Slok: It may take another month before we see the real state of the economy

Here's a summary of the provided YouTube video transcript:

Key Concepts

• Government Shutdown Impact on Economic Data: The primary focus is on how the government shutdown disrupted the collection and release of crucial economic indicators, particularly inflation (CPI) and employment (Nonfarm Payrolls).
• Data Quality and Timeliness Concerns: The shutdown raised questions about the quality and comparability of data collected during and immediately after the shutdown, especially with holidays like Thanksgiving approaching.
• Alternative Data Sources: Economists are relying more heavily on private sector and alternative data sources to gauge the economy's health during the data void.
• Labor Market Assessment: Despite data disruptions, available indicators suggest the labor market remains relatively strong, characterized by low jobless claims and rising private sector employment indicators.
• Shifting Economic Risks: The discussion explores the prevailing view among economists that the greater risk to the economy in the coming months is labor market weakness rather than high inflation.
• Role of Immigration in Labor Supply: A key argument presented is that slowing immigration is a significant factor contributing to a decline in labor supply, which in turn impacts job growth.
• Federal Reserve Implications: Changes in labor supply due to immigration have direct consequences for the Federal Reserve's policy considerations.

Impact of Government Shutdown on Economic Data Collection

The transcript highlights the significant challenges posed by a government shutdown to economists' ability to accurately assess the overall economy. Specifically, the lack of data collection in October meant that inflation (CPI) and employment figures for that month would likely not be available. This creates a "data hole" that makes it difficult to understand the current economic situation.

Specific Data Points Affected:

• October Inflation (CPI): Not collected, therefore unlikely to be released.
• October Employment Data: Not collected, therefore unlikely to be released.
• November Employment Data (Nonfarm Payrolls): The data collection week for November payrolls (the week of the 12th) coincided with the shutdown. Government workers were expected to return to work mid-week, pushing data collection closer to Thanksgiving. This raises concerns about the quality and comparability of the November employment report, as it might not be collected under normal circumstances.

Alternative Data Sources and Labor Market Assessment

In the absence of official government data, economists are turning to alternative indicators to gauge the health of the labor market.

Key Alternative Indicators Mentioned:

• Revelio Labs Indicator: This private sector indicator for total non-farm payrolls has been showing an upward trend.
• Jobless Claims: Nationwide data for all 50 states remains low, indicating a small number of layoffs.
• Challenger, Gray and Christmas: While some "small issues" were noted with this data, the overall picture from other sources remains positive.
• ADP (Automatic Data Processing): This private payroll provider's data suggests the labor market is in relatively good shape.
• Job Postings (General and LinkedIn): These indicators continue to signal that the labor market is "okay."

Overall Assessment:

Despite the data disruptions, the "big picture" from these alternative sources indicates that the labor market is "still doing okay." However, Torsten Slok emphasizes that it may take "another month" to get a clear and comparable view of the economy's true state.

Methodological Adjustments for Economists

Torsten Slok explains how economists adapt their workflows during such data disruptions.

Process Adjustments:

• Increased Reliance on Private Data: Economists must rely more heavily on data from private companies and alternative sources.
• Wider Data Assembly Line: The "assembly line of the data" that economists process has widened significantly due to the absence of primary government sources like the BLS (Bureau of Labor Statistics) CPI and Nonfarm Payrolls.
• Acknowledging Data Fog: Slok describes the current situation as "very foggy" regarding the exact health of the US economy.
• Gradual Improvement: He anticipates that data quality will gradually improve over the coming weeks as government agencies resume operations.

Shifting Economic Risks: Labor Weakness vs. Inflation

A significant point of discussion is the prevailing consensus among economists that the greater risk to the economy in the coming months and quarters is tilted towards labor market weakness, rather than persistent high inflation.

Argument and Supporting Evidence:

• Slowing Job Growth: The transcript acknowledges that job growth has been slowing over the last six months.
• Primary Driver: Slowing Immigration: Slok argues that the primary reason for this slowdown is not necessarily a decrease in labor demand, but rather a decline in labor supply due to slowing immigration.
  • Historical Context: Nonfarm payrolls used to average around 200,000.
  • Projected Future Growth: A recent paper suggests expecting job growth of only 30,000 over the next 12 months. This represents a "dramatic decline in the equilibrium rate of job growth."
• Consequences for the Fed: This shift in labor supply dynamics has "very important consequences for the Federal Reserve," as there are limitations to what the Fed can do to address a labor supply issue driven by immigration.

Notable Quotes

• "we did not have anyone collecting data in October, so we will most likely not get inflation for October, will most likely not get employment for October." - Torsten Slok
• "So there's all kinds of challenges for markets in terms of what is exactly the health of the economy, especially when it comes to the public data from the government, because we may not get the November data in a way that looks similar to what is comparable for how we normally think about the employment report." - Torsten Slok
• "the big picture when you look at across the board, also the indicators that are coming from other sources is still tells you a labor market that's actually still doing okay." - Torsten Slok
• "the economy is likely still doing fine. But the key issue here really is it may still take probably another month before we get a real look at where is the economy at the moment." - Torsten Slok
• "at this point where we sit right now, it's still is very foggy. When you think about what is actually the health of the US economy at the moment" - Torsten Slok
• "the maybe bigger risk to the economy in the coming months and quarters is tilted more towards the labor weakness side of the argument, as opposed to the higher inflation side of things." - Tom (Host, paraphrasing consensus)
• "So the key issue here to your question, Tom, it is probably not so much labor demand slowing. It's really more labor supply that's slowing." - Torsten Slok
• "And this has very important consequences for the Federal Reserve, because there's nothing the fed can do ab" - Torsten Slok (statement cut off)

Conclusion/Synthesis

The government shutdown has created significant uncertainty regarding the current state of the US economy, particularly for inflation and employment data. While official data is compromised, alternative indicators suggest the labor market remains resilient, characterized by low layoffs and steady private sector job growth. However, the underlying trend of slowing job growth is attributed primarily to a decline in labor supply, driven by reduced immigration. This shift in labor dynamics presents a key risk to the economy, with implications for Federal Reserve policy that are distinct from inflation concerns. Economists are adapting by relying more on private data sources, but a clearer picture of the economy's health is expected to emerge over the next month as data collection normalizes.