Three numbers that matter

0:05Pushkin. How healthy is the US economy really? It's a tricky question to answer, in all honesty, because the economic data is still a bit screwy since the federal government shut down earlier this year. If you are confused, don't worry, because Donald Trump says it's great. We are poised for an economic boom the likes of which the world has never seen, he said this week. Poised? Maybe. The general public, though, is not convinced. People are worried about all sorts of things, inflation and that kind of thing, and they are cautious on spending. Today on the show, inflation, jobs and market plumbing.

0:45We'll tell you the numbers that matter. This is Unhedged, the markets and finance podcast from the Financial Times. I'm Pushkin. Katie Martin, a slightly hungover markets columnist with coffee spilt on my white top here at FT Towers in London. That's one of those days. And I'm joined by the magic of the internet by that guy, the very Reverend Robert Armstrong off of the Unhedged newsletter. My head is clear as a bell and my shirt is spotless. I would just like the record to reflect. I am very pleased for you, Rob. How is Christmas party season treating you, though? Are you partied out yet? No, I'm still into it.

1:25We have the U.S. unhedged Christmas lunch today. Oh, yeah. So we're all going to go out and eat goose and mince pies or something. And go wild. Yeah, go wild. It'll be great. Yeah. I mean, we're nearly there, folks. The year is almost, almost, almost over. But so, yeah, what's the sense from over there about what the U.S. economy is really up to? Because it's a bit of a cloudy picture, isn't it? Yes, it is cloudy. Let's start with jobs. We did get a November jobs report. And the headline that the FT landed on and everybody else landed on was a higher unemployment rate at 4.6%. That is a relatively low historic number, but the trend is going the wrong direction.

2:13So this is weird, isn't it? This is the payrolls data that we normally get on the first Friday of every month. Yes. This is like just metronomically, like everybody knows that's when the payrolls data comes out. But because of this whole stupid situation you had, it's all gone wrong. Yeah, we shut down the government for reasons that no one remembers any longer, but we did. And so now all the important economic reports are coming out sort of when they come out. We're playing catch up. So anyway, we have November numbers. We are hoping we can rely on them, fingers crossed. And the unemployment rate, which you figure out by literally going to households, calling people up and saying, have you been fired?

2:55And you create the sample or hired or did you go to part time work and you do the sample that way? That ticked up a little bit. But that may have – there was an unusually high number of people who said they were on temporary layoff in that survey. And that's a volatile number and that may reverse and we may go back down to 4.5 or whatever. But again, the trend there is not great. The other half of the jobs report comes from calling not households but bosses, companies, and saying, are you hiring? How many people have you hired, et cetera, et cetera? And that side of the survey is a bit confusing because we had all the DOGE, Department of Government Efficiency-driven government layoffs, officially landed in October.

3:46So we had this huge drop in October and then a few stragglers in November. So for that side of things, the payroll numbers, you have to kind of put aside the government, right? Because the federal government is kind of doing all this crazy stuff that hopefully it won't do again. And if you just look at private employers, things are okay. You know, the numbers are positive. We're adding, you know, in on average in the last six months, you're adding kind of 50 to 100 ,000 jobs, maybe a month in that neighborhood, which which is I use the word fine. Yeah. And not fine in with the like a smile and exclamation point.

4:29The kind of the like, OK, fine sense of fine. You know, it'll do fine. Right. It's a bit better than meh. It's a bit. We notched up from meh to fine. Yeah. Yeah. And part of the reason here, of course, we as we've discussed on the show before, we have this big change in immigration. We have aging demographics. So there is an ongoing mystery about how many job additions is enough for the economy to be in a steady state in this low immigration aging economy. You know, it may be that just 10 or 20 or 30 ,000 job additions is enough to kind of keep the economy and the unemployment rate going sideways.

5:17But it is interesting, isn't it, that the unemployment rate is ticking higher at a time when, as you say, immigration is lower and people are getting kicked out of the country. Surely the opposite should be happening according to this whole framework that says that immigrants are stealing jobs. And so, you know, you can give more jobs to American citizens. That's not happening right now. I hear your argument. What we know is that's not happening. Right. Maybe it will happen eventually. That is not happening now. Huh. So anyway, I think that's fine. And the figure I would combine that with, the way a bad thing happens to economy is the job market weakens.

6:02Households either are less employed or underemployed or are worried about being underemployed. And then they start being thrifty. And so consumer spending falls. And then you get a cycle of bad things happening, kind of paradox of thrift stuff, where everybody's saving makes the whole thing worse. And speaking of fine, I would put the same. We got a retail sales report this week, too. And that looks pretty steady. You know, it depends a little bit how you cut it or whatever. But in real terms, in inflation-adjusted terms, retail spending is growing 1 % or 2 % year over year, which is OK. It's OK.

6:49It's not spectacular. It's not accelerating. But it's not falling through the floor. And it'll be OK. The exception to this is cars, which people are not buying with much enthusiasm. But there seem to be some one-off effects in there. And we're hoping that gets better. But if you exclude cars and petrol, as you would call it in your strange little island, then things look OK on the spending front. So these are good, solid pieces of news, I would say. No, I'm sorry. I take it back. Not solid. Fine. OK, so that's fine. Yeah. But then the other really sort of meaningful bit of U.S. economic data is always inflation, of course.

7:26And, you know, I'm one of these people that remains somewhat concerned that maybe inflation could still push higher at a certain point next year and that some of the impact of the tariffs hasn't quite fed through yet. And maybe we're all a little bit complacent about inflation. But latest release this week, U.S. inflation fell to 2.7 percent in November, which was not what economists had been expecting. so expectations were for inflation to be at 3.1 percent it's actually at 2.7 which is a decent chunk lower so a lot of that was housing and we can have a long extremely tiresome debate about whether housing should be included in this number or not because of some annoying details about how that data is collected and how much it lags in time or whatever.

8:24So a very, very benign shelter inflation number pulled the overall CPI inflation number down. The news overall was still good. But for example, services inflation, which is a chunky bit, if you take housing out, was still well above, you know, in the 3 %-ish range above target, right? So we're still not a target, but I don't want to discount this thing. This was good news. As you know, I'm very worried about inflation. I was very happy to see a lower number, whatever little amendments or butts you want to attach to it. I thought it was good news. Because inflation, everything counts. All the good things that can happen to the U.S.

9:12economy depend on inflation not spiking up again. Yes. Nothing else kind of works. Most obviously, if inflation spikes up again, the Fed can't cut rates and everything that follows from that. That gets very sticky as well, doesn't it? Because next year, as we've discussed before, Jay Powell, chair of the Fed, he stands aside. There'll be some sort of Trump sympathizer who will be put into that job. And effectively, this person's job will be cut the rates. I don't care how you want to dress this thing up. Just cut the rates. Yeah. I believe you said on the Internet that we should get used to the idea that the next Fed chair will be Donald Trump wearing comedy glasses and pretending to be an economics professor.

10:06Yes. I think that's a little extreme, Katie. But it's like, who will the next chair of the Fed be? You know, will it be Kevin Hassett? Will it be Kevin Walsh? Will it be Christopher Waller? Who will it be? It's going to be Donald Trump. Like, I don't know why we're all pretending it's not going to be. It'll be whoever does what Donald Trump wants him to do. That's who will be. Well, I'll agree with you that it will be whoever is the most lick spittily in the interview will win. Yes. I just have the naive belief that once you get in that job, your attitude changes. You're basically suddenly at an arm's length for the president, where once you are his complete underling, you get into that Fed chair, you've got some insulation.

10:52And I think people start to have ideas of their own once they get that job. So I am not taking the Katie Martin, Donald Trump in comedy glasses view of the next Fed chair, although it is a funny image and one that I will treasure in the new year. Can you point to any other Trump appointees who have gone their own way after their appointment? No, but no job is as well insulated from the president as the Fed chair's job. that's different from being a treasury secretary or a defense secretary or whatever the secretary of comedy glasses or whatever it is it's different very different but but it you know the fact that we have got inflation that's somewhat lower than people have been expecting means that kind of whoever this person ends up being and we are expecting an announcement pretty soon on who it will be it is easier for them to execute this plan of cutting interest rates and they should if inflation falls they should cut interest rates it's fine that's what they should do.

11:47Now, the worry is that next year that inflation doesn't, inflation, we know historically does not proceed in a straight line. And you get into next year and a couple things happen. We cut rates. The big, beautiful bill stimulates the economy. And, you know, maybe for reasons that are internal to the economy, things get a little bit better. Consumer confidence improves and the kind of pressure from demand increases and inflation changes direction. So to summarize, we're above target for inflation now. The trend is sideways, maybe a tiny bit down if you squint. Next year, we get fiscal support and possibly monetary support too.

12:39We also have other things that are stimulus for the economy, like a low oil price. Does this push core inflation up a little bit next year and upset the whole house of cards or upend the dinner table or whatever metaphor you want to use. I think that's a risk that is not high probability, but it's high destructiveness. And we need to worry about that. So inflation is a problem. And what could make it worse is a hot stock market. And I think there's some reason. I know people are worried, is the bubble going to pop? I'm slightly worried about the opposite thing, that we have a hot stock market next year, and that makes inflation risk worse.

13:17And the reason, the key reason I think we could have a hot stock market is there's a huge amount of leverage in the financial system. In other words, there's lots of borrowable money that people are using to buy financial assets. So that brings us to that$3.3 trillion number, which is the volume of overnight secured financing. And I know that sounds terribly nerdy, but that is basically people in the market borrowing against their treasury holdings to get cash to buy other financial assets with. And this market has gone bananas. So we have this insatiable appetite for leverage in the financial market, which could make prices rise and create more inflationary pressure.

14:02So I think that's something to watch is the amount of leverage in the financial system is a key factor in the background here. Yeah, short term, the inflation number may have come down, but I would not declare a victory yet. I am, however, declaring that we're going to be back in just a sec with Longshorts.

14:32okie dokie people it is time for long short that part of the show where we go long a thing we love or short a thing we hate rob what you got katie i'm short whams christmas carol last christmas I was thinking about this on the way into work what is the worst Christmas song ever recorded? What? And Wham's Last Christmas I am short that if every recording of that song were to be lost in a fire, I would rejoice George Michael is a national treasure I like Wham in general which makes it all the more painful to listen to that the worst of all Christmas songs Well, I am short amusing Wall Street festive videos.

15:23I regret to inform you that Blackstone has made one again. It's like an annual tradition where these private equity firms try and be amusing on the internet and jolly and lighthearted about the festive season. And it is cringe as an asset class. It's where funny goes to die. It's painful. to watch. There's nothing like a billionaire in a Santa hat to piss you off. I'll tell you that. It's like Danny DeVito is in it. It's like, what are you doing, dude? This is violence. It must stop. No more amusing festive videos from private equity companies, please. Listeners, that is it for today. We are going to be back in your ears on Tuesday with a special show.

16:11So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. Topher Forges is the FT's acting co-head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

16:49We'll be right back.