Revisions, Revisions, Revisions

Mark Zandi hosts his co-hosts Marissa DiNatale, Chris Drunis, and guest Dante D'Antonio to analyze a busy week of economic data. The centerpiece is the September jobs report, which showed only 29,000 jobs added with significant downward revisions to prior months totaling 60,000. The three-month average job growth stands at approximately 50,000 per month, which the team identifies as the underlying trend rate. Wage growth continues to decelerate, with year-over-year gains now at 3%—below inflation levels and the weakest since late 2019. This deceleration suggests the labor market still has slack despite a 4.2% unemployment rate.

The team also reviews GDP revisions that substantially raised growth estimates. Q2 GDP was revised upward to 2.2% annualized (from 2%), and Q1 was revised to 2.5% (from 1.5%). These benchmark revisions, which incorporated data back to 2021, show consumer spending and investment—particularly in data centers—were stronger than initially reported. Private domestic spending grew at 4.6% annualized in Q2. However, this strong GDP growth contrasts sharply with weak job creation, implying significant productivity improvements.

The hosts debate whether AI is driving these productivity gains. They identify evidence of AI's labor market impact: data center construction adding jobs (positive) while white-collar jobs in finance, professional services, and information technology decline (negative), resulting in near-zero net employment change in non-healthcare sectors. Chris Drunis suggests AI is more about firms pulling back on hiring and waiting to see rather than directly replacing workers.

Inflation data also improved, with the PCE deflator revised downward through methodological changes in how financial services are measured. Headline PCE stands at 3.4% and core PCE at exactly 3%, still above the Fed's 2% target but moving in the right direction. The team notes consumer spending remains resilient despite high inflation and interest rates, though real disposable personal income growth has stalled at zero.

They discuss labor market dynamics including a low job openings-to-unemployed ratio of 1:1 (compared to 2:1 during the pandemic), indicating difficulty finding employment. The Conference Board's labor market differential fell to 1.7%, its lowest in over a decade, reflecting sharply weakened consumer sentiment. Notably, quit rates remain depressed, particularly in white-collar sectors vulnerable to AI disruption, suggesting workers are fearful of job loss and reluctant to switch employers.

Regarding Fed policy, market expectations shifted decisively toward a pause at the October meeting based on weak employment and contained inflation data. December rate hikes remain 67% probable but declined from prior expectations. Bond yields initially fell but then recovered, with the 10-year at 5.25%, suggesting bond investors remain concerned about inflation, deficits, debt sustainability, and geopolitical risks rather than being convinced by stronger growth narratives.