Shutdowns, Signals & Jolts

Mary MacNamara and Jose Torres break down the rising odds of a U.S. government shutdown, what the JOLTS report reveals about worker confidence, and how missing data could leave markets flying blind.

Summary – Cents of Security Podcasts Ep. 118

Mary MacNamara

Hello everybody and welcome to the Cents of Security Podcast. I’m Mary MacNamara and I welcome you on this fine September day. And today we are here to discuss economics with our favorite Senior Economist, Jose Torres. Hi Jose. How are you?

Jose Torres

Hi, Mary. Doing great. We’re matching today, which is quite interesting. Great to be here as usual in this weekly series.

Mary MacNamara

I’m so glad we’re coordinating. Why don’t you tell us what’s going on? There’s government shutdown, there’s something called a jolt report. There’s also Case-Shiller coming up. So, tell us what it’s all about.

Jose Torres

Government shutdown odds have been rising. During the weekend. On Saturday, we saw an hour forecast trader, marketplace odds rising up to 81%. Today on Monday, September 29th, probabilities have shifted from the high sixties to the high seventies right now standing at 76%. The Democrats and the Republicans are disagreeing on the path forward for funding.

The Democrats want cuts to Medicaid to be paired back as well as they want to continue the health insurance subsidies that are set to expire soon. The Republicans don’t want to offer any concessions to the Democrats, and for that reason, there’s a high degree, a high elevated chance that we’ll be in a government shutdown in terms of how long it’ll be.

Hopefully it’s a short one because the longer it is, the more disruptive it is to markets and the economy. As far as economic impact, it’s quite obvious folks are not going to receive a lot of checks. Folks are not going to be receiving their compensation from work. If they work for the government.

A lot of folks are going to be furloughed. They essentially won’t have a job. Those folks won’t be, have, won’t offer the economy consumer spending power. And because of the loss of income the Republicans, they’ve been wanting to reduce federal government staffing. So there’s talk that the GOP might be looking to permanently eliminate some workers from certain.

Divisions in the federal government. We have to wait and see. But as of right now, it looks like the high degree of chance, a high degree of likelihood that that we’ll be in a shutdown. But these things tend to go down to the wire. A lot of times a deal is made in the last hour, in the last two hours, so that, that’s really the history of these things.

Mary MacNamara

All right so let’s talk about tomorrow a little bit. We got something called JOLT. Why didn’t you explain to me what that means?

Jose Torres

Yeah, so job openings and labor turnover survey, and the most important number there is job openings. So, if you have an economy with a high level of job openings, that would indicate that employers have a lot of for higher signs out there. They’re looking for labor. So, if that number is increasing, the demand for labor is heating up, it’s indicative of a growing and accelerating economy.

However, if that number is declining less for higher signs, that can be a sign that labor demand overall is weakening. And employers want to, reduce, either employers are fine with the staffing that they have at the moment. And aren’t necessarily too aggressive in terms of adding new workers.

Now, an interesting aspect about the government shutdown in Jolts is that today at around noon, September 29th, we received information from the Department of Labor saying that if there is a shutdown that they won’t be releasing. Statistics. So top of mind, while Jolt is certainly important, the main event for this week happens to be Jobs Friday, non-farm payrolls.

So that number is not going to come out if we are in a funding lapse. Also, thursday Weekly Unemployment Claims that number will also not be released if we’re in a shutdown. Those are important statistics because they inform the pace of the Federal Reserve’s path on monetary policy. Right now, the path is lower according to our prediction market and its forecast.

Investors are expecting rate cuts. So, without that data, investors are going to be flying blind for. Hopefully it’ll be a short period of time, these things could drag on longer, could be 10 days, 15 days or so. I was on with Bloomberg this morning and they asked me what is long, what is a long shutdown?

And I told them, five days or lengthier. And I would consider that long.

Mary MacNamara

So there’s something called quick rate, which is often seen as a measure of worker confidence. Is that important? What does it tell us about the job market?

Jose Torres

Absolutely. If you have a high quit rate. Then that pretty much tells you that workers feel confident that they can replace their employers elsewhere. But if you have a low quits rate, that means that employees are a little they’re more hesitant. They’re not as confident about leaving their jobs and finding a new job.

For years, the job changing has rewarded workers from a compensation perspective, so if you look at a DP releases these numbers, the changes in compensation between job stayers and job changers and the wage gains for job changers tend to be a lot higher, of course, because workers are going out there.

They’re essentially overall. Generally speaking, taken on more risk by leaving their current employer and going somewhere else against, again, generally speaking. So because of that risk, there’s somewhat of a premium tied to that, and that’s why in many cases compensation is higher when folks change their jobs than when they stay.

So of course, job quits is a pivotal statistic telling us, how confident our current workers that they can find another employer somewhere else.

Mary MacNamara

What about something like voluntary quitting? So, somebody decides to quit, do they track that as well?

Jose Torres

Yeah, so voluntary separations, that would be a quick they, one thing that they also track is a hiring rate in that report, and that’s essentially the speed at which employers are hiring new workers, and that’s been very low. We’ve been in a low hiring, a low firing kind of environment where employers have been stabilizing their headcounts and have just been progressing with the number of workers that they have, rather than trimming labor significantly or adding materially.

So, we’ve had a flat labor market that’s been the characteristic. For some time and then throw on top. Now you have immigration restriction, restrictiveness from the Trump administration. That also changes, how we analyze the labor market and the composition of the labor market.

Because you’re in an environment of low hiring, but you also don’t have buoyant supply of workers. You don’t have a lot, a big pool of people that you can go and hire from. In the previous administration, you had, a lot of new immigrants that were willing to work and join, firms and boost productivity, but now you have a lot less of those.

Labor pool has shrunk, so you have labor demand questionable, but labor supply for sure is down significantly.

Mary MacNamara

So just looking at a couple other things coming up possibly tomorrow or maybe not is there something, the House price index and also the Case-Shiller home price month over month and year over year. So how do those differ and what is the Case-Shiller Home Price?

Jose Torres Yeah, so the S&P Case-Shiller that’s an economist who essentially branded that index with his methodology. And then the other house price index, that’s the FHFA, the Federal Housing Finance Agency might be authority, forgive me folks. But essentially one is a government source, and the other one is a private sector source.

So the the FHFA and the S&P Case-Shiller home pricing disease. They compete in the same way that we have ADP employment, that’s a private sector organization letting you know what hiring levels were, and then you have the BLS, the government telling you what hiring was. So in the new age of data, in the last, I want to say 20 years or so. We’ve had this bifurcation in data sources when you have a government data source, but also a private sector data source. Another example is job openings with indeed.

Mary MacNamara

I have heard about that.

Jose Torres

Yeah. They have their own job openings so that, people look at the government’s numbers, but they also look at Indeed’s retail sales, now we have CNBC, they’re doing a retail sales report.

Ahead of the government’s report. So that’s what’s going to happen with investors. If we have a government shutdown, they’re going to be in the dark folks because they won’t have the information that they need to inform their path of rate cuts going forward. Right now, our prediction market expects with a high degree of likelihood that the Fed will cut in October, but December is more of a coin flip.

And data that was coming out this Friday. And you know what, Mary? If we have the CPI around the 15th or the 16th of a month, if we’re still in a shutdown by then we’re not going to get inflation figures either. So, you know that can really cloud, the outlook if a longer shutdown more than five days.

I think that’ll be bad for stocks less than five days. I don’t think stocks will care that much. More than five days, I think stocks will start to go down because the economic impacts will be more evident. But also, treasuries will, rally rates will fall because of slowdown worries. So that, that’s what I’m expecting from a market response perspective.

Mary MacNamara

But in recent times, it hasn’t ever gone beyond a few days.

Jose Torres In 2011 we went we went a little longer. I think we went 15 days or so.

Mary MacNamara

Wow. Okay.

Jose Torres

Yeah. And that was particularly disruptive to markets.

Mary MacNamara

On another note with the private and public data, so in the cases of CNBC, the Case-Schiller and also Indeed, can, people find that publicly or do they have to pay for it?

Jose Torres

Most of it is, most of it is public. At least the the overall numbers. But then if you want to go under the hood and you want to make charts and you want to look at historical perspectives, then that sometimes you end up having to pay for

Mary MacNamara

Is there anything else you want to add to this week? It’s somber, but hopefully they’ll figure it out. Is there anything you want to add, Jose?

Jose Torres

Yeah. No, I think if we don’t have a government shutdown. I think that the numbers on Friday are really going to influence market moves for market bulls. They’re going to be looking for cool numbers that support rate cut, enthusiasm going forward, but not ice-cold numbers that threaten the buoyancy of corporate earnings.

So I think that’s what bulls are going to be looking for. Bears are going to be looking for a number. That’s way too hot. That’s going to derail rate, cut optimism or numbers that are ice cold. That’s going to weigh, that’s going to spark economic slowdown angst. So two of a number, you’re going to have equities, you down rates go up.

If you have too cool, too cold, ice, cold of a number, you’re going to have rates and stocks go down. And if you have a number that’s just right. So cool. Not cold, cool, neutral, cool kind of number. Yeah. Goldilocks number that’ll lead to steady rates and rising stocks.

If we’re looking a number that’s too cold. Can’t have that. That’ll send stocks down and rates down number that’s too hot, too high. That’ll send stocks down and rates up. But a number that’s neutral. Cool. Where folks aren’t worried about the economic cycle. But at the same time, not necessarily worried about the fed’s rate cut prospects, then that’ll lead to rising stocks and steady interest rates.

Mary MacNamara

Thank you so much, Jose. We always welcome your insights, and we look forward to next week.

Jose Torres

Next Monday, and we’re going to be talking about, what happened with the government shutdown. Hopefully we’ll have a lot of data to talk about. If not, the markets will still be open so we can talk about trades Forecast Trader will be open. We can talk about Forecast Trader. But yeah, we’ll definitely we’ll definitely find themes

Mary MacNamara

So everybody, thank you once again for joining us and make sure you like us, send us a review and we’re so happy you could join us today. Thank you, Jose.

Jose Torres

Thank you, Mary. Pleasure joining everyone.