Full Video Transcript Below:
CAROLINE WOODS: Joining me here at the desk is Brett Ryan, Senior U.S. economist at Deutsche Bank. Brett, thanks so much for being here.
BRETT RYAN: Great, thank you for having me.
CAROLINE WOODS: So we got the August jobs data. The economy added 22,000 jobs, far fewer than what economists were expecting around 75,000. Unemployment rate at 4.3%. Put these numbers into perspective for us. What does it actually tell you about the state of the labor market right now?
BRETT RYAN: Yeah, it tells you that the labor market has definitely been slowing a bit over the summer months. It’s following a similar pattern that we saw last summer, and that partly reflects the low hiring, low firing dynamic that we’ve been in for some time. In addition, slowing income growth. One of the things that people miss is that there was a downtick in hours worked. So 1/10 down tick in hours worked along with the downward revision to the prior month. So the pace of income growth that you would extrapolate from the report is about 4.4% year over year, and that’s down from about 5% what you thought previously. So definitely a slower pace of income growth, slower labor market.
Debatable about how much weaker it is. To your point, the unemployment rate did tick up to 4.3%. But that was also due to participation rising. And, you know, there are signs — there was 288,000 in household employment, along with an uptick in unemployment. And that’s what gave you that rise in the unemployment rate. So slowing a bit, there is a difference between that and “oh my gosh, we’re heading into a recession.”
CAROLINE WOODS: So how concerned are you about how much the economy and the labor market is slowing right now?
BRETT RYAN: Sure, so given the pattern that we saw last summer, it’s not terribly concerning, because it’s really following pretty closely to that pattern and the fact that you’ve had a slow creep up in the unemployment rate and not a sharp rise in the unemployment rate. For example, this time last year, you were looking at about a 44/10 increase in unemployment rate over a four-month period. Now we’re talking about a slow creep up, a couple of tenths over a three-month period. And so the speed of the move is less concerning relative to this time last year.
So I think it reflects slower growth, fears of tariffs, but not a complete collapse or something more sinister that would require a very sharp policy response.
CAROLINE WOODS: Do we have some insights into why companies are hiring less? Is it because of tariff uncertainty? Is it AI replacing jobs? What is it?
BRETT RYAN: Yeah, so there are a few things. The big question is how much of this is being driven by supply versus demand factors. So supply factor being a sharp crackdown on immigration, deportations, and impediments to illegal immigrants showing up at work. That’s probably weighing on the establishment survey somewhat. But then versus demand factors, which would be employers slowing hiring. Now, in terms of it’s already been a slow hiring environment. And the JOLTS data from July that we saw earlier in the week pointed to more of the same, as opposed to a step shift into lower demand.
So I’d say it’s a combination of supply and demand factors. The main question for policymakers is how much of this is supply driven versus demand driven. There’s evidence on both sides. I would say that supply factors are probably the more dominant one at the moment. But, you know, that debate is certainly an open one.
CAROLINE WOODS: So the everyday American listening in — is it time to panic?
BRETT RYAN: No, it’s not time to panic. Absolutely not. Jobless claims, other labor market indicators — jobless claims don’t indicate broad-based weakness in the labor market. It’s more of the same uncomfortable equilibrium that we’ve been in for the last 12 months. There are pockets of weakness in the country, no doubt. But if you look at the top four population states, which account for about a third of payrolls, jobless claims aren’t telling you anything different than they were this time last year.
CAROLINE WOODS: OK, and then, of course, the big question is, what does this mean for the Fed. The market was already pricing in a Fed rate cut later this month. Could this weaker-than-expected report make the Fed cut 50 basis points instead of 25? What do you think?
BRETT RYAN: Yeah, so I think it’s helpful first to think about the June summary of economic projections that they released at that meeting. That summary had a median growth rate of 1.4%, a core PCE rate of 3.1%, an unemployment rate of 4.5%, and two cuts. Where are we tracking relative to that? Well, come in a couple of weeks when the Fed meets, you’re looking at probably an upward revision to the growth estimate, probably an upward revision to the core PCE inflation estimate. No change to the unemployment estimate, because you’re on track to hit that 4.5% if not lower.
So from the Fed’s perspective, does that argue for adding more cuts? Not necessarily. Now, are you going to have people on the committee that may be arguing a 50? And does today’s report open the door a crack for that? Yeah. And the market’s pricing a small probability of that. But I think you have the upcoming inflation data, which will be critical for that assessment. And you have another employment report. I think it more speaks to a sequence of cuts rather than a 50 basis point cut.
So our base case is that the Fed cuts 25 basis points in September, again 25 in December, and 25 in March — so a slower pace. Today’s report, if it were to be followed by another weak report, would argue maybe for accelerating that pace and doing sequential cuts, perhaps September, October, December.
CAROLINE WOODS: If and when the Fed does cut later this month, do you think it’s a reaction to the economy slowing, or do you think it’s just a normal time in the cycle and we’re ready for a cut?
BRETT RYAN: So it’s really risk management for them. And they’re in a difficult position because you have a growth impact from tariffs and an inflation impact. That creates a dichotomy for their dual mandate, right? It puts their dual mandate in tension. And so when that happens, they have to look at how far away are we from our inflation target versus how far away are we from our employment target, and what are the time periods in which to get there. And that’s how they balance it out.
All of their policy rules at the moment would tell them they don’t need to do anything. And so it comes down to risk management — and which risks do the particular people on the FOMC feel are more prevalent. You have some that think inflation is more of the risk right now, others that are more worried about the labor market. There are arguments for both sides.
CAROLINE WOODS: Well, as an economist, what are you more concerned about — a labor market that continues to cool, or inflation that’s come down a lot but seems like it’s creeping higher?
BRETT RYAN: I think inflation. In our view, inflation risks are greater at the moment because you have these rolling impacts of tariffs. At the same time, from a growth standpoint, you have a tax bill that was just passed that’s going to add 20 to 30 basis points to growth. So a bit of support for labor demand.
At the same time, the Fed’s been away from its inflation target for five years now and has not gotten back to target. And the time period to which it’s expected to get back to target keeps getting pushed out. That risks un-anchoring inflation expectations, and inflation-fighting credibility would be very difficult to regain over the longer term.
So it’s less about cutting in terms of what their policy rules would tell them. They should be above the neutral setting. They should be slightly — a slight tightening bias. The question is how much tighter should they be. And so we think neutral is closer to 3.50 rather than the Fed’s view of 3%. So we would have them only cutting a few times. The pace is determined by the data. And today’s data would argue for a bit of a quicker pace than what we have baked in. But it doesn’t change our overall view of the trajectory because, when you take a step back and look at the broad labor market picture, not much has changed.
There are reasons to think that we’re going through the same sort of seasonal pattern that we did last summer, and that jobs will pick up again in the fall.
CAROLINE WOODS: All right. We will see. Thank you so much for sharing your perspective, really appreciate it.
BRETT RYAN: Thanks for having me.
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