So where is the jobs growth? I think it tends to be in the middle and smaller companies that had a tough time hiring. This is a very tight labor market, obviously, right? After COVID and after losing so many people out of the labor force, it remains tight. So it's a weird one, in that sense.

- Matt, does this become self-fulfilling in terms of just layoffs? So if you're a company and you see Twitter laying people off, Amazon freezing hiring, Qualcomm freezing hiring, does that just cause more hiring freezes and more layoffs?

MATTHEW LUZZETTI: I don't think so. I think we should be cautious about overinterpreting, you know, what's happening with big companies. We tend to think of the equity market as not representing the US economy. And I would especially say that, I think, the tech sector does not represent the US economy.

So when we look at the JOLTS data earlier this week, job separations actually fell. When we look at initial jobless claims, they're very low, historically low levels. We're seeing very robust job gains in terms of 260,00 on month per average. The last time we were at this unemployment rate, we were talking about 125,000 150,000 job gains.

So the context is really important here. We're still adding a lot of jobs. Labor separations remain very low. Wage growth up 0.4%, up 4.7% year on year. It's a very tight labor market. And I wouldn't overemphasize what's happening within the tech sector and extrapolate that to the broader economy at the moment.

- Lakshman, it seems that the Fed is comfortable with taking its terminal rate, the rate that it looks to end some of its policy pathway at to end that higher. 4.75%, 5% is what we've heard from Goldman earlier this week. What does the unemployment rate look like by the time we actually get there?

LAKSHMAN ACHUTHAN: Well, I mean, you're in four handles. And the hope is that you stop there, you know, but you can't control the cycle that much. I think that's the risk here. And that's the knife's edge that Powell's kind of navigating. There are precedents for what's happening now.

We've had high inflationary periods, where we've had recessions. And the Fed has been hiking and being part of that process. But jobs growth didn't fall until well after the recession took hold. The real extreme example is '73, '75. You had a recession begin high inflation-- so high nominal numbers. The nominal headline numbers looked pretty good on revenues and things like that. But jobs growth didn't go negative until eight months after the recession actually took hold.

And again, in 1980, same kind of thing happened. The lag there was shorter. It was a couple of months after the recession took hold. So this can happen. It's not a rule that you have to have jobs growth before a recession takes-- go negative before a recession takes hold. And then also, a lot of this stuff gets revised. And we have to keep that in mind. It's hard to know where you are.

- Yeah, that's always a good-- a good footnote here to think about, caveat to think about when we're looking at these numbers. So Matt, that brings up the idea then of what this time will look like, where we've talked about these analogs other times. And we continue to see these job gains month after month after month. How long does that continue? I think I saw in a note, maybe it was even your note-- I've read so many notes over the past few days-- that once it turns, it turns quickly, in terms of the job market. When do you expect that to happen? And is that what it's going to look like?

MATTHEW LUZZETTI: Yeah. So I think, you know, we have a recession call for next year. For a while, we've had that call. We expect it to happen around the middle of next year. We have the unemployment rate rising to 5 and 1/2% by the end of next year.

And a lot of the questions that we get are pushback is, well, look at the economy today. Look at what the labor market is doing today. You know, how is it that we can get from here to there in that short of a period of time?

I think what we should have in mind is that what happens in the unemployment rate in recessions are typically very nonlinear. So the unemployment rate doesn't just rise by 5/10 and then stop, historically. Typically, what happens is anytime you get a 5/10 rise in the unemployment rate, a recession happens. And the actual eventual rise is much larger, 1 and 1/2, 2 percentage points, 3 percentage points.

And so that's what we have in mind from the context of our view. And it's predicated on the idea that wage growth is too strong. The labor market is too tight. Inflation is too high-- basically, everything we've heard from Chair Powell this week. And that can't persist for too long-- that they need to tighten monetary policy in order to make sure that that is not the labor market that we see at the end of next year.

- Well, Matt, what's the probability we do get another 75-basis point hike from the Fed?

MATTHEW LUZZETTI: So it's our call that we are there in December again.

- You can have a contrarian call, right?

MATTHEW LUZZETTI: It is a contrarian call. And the message that we got out of the Fed this week was, you should take down your probabilities of that happening. You know, they are saying it's not just based on what we see in the inflation data and labor market data. We are also taking into account the cumulative tightening we've taken so far, the lagged effects of monetary policy.

But at the same time, I think that there's this discordance between saying we need to get to a higher rate, but, yeah, we're going to slow the pace to get there. And I think if you don't see slowing in the labor market, if you don't see slowing in the inflation data between now and then-- we have another jobs report. We'll have two more CPI reports. I think there's a strong case that they should go by 75 again in December.

- And so perhaps we should be moving away from this word pivot, but perhaps a pause more apt at this point in the conversation. And so, Lakshman, when do we see that timeline for a potential pause? And what are some of the factors that the Fed would really have to take into consideration and see before that takes place?

LAKSHMAN ACHUTHAN: Well, at the beginning of the year, we were on the same view that there's going to be a recession. They're going to push the rates up pretty high because of catching up on inflation. And so when do they stop? It's when the recession really bites. So you'll have the big spike in the unemployment rate. Or the other reason they might stop is if something breaks, which we don't know what it is, right? You never know.

- What are the-- what are the contenders? What does something breaking--

- Give me three things, Lakshman.

[LAUGHTER]

- No, seriously, what does something break-- what does that look like? What's an example of what that looks like?

LAKSHMAN ACHUTHAN: Look, I mean, we were just talking about currencies a second ago, and you saw some pretty quick reaction with the dollar index. And it was only a month or so ago that you were seeing a couple of percentage point moves in currencies. That's not normal. I'm not sure if that's something breaking, but that's not typical. And we just don't know exactly. We know the banks seem to be well capitalized, right? So we're not-- the last thing we were worried about probably won't happen. It's going to be the thing you're not worrying about.

And I don't-- I actually can't predict what that is. The things that are on my radar screen-- because I hear as people come around to our view, which is, yeah, there's going to be a recession, OK? And everything's telegraphing this. But it will be mild because the banks are OK, and the balance sheets are OK, and XYZ reasons.

I would say that if the terminal rate's higher, this is all with long and variable lags, the impact on the economy, that argues for it being more severe because the fact that there's going to be a recession is not predicated on the next move that the Fed does.

And the second thing is, to your point also about the global aspect of things, if you look around the world, things are not good, right? Europe is in recession. China-- we look at business cycles in China, actually, right? So the last time China had a recession was in the late '80s, which is when, coincidentally, Tiananmen Square occurred. And now the forward-looking data on China, because of a whole host of issues, is as worse-- worse than it was then.

So that's like you're talking about the potential of even a recession in China, which doesn't really happen. They have different controls on their economy. That's arguing maybe for a more severe or prolonged downturn.

- Matt, how severe do you think of a recession we could get next year? So we have a more than 2-percentage-point rise in the unemployment rate by the end of next year. We have peak-to-trough GDP falling by more than 1%. It looks a lot like the 1990s-type recession. And I think there's kind of varying forces there.

You know, we think the Fed will be constrained. Inflation is high, so they can't cut rates as much. Fiscal policy, as we get past the midterm elections, I think is unlikely to be proactive in terms of easing. And so those two things would certainly argue for deeper and more protracted as well as the global picture just mentioned, which certainly doesn't add a lot of confidence about the depth or kind of duration of the recession.

- I told the team here I feel smarter after this segment. Indeed I do. Thank you, both, for--

- Or sadder, like more bummed out.

- Sadder but smarter.

LAKSHMAN ACHUTHAN: I say it every time. We've survived 47, 48 of these. So we'll survive this.

- Very reassuring. Time for a drink. Deutsche Bank Securities Matthew Luzzetti and Economic Cycle Research Institute Cofounder Lakshman Achuthan. Good to see you. Appreciate it.