don't know. But, you know, the other thing that's happened over the last week is that we have had this pretty substantial drop in 10-year yields. As of the time we were recording this, which is March 27th, we touched 4.25 yesterday.

3:37We had been at 4.65 on February 12th. So it's like— I think the curve inverted again as well. The curve—it's a weird time. John Turek, what do you think? What happened that we were at 4.65 % on the 10-year February 12th and right now we're at 4.2886? Yeah, I think it's an interesting one. I mean, as you guys kind of noted, I mean, I think we came into this year with a lot of excitement in terms of what the policy impulse would mean for the economy. It seemed that the animal spirits were going to lead to a more meaningful real growth impulse. I mean, I think the famous Dan Druckenmiller said in a note or on a TV interview that he hadn't seen the business community this excited in like his 40 years in the business.

4:24And, you know, I think that we've had a little bit of a transition in like what that policy impulse means and the fact that it seemingly is two sided. As we're seeing today, tariffs are also a big part of that policy impulse. And as we've seen over the last few weeks, it has a very unevenness into either both the implementation and the scope. So I think the market kind of has had to adjust to a policy impulse that seemed to be unambiguously positive to one that's more mixed. And I think the 10-year is just kind of a reflection of that. I would also note, as Tracy pointed out about inflation pricing, a lot of the moves, especially since the middle of January, has been in real yields lower.

5:09As in 10-year break-evens, it actually stayed pretty firm. So I think that the economy is having to – the market is sort of having to deal with an economy that's a little more confusing. And the policy impulse is more muddled this time around where you have the potential for tax cuts deregulation on one side and just a lot of tariff uncertainty that is potential in scope much more drastic than we saw in Trump 1.0. Yeah. So I think that that is sort of at the nexus of what's going on here. And just to add one more thing, you guys kind of made it up like the meat and potatoes of the economy. I think that for the last two years, we've been in a very stable nominal GDP regime.

5:53It's kind of oscillated between high fours and high fives. And the economy seems to be running on a few less cylinders than it has been in the last couple of years. Consumption is much more uneven and very biased towards the high end. Outside of the AI CapEx cycle, there really isn't that much CapEx. And we've seen that housing has been in a wall now for a while and hiring isn't that high. So it's just a much more, you know, a lot more cross currents than I think the market probably anticipated six weeks ago. So we are recording this on February 27th. In about a week, we are going to get U.S. payrolls for February.

6:33We just had initial claims, as Joe mentioned, showing that they jumped to the highest level so far this year. I think increasing by 22 ,000. A lot of that is the cuts in D.C. What are you seeing on the labor side of things? Yeah, I think that, you know, from the labor market perspective, I still think the economy is in a decent equilibrium in terms of that we have a pretty stable unemployment rate. We're still churning out pretty respectable levels of payroll growth per month. And that's sort of been noted by the Fed now that they're much less worried about the labor market side of their mandate than they were, say, in Q3.

7:13You know, but I think what's a little bit worrying is that the labor market is kind of coming into this, you know, whatever the DC impulse is, you know, I would say a little bit more vulnerable to shocks than it's been maybe over the last few years. And I would namely say that because the hiring rate is still quite low, which means it doesn't take much in terms of, you know, negative payroll impulses to sort of lead to more drastic jumps in the unemployment rate. So, you know, I don't necessarily look at it right now and say, you know, there's an obvious threat to three months, the labor market being materially weaker than it is now.

7:47I still kind of get the sense that it's pretty stable, but I would say that we kind of we feel a bit more vulnerable given that we don't have the cushion of a decent hiring rate. So we're probably a bit more vulnerable. If this DC impulse is more of a shock, it could spiral a little quicker now than, say, a year or two ago. I saw someone make this point on Twitter. I wish I could remember who, so I could give them credit. He said, one encouraging thing that we've seen lately in the markets is that at long last, there are hints of the inverse correlation between stocks and treasuries reemerging.

8:27That was the famous condition of the 2010s, that if stocks went down that day, your treasuries probably did well and you got that beautiful hedging effect from that. And then it famously blew up in the immediate wake of COVID where you would have these big down days in stocks and also big down days in treasuries as inflation took center stage as the main source of economic worry, et cetera. In recent days, are we potentially looking at signs that we might go back to something resembling more pre-COVID patterns? And is that a sign that the price on the so-called Fed put is not as far out of the money as it had been in recent years?

9:06Yeah, it's a good question. I'm not sure. I think that the simple empirics that have kind of come out is that when CorePC is printing below three, you'll get a decent buffer from treasuries in the way of a growth shock that will cushion you at the risk asset side of your portfolio. And when CorePC is above three, you don't have that and you can miss their worlds as we saw in 2022. You lose on both. I think it's a little early on in terms of kind of getting a sense for like what the tariff impact on spot inflation is going to be. Because, you know, I think that what's different to me about this time versus, you know, Trump 1.0 is the psychology of price setting is totally different.

9:51And as we see every Q1, even in an economy that's much more balanced in terms of inflation, where we've noted that companies don't feel the same ability to pass through price, but we see every Q1 that price resets have still been pretty strong, especially as it's places now like Canada who are being inflicted in all of this. It seems that you kind of have to keep an open mind that spot inflation could move a decent amount if the price setters feel that in the post-COVID world, it's much easier to pass through any pain on their input side to the output side. So I think from a base case, I think it's fair to say that we're not durably going to a core PC plus three world so that Treasury should sort of – the underlying fundamentals of 60-40 should be okay.

10:42But I wouldn't say it's all, you know, it's kind of all clear for return to the pre-COVID world. We just don't really know yet how price centers are going to internalize this past year. Yeah, Joe, I remember Tom Barkin over at the Richmond Fed making exactly this point, this idea that one of the things companies learned from the post-COVID world was just how fast and perhaps just how far they could push on price. And so that's still lingering in their minds, even if they're not doing it as much as they were back then. So it seems like they could raise them very quickly if they saw a chance. Yeah.

11:21No, I'm fascinated by that. The reminder that price increases can be part of the corporate playbook is not going to be forgotten. By the way, I should mention John Turek is the founder and CEO of JST Advisors. Been a few years since we had him on. It's nice having him back. Let's talk about the D.C. impulse. So I think right now these cuts that we've seen towards federal employment, very few people would say they're going to meaningfully change the dial on deficits, et cetera, at this point. But they're real and they're happening and there's a lot of anxiety and there are a lot of people who are out of a job that never expected to be.

11:58And there are a lot of stories. We saw in a recent – I think it was the conference board survey – respondents saying that expectations of fewer jobs existing six months from now, that spiked in the survey highest level now I think since like 2013. Talk to us a little bit about how you are thinking about the macro impulse from the labor market cutting that's happening in D.C. Yeah. I mean, I think that as a baseline, it's hard to see that it being an outsized factor in terms of the status quo in the labor market. But I think, as I said, I think you have to take it in the context of the hiring rate in the economy is lower now.

12:44So I think the labor market as a whole is more vulnerable to things that net-net shouldn't be as big of a deal. And I think that's gotten the market's attention as we've over the last few weeks entertained more left-tail risks, is that the starting conditions really matter when you're dealing with exogenous variables. and the starting conditions for the labor market are, it's steady, but it's not bulletproof. And it has been bulletproof probably for the last three years, maybe really since COVID. So yeah, I think it's hard to say, it's hard to map out the spillover in terms of what number of claims will be in four weeks.

13:29But I think you really have to keep an open mind to the left-tail side, even though the starting point isn't great. Thank you.

14:06like your best property? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. For enterprise organizations, managing all your food needs is a tall order. But with EasyCater, you get a single workplace food vendor with the tools and resources to make it easy, giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform, all while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. EasyCater, your business tool for food.

14:46To learn more, visit easycater.com slash podcast. By the way, Tracy, for people listening who want to understand this sort of why some of the engines that are not, that were growing or not there anymore. I thought, you know, so Neil's four points, real incomes aren't rising anymore. The housing market is no longer showing the signs of life. Local government spending is clearly, there is a fiscal retrenchment. Clearly it's not just what's happening at Doge. It's also state and locals, which are no longer flush with money. So like, they're like, this is when, when John here is talking about, you know, the, not as many engines are firing, there's some pretty big forces that sort of give people caution or why the hiring rate is not great right now.

15:30Yeah, absolutely. And John, you brought up earlier the tariffs, and I think some of those are slated to start as soon as next week. How long would you expect it would take for the effects of those to feed into the U.S. economy, either in terms of corporate earnings or the inflation rate? You know, I think the interesting thing about tariffs, as opposed to a lot of other policy measures is the impact is like fairly mechanical. So, you know, it immediately has its FX impact. It immediately has its, you know, direct trade impact. And I think, you know, kind of the deeper questions will be like, what are like the broader externalities?

16:09Because I, you know, something that like really fascinated me was Governor Macklin gave us, the Bank of Canada gave a speech last week. And he was talking about sort of like what these numbers would mean for the Canadian economy. and he was saying, well, you know, they're huge because, you know, trade is 25 % of national income in Canada. Trade with the U.S., excuse me. What will that impact me? Because it'll eventually sort of, you know, feed back into the U.S. So, you know, I think that, you know, in terms of the scope, I think that the two things now that are sort of critical are, you know, in terms of who eats sort of the cost.

16:43Will corporations really, you know, take a bigger share or will they try to pass it on? And then I think, you know, sort of the, you know, the next, the next big domino will be the question of like, what is the bigger impact, the mechanical effect on price or the more psychological effect on growth, where it just becomes very hard to operate in an environment where, you know, we're a, you know, a tweet away from, or sorry, whatever platform uses now, um, from like, you know, you, it's very hard to plan in that sort of world. You know, we had two weeks ago, we thought we were delayed until April.

17:15And then today it comes out that they start next week? You know, I think those are kind of the two like very immediate questions that we'll get a real feel for, I think pretty quickly. And then, you know, kind of zooming out, the bigger questions is like, how does the global economy absorb this? Because some of these numbers this time around, and I think it's a big point to emphasize where like a lot of the tariffs last time were really focused on China and substitution effects like kicked in pretty quickly. And also companies had time to sort of digest that this was coming, where this time around, both in terms of scope and who it's applicable to seems much more vast.

17:50So I think that will be really crucial to watch. Tracy, something I've been thinking about a lot is that if you want to find like this sort of – first of all, admire the fact that Trump still posts primarily to Truth Social, even though Twitter is sort of – That's what it's called, Truth Social. The spiritual home of Trumpism is on Twitter. So the fact that he's sticking to Truth Social, I sort of admire it. Do you think Elon talks to him about that? I was just wondering, like, what does Elon think about this, that he's still holding out on Truth Social? Anyway, you know, I always think like, you know, there's sort of like a core pillar of the sort of Trump coalition in the United States is like small business owners and small business optimism.

18:31You know, it's been through the roof since the election, but they don't like tariffs by and large. And if you look at any regional business survey, et cetera, you'll find a lot of clearly politically inclined respondents who are excited about the Trump administration and then say, but we're worried about trade. And I'm actually, for the first time, especially assuming these tariffs go into effect, extremely excited about the headline numbers of the NFIB survey in the coming months. You have this core Republican constituency, which is totally on board generally with everything except tariffs. I think that's going to be something interesting.

19:04No, it's going to be really interesting to see whether, I guess, political allegiance trumps some of the feelings around business effects. Oh, I said Trump's. There's a pun for you. It's crazy. His name is Trump. Sorry. I always think like what an amazing afternoon. Anyway, I mean, he owned a casino and his name is Trump. I know this has been observed hundreds of times, but it still always blows my mind. Thank you, Joe, for reminding us. It's his real name. That blows my mind all the time.

19:34Lots More is produced by Carmen Rodriguez and Dashiell Bennett with help from Moses Ondaum and Kale Brooks. Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts. Please rate, review and subscribe to OddLots and Lots More on your favorite podcast platforms. And remember that Bloomberg subscribers can listen to all of our podcasts ad-free by connecting through Apple Podcasts. Thanks for listening. Thank you. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. This podcast is brought to you by FedEx, the new power move. Hey, you know those people in your office who are always pulling old school corporate power moves?

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