Lots More on the Growing Risks to the US Labor Market

Summary

Odd Lots: Lots More on the Growing Risks to the US Labor Market
Bloomberg, Hosted by Joe Weisenthal and Tracy Alloway
Release Date: February 28, 2025

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Introduction

In this episode of Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve deep into the burgeoning risks facing the US labor market. Joined by John Turek, founder and CEO of JST Advisors, the discussion navigates through the complexities of economic slowdown indicators, the interplay between inflation and federal policies, and the imminent impact of new tariffs on the economy.

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Economic Indicators and Signs of Slowdown

The conversation kicks off with an observation from Joe Weisenthal about the current economic landscape:

"I feel like we are 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, what's happening with housing starts, what's happening with the jobs report."
(02:28)

Key Points:

• Slowing Economic Activity: Both hosts note a noticeable slowdown in traditional economic discussions, overshadowed by political and technological narratives.

• Inflation Concerns: Tracy Alloway highlights signs of rising inflation, questioning the Federal Reserve's shifting focus:

  "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."
  (03:35)

• Yield Curve Dynamics: The episode discusses the recent drop in 10-year Treasury yields from 4.65% on February 12th to 4.2886% by March 27th, indicating potential economic uncertainties.

  "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."
  (04:14)

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Insights from John Turek on Policy Impulses and Market Reactions

John Turek provides a comprehensive analysis of the multifaceted policy impulses affecting the economy:

"The market has had to adjust to a policy impulse that seemed to be unambiguously positive to one that's more mixed."
(04:25)

Key Points:

• Mixed Policy Impulses: Initial optimism driven by policy changes has transitioned to uncertainty due to uneven implementation and broader scope, including unexpected tariffs.

• Inflation and Real Yields: Despite steady breakeven inflation rates, the real yields on 10-year Treasuries have declined, reflecting market adjustments to more complex economic signals.

• Economic Stability Concerns: Turek emphasizes that while the nominal GDP has remained stable, underlying economic activities like consumption and housing are showing uneven performances.

  "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 lull now for a while and hiring isn't that high."
  (05:55)

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Labor Market Vulnerabilities and Federal Policies

The discussion shifts to the labor market's current state and vulnerabilities introduced by federal employment cuts:

"I still kind of get the sense that it's pretty stable. But I would say that we feel a bit more vulnerable given that we don't have the cushion of a decent hiring rate."
(07:21)

Key Points:

• Stable Yet Vulnerable: While unemployment remains stable with respectable payroll growth, the low hiring rate makes the labor market more susceptible to shocks.
• Impact of Federal Employment Cuts: Recent federal job cuts, primarily in Washington D.C., contribute to increased vulnerability, as the labor market lacks a robust buffer to absorb these shocks.
• Potential for Rapid Unemployment Growth: Turek warns that even minor negative payroll impulses could lead to significant increases in unemployment rates due to the fragile hiring landscape.

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Stock-Treasury Correlation and Market Hedging

Joe Weisenthal introduces an intriguing observation about the relationship between stocks and Treasuries:

"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 so far out of the money as it had been in recent years?"
(08:41)

Key Points:

• Reemerging Inverse Correlation: Historically, stocks and Treasuries moved inversely, providing a hedging mechanism. Post-COVID, this correlation had weakened, but recent trends suggest a possible return to pre-pandemic patterns.

• Fed Put Implications: The potential restoration of the inverse correlation may imply that the Fed's protective measures (Fed Put) are more reliable than previously anticipated.

• Uncertainty Remains: Turek cautions that while trends are emerging, the full implications of tariff impacts and price-setting behaviors are still unfolding.

  "I think that what's different to me about this time versus Trump 1.0 is the psychology of, of price setting is totally different."
  (09:36)

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Impact of Tariffs on the US Economy

A significant portion of the discussion centers around the newly introduced tariffs and their immediate and long-term effects:

"The impact is like fairly mechanical. So, you know, it immediately has its effects impact. It immediately has its, you know, direct trade impact."
(16:45)

Key Points:

• Immediate Economic Effects: Tariffs are expected to have a direct and prompt impact on trade balances and corporate earnings.
• Corporate Response: A critical question is whether corporations will absorb the increased costs or pass them onto consumers through higher prices.
• Global Economic Absorption: Given the expansive scope of current tariffs compared to previous implementations (notably those targeting China), the global economy's ability to absorb these changes remains uncertain.
• Psychological and Planning Challenges: The unpredictability introduced by swift tariff implementations complicates business planning and could hinder economic growth.

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Political Dynamics and Business Sentiments

The episode explores the intersection of political allegiance and business sentiments, particularly among the Republican base:

"There are a lot of clearly politically inclined respondents who are excited about the Trump administration and then say, but we're worried about trade."
(19:03)

Key Points:

• Republican Constituency: Many Republican small business owners and entrepreneurs express support for the Trump administration's broader policies but oppose specific measures like tariffs.
• Balancing Act: This creates a dynamic tension where political support does not always align with business interests, especially concerning trade policies.
• Future Surveys: Alloway anticipates that upcoming NFIB surveys will reflect this nuanced stance, showcasing support for Trump policies while expressing concerns over the economic impacts of tariffs.

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Conclusion

As the episode wraps up, Joe and Tracy emphasize the precarious state of the US labor market amidst shifting economic indicators and policy changes. With tariffs set to take effect imminently, the full ramifications on corporate earnings, inflation, and overall economic growth remain to be seen. The conversation underscores the importance of monitoring both immediate mechanical impacts and the broader psychological effects on the economy.

"We just don't really know yet how price setters are going to internalize this past."
(11:24)

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Final Thoughts and Production Credits

Odd Lots is produced by Carmen Rodriguez and Dashiell Bennett, with additional support from Moses Ondahm and Cale Brooks. The sound engineering is handled by Blake Maples, and Sage Bauman serves as the head of Bloomberg Podcasts. The hosts encourage listeners to rate, review, and subscribe to stay informed on the latest in finance, markets, and economics.

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For a deeper dive into the topics discussed, subscribing to Bloomberg's Odd Lots podcast is highly recommended.

Transcript

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[Joe Weisenthal]

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[Tracy Alloway]

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[Joe Weisenthal]

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[Tracy Alloway]

It would be terrible if I didn't. Not only did I read them, I lightly edited them.

[Joe Weisenthal]

That's right, you did. You did. You did. I think I uploaded the text of them and then you edited them. I did. A dead list.

[Tracy Alloway]

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[Joe Weisenthal]

Feta's going viral.

[Tracy Alloway]

Barges.

[Joe Weisenthal]

This is an after school special.

[Tracy Alloway]

Except I've decided I'm gonna base my entire personality going forward on campaigning for a strategic pork reserve in the US Black Gold. These are the important questions. Is it robots taking over the world?

[Joe Weisenthal]

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 he how do I get.

[Tracy Alloway]

More popular and successful?

[Joe Weisenthal]

We do have the perfect guest. Welcome to lots more where we catch up with friends about what's going on.

[Tracy Alloway]

Right now because even when odd lots is over, there's always lots more.

[Joe Weisenthal]

And we really do have the perfect guest.

[Tracy Alloway]

I 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 Skanda pointed out earlier in the newslet, how embedded or how important AI is becoming to the US Economy.

[Joe Weisenthal]

Yeah. And like this idea, like there are signs of slowing.

[Tracy Alloway]

Oh yeah.

[Joe Weisenthal]

I feel like we are 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, what's happening with housing starts, what's happening with the jobs report. And there's actually signs of a slowdown.

[Tracy Alloway]

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.

[Joe Weisenthal]

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. We had been at 4.65 on February 12th.

[Tracy Alloway]

So I think the curve inverted again as well.

[Joe Weisenthal]

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.

[John Turek]

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. And 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. You know, 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 that has a very unevenness into either both the implementation and the scope. So I think you know, the, the market 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 as in 10 year breakevens have actually stayed pretty firm. So I think that the economy is having to, the market is sort of having to deal with you know, economy that's a little more confusing and you know, the policy impulse is, is more muddled this time around where you have, you know, 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 you know, I, I, I, I, I, I think that that is, you know, sort of at the nexus of what's going on here. And you know, just to add one more thing, you know, you guys kind of made it up like the meat and potatoes of the economy. I think that you know, for the last two years we've been in a very stable nominal GDP regime. It's, we've kind of oscillated between high fours and high fives and you know, the economy seems to be running on a few less cylinders than it has been in the last couple of years. You know, 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 lull now for a while and hiring isn't that high. So it's just a much more, a lot more cross currents than I think the market probably had anticipated six weeks ago.

[Tracy Alloway]

So we are recording this on February 27th. In about a week we are going to get us payrolls for February. We just had initial claims as Joe mentioned, showing that they jump to the highest level 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?

[John Turek]

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 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, you 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, I would namely say that because the hiring rate is still quite low, which means it doesn't take much in terms of negative payroll impulses to sort of lead to more drastic jumps in the unemployment rate. So I don't necessarily look at it right now and say there's an obvious threat to three months, the labor market being materially weaker than it is now. I still kind of get the sense that it's pretty stable. But I would say that we feel a bit more vulnerable given that we don't have the cushion of a decent hiring rate. So probably a bit more vulnerable. You know, if this DC impulse is more of a shock that could, you know, it could spiral a little quicker now than, you know, say a year or two ago.

[Joe Weisenthal]

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 re emerging. That was the famous condition of the 2000 and tens 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 so not as far out of the money as it had been in recent years?

[John Turek]

Yeah, it's a good question. I'm not sure. You know, I think that, you know, the simple empirics that have kind of come come out is that when Core PC is printing below 3, you'll get a decent buffer from Treasuries in the way of a growth shock that will cushion to the risk asset side of your portfolio. And when core PC is above 3, you don't have that. And you can stir worlds. As we saw in 2022, you lose on both. I think it's a little early on in terms of getting a sense for what the tariff impact on spot inflation is going to be. Because I think that what's different to me about this time versus Trump 1.0 is the psychology of, of price setting is totally different. Yeah. And as we see every Q1, you know, even in an economy that's, you know, much more balanced in terms of inflation, where we, you know, we've noted that, you know, 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, you know, being inflicted in all this. It seems that you kind of have to keep an open mind that, you know, 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 like a base case, I think it's fair to say that, you know, we're not durably going to a core PC plus three world. So that treasury should sort of, you know, the underlying fundamentals of 6040 should be okay. But I wouldn't say it's all, you know, it's, it's kind of all clear for return to the pre Covid world. And we just don't really know yet how price sitters are going to internalize this past.

[Tracy Alloway]

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.

[Joe Weisenthal]

Yeah, no, 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 as 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 DC impulse. So I think right now, these cuts that we've seen towards federal employment, very few people would say they're gonna meaningfully change dial on, you know, deficits, et cetera at this point. But they're real and there have been 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. And there are a lot of stories we saw in a recent. There was, 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 like a little bit about like how you are thinking about the sort of macro impulse from the labor market cutting that's happening in D.C.

[John Turek]

Yeah, I mean, I think that, you know, as a, as a baseline, you know, it's hard to see that it being a, you know, an outsized factor in terms of like kind of the status quo in the labor market. But I think, you know, kind of, as I said, I think you have to kind of take it in the context of the hiring rate in the economy is lower now. So I think the labor market as a whole is more vulnerable to things that kind of net net shouldn't be as big of a deal. And I think that's kind of gotten the market's attention as we've kind of like over the last few weeks entertained more left tail risks is that, you know, the starting conditions really matter when you're dealing with exogenous variables. And you know, the starting conditions for the labor market are, you know, it's steady, but it's not bulletproof. And it has been bulletproof, you know, probably for the last three years maybe really since COVID So yeah, I think, you know, it's hard to say, you know, it's hard to map out the sort of the spillover in terms of like, you know, what number claims will be in four weeks. But I think you really have to keep an open mind to the left tail side given that the starting point isn't great.

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[Joe Weisenthal]

Tracy, for people listening who want to understand this sort of why some of the engines that are not that we're growing are 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 when when John here is talking about, you know, 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.

[Tracy Alloway]

Yeah, 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 expect it would take for the effects of those to feed into the US Economy, either in terms of corporate earnings or the inflation rate?

[John Turek]

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 effects 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? Because something that really fascinated me was Governor Acklin 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, they're huge because trade is 25% of national income in Canada. Trade with the U.S. excuse me, will that impact me? Because It'll eventually feed back into the US So I think that 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. Will corporations really, you know, take a bigger share of it? 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, you know, a tweet away from or, sorry, whatever platform uses now from like a. You know, 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, and 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, 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 the 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. So I think that will be really crucial to watch.

[Joe Weisenthal]

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.

[John Turek]

Now that's what it's called.

[Joe Weisenthal]

Truth Socialism, the spiritual home of Trumpism, is on Twitter. So the fact that he's sticking to Truth Social, I sort of admire it.

[Tracy Alloway]

Do you think Elon talks to him about it?

[Joe Weisenthal]

I'm just, like, 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. You 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 where you see 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.

[Tracy Alloway]

No, it's going to be really interesting to see whether, I guess political allegiance trumps some of the feelings around business effects. Ooh, I said Trump's. There's a pun for you.

[Joe Weisenthal]

It's crazy. His name is Trump. Sorry. I always think like, what an amazing anthem. 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.

[Tracy Alloway]

Thank you, Joe for reminding us it's.

[Joe Weisenthal]

His real name that blows my mind all the time.

[Tracy Alloway]

Lots More is produced by Carmen Rodriguez and Dashiell Bennett, with help from Moses Ondahm and Cale Brooks.

[Joe Weisenthal]

Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts.

[Tracy Alloway]

Please rate, review and subscribe to odd lots and lots more on your favorite podcast platforms.

[Joe Weisenthal]

And remember that Bloomberg subscribers can listen to all of our podcasts ad free by connecting through Apple Podcasts. Thanks for listening.

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