Episode 30

Episode summary

The economy continues to defy expectations, remaining strong in many fundamental areas despite many warnings of tough times ahead. In this episode, Caleb and Liz discuss the latest jobs report, inflation, interest rates, and the other factors that are keeping the economy in fine shape.





Liz Wilke (00:00:33) – Hi, I’m Liz Wilkie. 

Caleb Newquist (00:00:35) – And I’m Caleb Newquist. 

Liz Wilke (00:00:37) – And this is the Gustonomics Podcast. In each episode, we bring you a little bit of economics knowledge so you can be more informed, use the information in your business or work, or have something memorable to say at your Memorial Day barbecue. 

Caleb Newquist (00:00:53) – Please remember to rate, review, and subscribe to the show. Or share it with an economics-curious friend. Anything you can do to spread the word about the podcast is greatly appreciated. 

Caleb Newquist (00:01:05) – Liz, we have a situation. 

Liz Wilke (00:01:10) – We have a situation. And it is not, what’s his name, Mike the Situation? 

Caleb Newquist (00:01:15) – Right. We have an employment situation. 

Liz Wilke (00:01:19) – We have an employment situation every month. 

Caleb Newquist (00:01:21) – Every month we have an employment situation. And that’s what we’re going to talk about today. At least that’s where this conversation is going to start. As it stands, when we’re recording, what’s your big takeaway from the latest employment situation? 

Liz Wilke (00:01:35) – Well, first, I will clarify that the employment situation is the formal title of the monthly report by the Bureau of Labor Statistics, which many people know as the jobs report. So the employment situation is the jobs report. And I will refer to it at least as the jobs report for the benefit of our listeners. 

Caleb Newquist (00:01:54) – Okay. I was just, I was just feeling, I was just feeling the situation, Liz. 

Liz Wilke (00:02:01) – I have not asked you, Caleb, to change how you call the jobs report slash employment situation. At any rate, we digress. The recent employment situation slash jobs report was more muted than observers were expecting. Forecasters expected us to come in with about 230,000 to 235,000 jobs up this year in April. And the report was weaker than that. We clocked in at 175,000 jobs gained in the US over the month of April. That was obviously lower than expectations. And it was significantly weaker than the prior month’s jobs report of 300,000 jobs thereabout. 

Liz Wilke (00:02:45) – And so some people are seeing this as a sign of economic slowing. And you know, people are trying to figure out what to do about that and what that means for the Fed to cut interest rates, right, sometime later this year. 

Caleb Newquist (00:03:00) – Right. So that’s the big, so that’s like, I hate using this phrase, but like that’s everybody’s North Star, right? Everybody wants to know when rates are going to be cut. And the latest, as best I can tell, is that people are more or less giving up on them being cut this year. Is that kind of where you fall now? 

Liz Wilke (00:03:24) – I think it would be strong to say that rates aren’t going to get cut this year. But I do think that the expectation, so at the beginning of the year, it was very common to expect that the Fed was going to do three cuts this year and probably starting in May, right? That those cuts would be non-trivial, like a reasonable size. And I think the expectation for that is pretty much out the window if we keep getting reports like this. What I think that it’s more reasonable to expect now is that we will probably get some cuts, right? 

Liz Wilke (00:03:58) – We’re seeing a little bit of softness overall in the economy. The recent jobs report is one of those signs. We could get three cuts, but they could be really minimal cuts. Or we could get two cuts that are minimal or maybe moderate sized, and the Fed will probably hold on past May or June or July, right? We have a lot less certainty about when exactly the Fed might start to cut rates. They have lots of opportunities through the end of the year to do so if they’re going to do so. 

Liz Wilke (00:04:28) – And they keep, Mr. Jerome Powell keeps reiterating their data-driven focus on deciding when to cut rates. They definitely do not want to cut rates early, so they’re going to be very laser-focused on that economic data. And as long as the economic data is still basically good and positive, that gives them more runway to hold on to rates where they are. 

Caleb Newquist (00:04:52) – Yeah. OK. So one clarifying question. When you say a minimal rate cut, what does that mean, like ballpark? 

Liz Wilke (00:05:00) – Like a quarter of a percent is a pretty minimal cut. 

Caleb Newquist (00:05:04) – OK. That’s the least they would do. That’s the least they would do.

Liz Wilke (00:05:09) – It’s not the least they can do, but I will say from my perspective, it would be sort of minimal. 

Caleb Newquist (00:05:14) – So if you think about all their rate increases- They’re not going to do anything lower than that, right? Is that what you mean? 

Liz Wilke (00:05:19) – Well, I don’t sit on the Federal Reserve Open Market Committee, so I really want to be cautious here about what’s in the hearts and minds of our 12 board members. But I do think that when I think about the rate increases, which were all 50, you know, half a percent or three quarters of a percent, a one quarter percent cut would be a pretty small cut relative to the hikes that they made in order to get us where we are. 

Caleb Newquist (00:05:48) – Right. Okay. So that makes sense. So then let me ask you this. You say there’s some softness in the economy. Should we interpret that to mean that the economy is just not as strong as we thought it was or that it’s kind of taking a breather? When you say softness, how does that manifest in the real world? 

Liz Wilke (00:06:12) – I think I would put it like this. So in the quarterly release for Economic Outlook that we just did for our accountant partners, I called the economy strong but soft, right? So they’re really good fundamentals. We keep seeing positive GDP growth despite these interest rate hikes. We’ve seen good jobs numbers. We’ve seen spending really, you know, sort of keeping track despite inflation. But when I say soft, you know, we’re not still posting, you know, three or four hundred thousand jobs numbers. 

Liz Wilke (00:06:45) – You know, spending is starting to drift sideways a little bit. The reports that we have suggest kind of like a sideways drift, right? Unemployment has been basically stable for the last several months. It’s bounced around between 3.7 and 3.9 percent, which is like a really good unemployment rate, right? 

Caleb Newquist (00:07:03) – Yeah, and stable is good, right? 

Liz Wilke (00:07:05) – Stable is not a bad thing, right? But I think, you know, but I think that softness is about tempering sort of expectations for continued growth, right, this year. We’re sort of in a solid position. There is a little bit of softness. Fed puts out what’s called a beige book several times a year. And it’s not quantitative data and statistics. It’s just, you know, people talking to business owners and industry experts and then putting all of their takeaways into the beige book. And it’s really it’s called the beige book. 

Liz Wilke (00:07:38) – And it’s a really thrilling read for those of you that think so. 

Caleb Newquist (00:07:41) – And with a name like beige, how could it not be? 

Liz Wilke (00:07:45) – It screams read me. I agree. It is on my must read list, I will say. But I realize that might not be the case for everybody, which is why we do sometimes summarize it for others. But the anecdotal, you know, stories that are coming out from real people on the ground in the beige book are conditions are pretty good. 

Caleb Newquist (00:08:04) – Yep. 

Liz Wilke (00:08:05) – But, you know, there’s there’s some softness, right? Orders might be a little down from last year or, you know, it’s it’s getting a little easier to find talent except for these hard to fill roles. And that’s good. But, you know, demand is maybe dropping off a little bit. And so I’d say there’s sort of pockets of softness, despite the fact that the economy as a whole really is, you know, sort of coasting along in a strong position. 

Caleb Newquist (00:08:28) – Right. Yeah. We’re still kind of this is a few episodes back, but we’re still kind of in the fine zone. 

Liz Wilke (00:08:34) – Yeah, we’re fine. We’re fine. 

Caleb Newquist (00:08:37) – Okay. And fine’s not bad. 

Liz Wilke (00:08:41) – I agree. I mean, I think fine is pretty good if you think about what everybody was expecting. Right. You know, and I’ve my economist brethren, you know, have a large role to play for this. We’ve been sort of the sky is falling. The sky is falling. 

Caleb Newquist (00:08:53) – Yeah. 

Liz Wilke (00:08:54) – Or just wait. It’s going to fall. It’s going to fall. You know, just wait. And, you know, the economy continues to defy expectations on this front. 

Caleb Newquist (00:09:02) – Right. 

Liz Wilke (00:09:03) – And I think it’s it’s still sort of continuing to chug along. 

Caleb Newquist (00:09:07) – Yeah. 

Caleb Newquist (00:09:07) – And I think so as far as that inflation is still not where. the Fed would like it to be, is that fair to say? 

Liz Wilke (00:09:20) – That is very fair to say. 

Caleb Newquist (00:09:22) – Okay, and do you think their 2% target, which for new listeners, we did a whole episode on this a while back, and I cannot remember which episode it is, but 2% is the Fed’s goal when it comes to inflation. Is that still, is reaching that goal feasible for this calendar year, in your opinion? 

Liz Wilke (00:09:47) – What a great question. Do I think it’s possible? Yes. Do I think it’s the most likely outcome? No, I don’t. And I think that’s because we have made a lot of progress on the parts of inflation that are either interest rate sensitive, right? Or that can be resolved by supply chain issues. And we’ve mostly worked through that. And that’s very good for inflation for household pocketbooks. The core part of inflation is being driven by basically two things. One, the cost of services, right? And services employ more workers, generally speaking, than goods do, right? 

Liz Wilke (00:10:29) – So it’s not us buying stuff, it’s us buying experiences and services, which are employing more workers, right? But workers are scarce. And so that’s keeping their pay high, right? There’s a lot of demand for them. And there’s a lot of willingness to pay, right? For those services. The second thing is housing. 

Caleb Newquist (00:10:51) – Yep. 

Liz Wilke (00:10:51) – So in fact, the interest rate increases are actually working counter to inflation in this point, in that the interest rate increases from the Fed are making mortgages more expensive, which are contributing to what’s called rate lock, which Orphe and I talked about, the economist from Zillow a few times, or a few episodes ago. People that got their mortgage at two or three or four or even 5% can’t trade out their mortgage for a mortgage that’s seven or possibly even 8% right now, so they’re staying put. 

Liz Wilke (00:11:25) – And despite the fact that houses are very expensive, we don’t expect to see big breaks in the cost of housing because of this rate lock scenario. So keeping the interest rate high in order to try to bring down housing is, well, at least not housing for sale, right? The way to resolve some of the housing cost pressure is to build more rental housing or to build more houses for sale, right? Which you have to wait a while, right? For houses to be built and then for people to start to move into them. 

Liz Wilke (00:11:56) – So that’s all to say that the things that are still holding up inflation outside of that 2% target are things that are of limited ability for the Fed to influence with the interest rate and will take time to resolve. 

Caleb Newquist (00:12:11) – Yep, so not only are things fine, still fine, then I think this also calls back to a recent episode where everybody’s still kind of in wait and see mode because there just isn’t that much that can be done from a, I guess, monetary policy perspective that will make changes in the short term. 

Liz Wilke (00:12:40) – What I think that’s really gonna drive the short term is the relationship between wage growth, pay growth for workers, right? Especially the ones involved in these services and the inflation rate, right? So the way the consumer is feeling right now was really well summarized by this quote I saw by a guy in a CNN article who says, all of the inflation, all of the things that we’re paying more for are really starting to bite a little bit, but we’ve basically been able to afford it because we’ve had some nice raises. 

Caleb Newquist (00:13:14) – Yep. 

Liz Wilke (00:13:16) – And consumer spending, which is somewhere between 2 3rds and 70% of GDP, and it’s the vast majority of money and stuff that circulates in the economy and keeps us all afloat has been really, really resilient to the inflation that we’ve seen. And that’s because the pay for workers has also risen, significantly above inflation. Pay is attenuating a little bit. So that’s all to say that businesses are starting to level out, right? The pay increases for workers, right? 

Liz Wilke (00:13:49) – And as the jobs number continues to go down, and as people really sort of stop quitting their jobs all the time, and the sort of churn for workers in the market gets a little easier, there are some signs that are early that pay growth is gonna stop growing as fast as it’s been growing. And then the question is, will it grow fast enough to keep up with whatever inflation we have left? 

Caleb Newquist (00:14:14) – Yep. 

Liz Wilke (00:14:15) – And if it does, then we’ll probably really have a hard time fighting inflation because workers can continue to pay those higher prices. And if it doesn’t, then we’ll probably see a reasonable drop-off in consumer spending because they just can’t keep up anymore with the inflation. And then ironically, that will make it progress on inflation because demand for all those goods and services will really start to pull back finally. 

Caleb Newquist (00:14:40) – Right. It’s all kind of counterintuitive in a way.

Caleb Newquist (00:14:45) – Right? We have to, you know, we have to earn less so that we don’t spend as much. So then things are less expensive and that’s a better situation for everybody. Like that’s a very kind of, I mean, it’s hard to think of it about that way, but that’s essentially what you’re saying, right? 

Liz Wilke (00:15:01) – It’s a cycle. 

Speaker 4 (00:15:02) – Right. 

Liz Wilke (00:15:03) – So, you know, everything is sort of cyclical and, you know, when the economy gets hot and worker pay goes up and then they can afford more things and that makes inflation. And then you think that it’s supposed to even out on the other side, which is people eventually can’t keep up with that inflation. They pull back and that brings down prices and maybe causes a little bit of a slump. And then you sort of start over again, right? Because then you have more runway to start growing again. 

Liz Wilke (00:15:30) – You can make more investments or, you know, you can hire workers for cheaper, et cetera. And so the economy really does have this cyclical model to it that is, you know, what goes up must come down basically. And it’s the job of, you know, policymakers to sort of try and even out, right, the ebbs and flows of what is thought of as a pretty natural cycle. 

Caleb Newquist (00:15:53) – Right. 

Liz Wilke (00:15:54) – Okay. 

Caleb Newquist (00:15:55) – So with all that in mind, has your advice to small businesses in terms of the economic conditions, has that changed? 

Liz Wilke (00:16:03) – So for the listeners that don’t know yet what my advice to businesses has been, it is basically, you know, try and hold on to some cash reserves, right? Because we think that, you know, it’s tough to go to the credit markets right now and get money that’s even on short term. Also to put off big finances, excuse me, also to put off big investments that you can put off because the financing conditions are really quite bad. And then to expect some consumer softness. 

Liz Wilke (00:16:33) – We’ve also told businesses that they can probably come out of, you know, talent acquisition, recruitment, retention mode, right? And really focus on making their processes efficient and making sure that their business is running productively. I think that’s, I think that’s basically still true. Even if the Fed makes moderate cuts towards the end of the year, the financing conditions will still be better and, you know, having good cash flow model will actually make these businesses much more credit worthy when that happens. So that’s generally good. 

Liz Wilke (00:17:03) – There are obviously businesses that are on a growth trajectory and have projects that are going to make money no matter the financing conditions because they’re so lucrative and there’s no reason that they should wait, but that’s not the advice for all businesses. What is really nice about this sort of wait and see moment, and I call it the sort of wait and see moment, or other people have called it the great wait, where we’re past the great resignation and in fact quits are way down and hiring is down as a result of quits being way down. 

Liz Wilke (00:17:34) – Workers just aren’t churning as fast and businesses are I think a little more, a little more hesitant to hire people, especially with the uncertain environment and still the remaining difficulty of bringing on workers. But that means that that creates an opportunity for stability and stability is good for building foundational practices that improve the health of businesses over the long term. 

Liz Wilke (00:18:00) – I think my advice is still the same, partially because it’s very recent advice from the recent economic forecast that we did for our accounting partners, is that it’s a good time to take a beat, build the team that you’ve hired, make sure your processes are in good shape, and start to develop a strong cash flow. Focus on cash flow and reserves to where there are any bumpiness. As you’ve also said, expect a decent, not stellar quarter. There’s no reason to assume that things are going to fall off a cliff anytime soon. 

Liz Wilke (00:18:36) – The economy has proven really resilient to lots of forecasts of doom and gloom. And we are looking ahead at a softer economy in the latter half of the year, but that also means that investment and finance conditions will start to get better. 

Caleb Newquist (00:18:54) – Well, thanks, Liz. That was all fantastic. And that’s it for this episode. We hope you learned something new and useful for yourself or your business. Please let us know what you think of the podcast by leaving a review or sharing it with a friend or colleague who might enjoy it. I’m Caleb Newquist. 

Liz Wilke (00:19:07) – And I’m Liz Wilkie. Thanks for listening.

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