Slow economic growth is here, market expert warns — with a silver lining

The Bureau of Labor Statistics is set to release revised jobs numbers, with speculation that the slowdown in job growth began earlier than previously reported, potentially under President Biden. John Lonsky suggests these numbers were likely not politically manipulated, but rather suffer from inaccuracies due to a declining response rate from surveyed employers, dropping from 60% to around 40% over the past decade.

This week's economic data includes the Producer Price Index and Consumer Price Index, with inflation at the consumer level believed by many to be below 3%, despite official reports. While a 50 basis point interest rate cut by the Federal Reserve would be welcomed by some, the consensus points towards a 25 basis point cut. Lonsky anticipates a period of slower economic growth, potentially leading to Fed funds rates below 3% by early 2026, and predicts eventual decreases in mortgage rates, though a significant recovery in housing awaits a 30-year mortgage yield below 5.5%.

• A major revision to US jobs numbers is expected, potentially showing a job slowdown began earlier.
• The accuracy of jobs numbers is questioned due to a significant drop in employer response rates for surveys.
• Inflation at the consumer level is perceived by many as being under 3%, despite upcoming CPI and PPI reports.
• The Federal Reserve is expected to cut interest rates by 25 basis points, with hopes for a larger 50 basis point cut.
• Housing recovery is tied to a 30-year mortgage yield falling below 5.5%, which is seen as a distant prospect.

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Jobs Numbers Revision and Accuracy Concerns [00:00]

• The Bureau of Labor Statistics will release a major revision to jobs numbers.
• Some believe the new numbers will indicate the jobs slowdown began earlier under President Biden.
• John Lonsky doesn't believe the numbers were politically manipulated.
• He suggests the issue is with the accuracy of the establishment survey.
• The survey relies on a high participation rate from contacted employers, which has declined significantly.
• About 10 years ago, 60% of surveyed employers responded; now, the response rate is closer to 40%.

"Well, you know, I don't think so. To be honest with you, Stuart, if uh they were politically manipulated, why not have lower than expected readings on payrolls? uh pop up uh say 9 to 12 months before the election so that you would get Federal Reserve rate cuts that would help assure that the economy is growing rapidly enough to boost the likelihood of Biden's being uh reelected or whoever was the Democratic Party standard bearer."

This section discusses the upcoming revision of US jobs numbers and the potential implications for the perceived timeline of economic slowdown. It also delves into the methodological challenges of the establishment survey, particularly the declining response rate of employers, which raises concerns about the accuracy of the reported employment figures.

Inflation Outlook and Consumer Perception [01:40]

• This week will bring the Producer Price Index (PPI) and Consumer Price Index (CPI) reports, providing inflation news.
• The baseline question is whether inflation at the consumer level is above or below 3%.
• Lonsky believes inflation is definitely under 3%, aligning with the everyday consumer's feeling.
• Many middle-class Americans are burdened by the elevated cost of living, regardless of official reports.

"More inflation above 3%. I would say it is definitely under 3%. That's what it feels like to the everyday consumer. I don't care what this report says. A lot of consumers, middle class Americans are currently being burdened by an elevated cost of living."

This part of the transcript focuses on the current state of inflation, contrasting official expectations with the lived experience of consumers. It highlights the sentiment that despite official figures, the cost of living remains a significant burden for many Americans.

Federal Reserve Interest Rate Decisions and Economic Growth [02:26]

• If fewer jobs are added than expected and inflation reports are benign, the question arises about a Federal Reserve rate cut.
• Lonsky would like to see a 50 basis point rate cut, but the consensus expects a 25 basis point cut.
• He anticipates a period of slower economic growth.
• It's possible that by early 2026, the Fed funds rate could be less than 3%.
• Lonsky believes there are many rate cuts in the pipeline.

"I would like to see a 50 basis point rate cut, but you know the consensus is still looking for a 25 basis point cut. I think we're entering into a period of slower economic growth and it could well be that by uh the early part of 2026 we will be perhaps looking at a Fed funds rate of less than 3%."

This segment explores the potential actions of the Federal Reserve concerning interest rates, linking them to the economic outlook. The discussion points to an expected slowdown in economic growth and suggests a future trend of decreasing interest rates.

Mortgage Rates and Housing Market Recovery [02:55]

• The question is posed whether lower mortgage rates can be expected.
• Eventually, mortgage rates have to come down.
• The current 30-year mortgage yield is around 6.35% to 6.4%.
• Housing is not expected to recover on a recurring basis until the 30-year mortgage yield is less than 5.5%.
• This scenario implies a substantially lower benchmark 10-year Treasury yield.
• This is considered a long way off, with no good news for housing yet.

"You know right now the mortgage yield perhaps has come down to about uh 6.35 6.4%. Housing is not going to recover on a recurring basis until that 30-year mortgage yield is less than 5 a.5%."

This final topic addresses the prospects for the housing market, specifically the impact of mortgage rates. It highlights the current high mortgage yields and sets a clear threshold for a sustained housing market recovery, suggesting that this improvement is not imminent.