Associated Bank Thought Leadership Podcast

WGN: We’re on with Drew Lear, senior vice president and relationship manager in Associated Bank’s Commercial Banking Group. Drew. Welcome.

Drew Lear: Stephen, Good to be here a second time and looking forward to being here in person.

WGN: Yeah, it's nice to see you in person as well. We have a lot to talk about today. One of those things is just the state of the economy and a couple of things that we use to, you know, a barometer of how things are going. One of them is the jobs report. We have a new jobs report coming this week. Talk to us a little bit about what this data might include and why we should be concerned if it's especially low number.

DL: Yes, I think it's a really hotly anticipated jobs report, as they all are. Just this one, I think, has a little bit more attention because the president has been pushing the Fed to cut rates because their mandate is maximum employment, price stability. And the last two jobs reports we got were revised down by a quarter of $1,000,000. So it does show that the economy is slowing, which is not great. I think it's going to put more pressure on the Fed from the White House, specifically that they need to start reducing rates. I think it's going to be a very telling report that shows, you know, were those two blips on the radar or is this a bigger problem? Is the labor market truly softening or were those revisions, you know, kind of one-offs?

WGN: You know, because those revisions were pretty big. And, you know, after the last jobs report came out, the president fired the head of the group that does the numbers. Talk to us a little bit about, you know, whether or not we can believe the numbers that will be coming out after that has happened.

DL: Yeah, So I've been doing this quite a long time and I've watched jobs reports every month for the better part of two decades. And I've not seen a president scrutinize a report such as this. So, I think you can believe in the numbers. Do I think they're perfect? No. But I think directionally they are in the ballpark of what the actual economy is doing. So it is kind of unprecedented for a president to fire the BLS chief because they didn't like the jobs numbers. In fact, he specifically said these were manipulated to, you know, paint a picture against me. So it's truly unprecedented. And like I said, I think we can, you know, believe in the numbers. You know, the revisions do make you think, wow, this is not that great. You know, how can we be off this much? But it's one of the biggest revisions we've ever had. So I think that's why, to your point, these Friday job numbers are incredibly important because it's going to show, are we truly softening? Was that a one-off or, you know, can we continue the economy humming along with decent job growth?

WGN: If you see a jobs report come in on with higher than expected numbers, does that tell you anything about the veracity of that report? Or what will your reaction be?

DL: If the jobs come in and it's truly gangbusters if we you know, I forget, I think they're expecting 117,000 jobs, if I remember right or in that ballpark zipcode, if it comes out to be double, triple that number, then, you know, I think you can truly paint that. You know, it was a one-off a couple the last two months that were revised down. It shows that the economy is still moving and moving along, you know, nicely and humming. But, you know, I think it's too early to really tell. I think we really need the numbers before we can, you know, paint an accurate picture.

WGN: One of the things that might be foreshadowing the jobs report is the JOLTS report—the Job Openings and Labor Turnover Survey—which the shows that there are more people looking for jobs now than there are jobs available. That's a huge departure from just a few years ago.

DL: Yeah, I think less than 24 months ago, you had, you know, two open jobs for every one person, searching for the job. And it led to a lot of inflation on the wage front because companies were having to up wages, benefits. You know, they had the you know, employees had the upper hand when it came to return return to office. They were, you know, with 2 to 1 job opening to people looking for one. You know, people could say, we don't want to come into the office. We want remote work. Companies were catering to them, Wages were rising dramatically.

So it's quite a departure now that you know that there are more people looking for jobs that are available. I think what we're hearing from our customers and what I'm reading is that, you know, people are freezing hiring, you know, companies specifically in anticipation of tariffs, continued price increases on the inflationary front. It's not surprising that the job openings are kind of coming back to parity of 1 to 1 and or, you know, below 1 to 1.

WGN: Yeah, you mentioned inflation. That was the other barometer of the economy that we had a report on recently. Inflation, core inflation rose to 2.9% in July. That's the highest since February. The report said that the tariffs are impacting some of the prices that people are paying. The Fed wants that number to be more at 2%, but they've still signaled that perhaps a rate cut is still coming in September.

DL: Yeah, I think going back to my earlier point, you know, the Fed has two mandates, price stability, which is the PCI, they look at core prices and then, you know, maintain full employment. So you can argue at 4.2 unemployment percent right now; we are at full employment. We're getting closer to that 2% mark. But, you know, to your point, that's the target is 2%. And so even though inflation's been coming down, it's still elevated. It is a bit concerning and contradictory now for the Fed when they look at cutting rates. They did a 50-basis-point cut last year and in my opinion, that bought them time rather than doing a 25 basis point. This was a bit concerning.

If you look at the numbers, you know, there is some tariffs baked into that, but the bulk of the tariffs hadn't really taken place. They started taking place on August 7th, which is after this report came out. We just got through earnings season. And if somebody follows that closely, you know, Walmart, Dick's, Kohl's, Macy's, they've all said we put tariffs in place in the second quarter. But now that the tariffs are fully in place, it's going to lead to even further inflationary pressures on our pricing. They don't have the margins as retailers to eat the costs that have happened. So I think, you know, it puts the Fed in quite a predicament. You know, the futures are pricing in a 90%, 25 basis point rate cut, which I think they will do. But now, if you've got employment still hovering around 4.2%, which is for all intents and purposes, maximum employment, but inflation going up, it's going to put them in a really tough spot to cut rates by more than 25 basis points.

WGN: One of those retailers, Macy's, says that in addition to having to raise prices, consumers have already been pulling back on purchases. That seems concerning.

DL: It does seem concerning. And you're not only seeing in the lower-income cohort, you know, you're starting to see it move upwards. You know, the core middle class, which is defined as $50,000-$150,000-ish. And in incomes, you know, even then, you know, even the $150,000 to $250,000, they're starting to move downward from the luxury, you know, ultra-whatever down to potentially shopping at Walmart and dollar stores. So you've even got higher-income cohorts that are starting to feel the pinch and moving downward. You know, McDonald's came out the other day and said that people are starting to buy more value menus off the higher priced menu. Again, Walmart warned the other day that, again, their core consumer is pulling back, so it is a bit concerning.

WGN: You brought up McDonald's. It might seem pedantic, but when McDonald's starts talking about bringing back these $5 and $8 value meals to drive business, that tells you something about the consumer, doesn't it?

DL: It does. You know, because they've been known for, you know, you know, quick service, lower cost. But, you know, there was a story out last year that a McDonald's value menu in Connecticut got up to like $18, $19. So you've got a family of four or five, that's not really quick, fast and cheap eating.

WGN: McDonald's says today they're lowering the one—I think it's the Big Mac or maybe it's the Quarter Pounder value meal—to 8 bucks. So I think they heard that message loud and clear.

DL: I think they did, you know, store traffic was down. I think it was last quarter, the quarter before that, same-store sales were declining. And, you know, to your point, I think a lot of consumers are really starting to feel tapped out. You know, the the GDP print that came in higher than expected, a bit surprising, but I think some of that was the you know, the imports that were pulled in that, you know, people wanted to get out in front of before the tariffs really took place. I mean, that was specifically called out in one of the readings. And then consumer spending held up. But I do truthfully think that the consumer is getting tapped. If you looked at the pandemic stimulus that was built up, those funds have all but depleted; the amount of folks taking hardship withdrawals of 401(k)s is up, people tapping home equity lines to pay off high interest credit cards, delinquency rates on the credit and auto side are rising. So I do think that it is a really precarious situation for all parties involved. And I think that, you know, we're going to be really watching the jobs number to see, you know, what the true health of the economy really is.

WGN: Yeah. My next question was going to be about GDP. It was a surprising number, 3.3. What do you think was going on there?

DS: You know, I think based on what I read, you know, you got some really good numbers on the services side. But if you if you peel back, the imports are subtracted from GDP, and those declined in the second quarter and that added five percentage points to this number. You know, cost of gas is going down. But if you look at it, you know, all holistically, it was a lot driven by, you know, the imports coming and people trying to get in front of the inventory before these tariffs took place on August 7th. So it was a lot of pre buying and things like that. So, you know, it was a bit of a surprise. Every economist that I read was a bit shocked by the growth. So it does show some underlying strength in the economy. But again, you know, how much more of that can we see, given these increased pricings and some of the tapped consumers that you're starting to see over the last earnings release for Q2?

WGN: Well, based on all of this, what does your gut tell you after looking at the data about where we're headed in the next 6 to 12 months?

DL: I think, one, employment's still low. I think a lot of folks and a lot of companies that I'm talking to are still trying to, you know, ascertain what is going to happen. And we've had a lot of stops and starts on the tariffs front. We've had a consumer that is, by all intents and purposes, still humming along nicely. You know, consumer spending is nice. Retail sales are up. Macy's had a good quarter today. So I think there is some underlying—I don't want to say momentum, but I think the economy is going to hum along until we really feel what these tariffs are going to do.

I think Q3 numbers from the big retailers and the jobs numbers are going to be all the more important, especially on the inflationary number side. So I think I'm a bit cautious. I think consumers are starting to show signs of weakness and it's moving all the way up into the higher income echelons. So, you know, for me and what we're seeing now, I think, you know, a lot of banks are probably being a little bit more cautious on the next couple of quarters.

WGN: So talk to us a little bit about the Fed and interest rates. What is your prediction of where interest rates are going? How much should we be paying attention to all of the news that's involving the Fed these days about a Fed governor being replaced, maybe the Fed chairman being replaced?

DL: Yeah, I think I think it's something we need to pay a lot of attention to, right? The Fed was implemented to be fully independent and, you know, not be influenced by presidential and or political reasons. And so I think, you know, my personal view is that Powell is going to probably keep rates a little bit higher for longer. I think they do move at a 25 basis point in September. Wait and digest what the data says over the next couple of quarters.

But if we look back to the inflationary environment—2020-2022—which he called transitory; he was pretty much wrong and he kept rates low, allow inflation 8%-9%, thought it was going to move out of the economy fairly quickly. And so I think this time he doesn't want to be wrong again. You couple that with some of the political pressure he's getting to cut rates and all that, I think is probably going to lead to an era of higher rates for longer, especially with some of this inflationary and GDP data that's coming out.

WGN: How would your Chicago-area clients, Midwestern clients, feel about that?

DL: I think they're all prepping for higher rates for longer. I think they're still trying to digest what, you know, the actual tariff number is going to shake out and be. But, you know, I think a lot of them are putting plans, you know, not on hold necessarily, but they're potentially pulling back on a little bit of CapEx investment, hiring, maybe M&A activity. You know, financing markets are still are still elevated, so raising money right now is still prohibitive. So I think no one's going to love higher rates for longer. It puts a stress on debt service levels, you know, stresses on, you know, how you can hire, what you can pay. So I think a lot of companies are really hoping that, you know, rates do start to come down. And so, again, that's that's going to be dependent on the data. And so, again, I think our personal viewpoint around the bank is that rates are probably going to stay elevated for a little longer.

WGN: And these companies are doing budgets for next year already. Are you hearing anything about them cutting back on positions, jobs or…

DL: What we've seen is a lot of hiring freezes. So, you know, companies that may have jobs that are maybe out there, they're not filling. You have seen some layoffs increase, you know, people trying to protect margins, whether it's because of tariffs and or just potential slowing to the consumer. You know, the return to office is also something we haven't talked about that I think is going to lead to more layoffs, right? You know, people have gotten used to not being in the office. But, you know, most companies are now saying you're going to be in the office 3 to 5 days a week. New York is already back to pre-pandemic office levels. So I think that's going to lead to a lot of folks maybe voluntarily leaving, and/or if they're forced to relocate, you know, taking packages and exiting. So I think those numbers could come up depending on if we stick to these strict return-to-office mandates.

WGN: You know, given the numbers that we're seeing in the jobs market, that might not be such a good idea for some people.

DL: I completely agree with you. To your point about JOLTS with the open jobs to people searching, it does make it a much more competitive environment. And so you have less less negotiating power, whether it's wages, where you want to work, if you want remote work or hybrid. So it's like I said, I'm not a super bearish individual, but I do think there's a lot of cracks in the broader economy from a lot of different fronts that just make me a little more cautious. And that's kind of consistent with what we're hearing from customers.

WGN: All right, Drew, great conversation. How can people get ahold of you and have a one-on-one?

DL: Yeah. So my email’s just Drew.Lear@AssociatedBank.com. Shoot me an email. I love talking markets. if you have any questions or any updates on the financing markets, happy to provide.