Jefferies Chief Financial Economist Aneta Markowska shares the outlook on Jerome Powell's Fed chair re-nomination, including how the event is expected to influence GDP, inflation, job growth, and markets.

Video Transcript

JULIE HYMAN: Well, as we look ahead to 2022, we're going to get some help now from Aneta Markowska. She is Jefferies Chief Financial Economist recently out with her outlook for 2022. And Aneta, let me start with interest rates, right? Because of the news that we got yesterday and the sort of repricing that we seem to be seeing in the market here, first of all, I'll get this out of the way. Do you think that having Jay Powell continue at the top of the Fed is going to have any sort of meaningful difference in terms of the path of rates here?

ANETA MARKOWSKA: No, I don't. I would agree with your earlier comment. I think this was a market clearing event that really allows investors to go back to the fundamentals and think about, OK, now that we've gotten that decision out of the way, what's next for the Fed? And I think actually there there's a very good chance, given what the data have been doing in recent weeks, that the Fed might have to accelerate the pace of tapering as soon as the December meeting.

That is our base case as of now. Clarida also open the door to this idea late last week. He was very clear that he will be watching the data very closely between now and the December meeting. And if the data continues to price on the upside, as they have in recent months, that it might make sense to actually accelerate the pace of tapering. I think the data will continue to surprise on the upside. A lot of the big data that we watch point to another very robust month for retail sales in November.

I also think employment is tracking very well for November. As of right now, we've penciled in somewhere between 8 and 850,000 jobs. So you've got not only inflation being hot, but actually just a lot of evidence that the economy is able to withstand it.

If anything, GDP is tracking very well. I think those estimates are going to be coming up. And so I think that's really what the market's starting to focus on, right? What's happening on the ground in the real economy and what does that imply for the Fed? And again, I think a very good chance that they continue to along the hawkish pivot path at the December meeting.

BRIAN SOZZI: Aneta, are you still looking for a 7% increase in fourth quarter GDP and what's driving that?

ANETA MARKOWSKA: So I think it's actually a lot of different things, consumption, first of all. We started the quarter with very strong October retail sales. It looks like November is going to be equally strong, if not better. Card spending data so far, it looks really good.

Something else that's worth noting is you following the removal of the travel ban in early November, we've seen the number of international visitors spike by 35%, right? So presumably, a lot of folks come here to shop ahead of the holidays. I think that's going to be another important factor driving retail activity and consumption.

Housing is another area that has really picked up. Housing was a drag on GDP growth, both in the second and the third quarters. It knocked up 4/10 in the third quarter.

It's on track to actually add 8/10. So you're talking about almost a full percentage point swing there, just in housing alone. And so I think just between those two areas, that's a pretty sharp acceleration in growth momentum.

JULIE HYMAN: And let's talk about the end of 2022, fast forward a little bit. You are looking at the tightest labor market since the 1950s, that's what you're projecting, and that means that we're going to see wage growth. It sounds like what you're expecting next year is this sort of goods inflation that we have been seeing is going to moderate and that wage inflation is going to pick up. Is that going to convince people to get back to work and help then loosen up the labor market a little bit?

ANETA MARKOWSKA: Yeah, I mean, I think we are starting to see that. As I mentioned, I think November employment is tracking very well and I mean, we already saw a little bit of a pick up in October. I think that momentum looks like it's continuing to build and it makes perfect sense, right? For all the reasons that we were looking for, labor supply seems to be improving a little bit.

Demand for labor is just unprecedented, right? And I think even after, there's obviously Slack in the labor market. As of right now, we estimate that there's about 4 million people that can still come back to the labor market relatively easily, but labor demand far exceeds that. There still about 10 million job openings.

Even after we absorb all those people that are currently unemployed or who have dropped out of the labor force, we're still going to end up with excess demand for labor that's likely to be unmet. So I am looking for the tightest labor market in decades. I think there's a very good chance that we go back to a 4% unemployment rate as early as January.

That's the Fed's definition of full employment by the sort of narrow measures. As far as broader measures, I think will get there by roughly the middle of the year. And I think there's a good chance that by the end of next year we see the unemployment rate dip toward 3%. And again, we haven't seen that since the '50s.

BRIAN SOZZI: There's been some talk amongst the folks that I talked to on the street, Aneta, about a potential productivity boom next year. Where do you stand on that?

ANETA MARKOWSKA: Yeah, I think that makes sense. There's been a little bit of a dip, or payback if you will, in productivity and I think that might continue into the fourth quarter as we reopen some of the more labor intensive parts of the economy, like leisure and hospitality, like health care. But then when I'm thinking about the spring and summer of next year and from then onwards, you to the extent that supply side on the manufacturing side starts to catch up to demand, I think you kind of have the mix shift going the other way again. But really, we've had robust investment since the start of the pandemic.

The lags there can be long, but there are somewhere between two and three years. So I think we could start to see that payoff in productivity data. I will say I am very constructive on CapEx for 2022. I think the one sort of logical or rational response from the business community to persistently strong demand and just chronic supply shortage is to increase capacity, is to invest in productivity enhancing technologies, certainly a rational response to a very tight labor market.

So I think we've started to see a secular improvement in productivity that frankly began before the pandemic. Again, we experience a little bit of a sort of payback effect in the last quarter, but I think that secular trend continues and I think you're going to see very robust investments through the end of next year that will just continue to support that. So yeah, I mean, at some point I think that is something that could help extend the cycle. But I don't think it's something that's going to prevent us from getting to a very tight labor market situation because those job openings are there and there's just simply not enough people to fill them.

JULIE HYMAN: And Aneta, finally, if that's going to be the rational reaction on the part of corporations, I'm curious what you see for consumer spending. Thus far, what seems to be happening, consumers feel terrible, they see higher prices, but they're spending anyway. And so I'm curious if you think that dynamic is going to persist well into next year until we start to see that inflation dynamic switch, in which case maybe consumer spending will continue to be robust.

ANETA MARKOWSKA: Yeah, so I'm much more in a camp that this is sustained demand. I actually believe this is demand led inflation for the most part. I think this narrative about supply bottlenecks is a little bit overstated.

If you look at imports, our imports of consumer products, they are up 20% since before the pandemic. So it's not that ports are processing less stuff because somehow everything's stuck and not moving, they're actually processing a lot more. The problem is the demand for consumer products is up 23% since the start of the pandemic and that gap has been accumulating for months and months and months.

So I think this is very much demand led inflation and I think it's being sustained by a combination of very healthy household balance sheets, the best balance sheets we've seen in decades, literally in our lifetime, and there's still $2.5 trillion of cash that has yet to be spent. So a lot of firepower there that will sustain demand for the foreseeable future. And then on top of that you have, again, a very robust labor market. You have wage inflation that we normally don't see until very late in the cycle.

And what's really unique is that these wage rate gains are skewed toward lower income households, which we haven't seen in two decades. If you're a leisure hospitality worker, your annualizing 12% wage inflation. So price inflation 6%, guess what? You're fine. I think, again, it's a combination of excess savings and robust wage growth that is allowing consumers to absorb these higher prices and I and I don't see that changing next year.

JULIE HYMAN: Very interesting stuff. Good to see you, Aneta. Aneta Markowska, Jefferies Chief Financial Economist. Happy Thanksgiving to you and we'll catch up with you soon.