We could live in a world of 3% growth and 5% unemployment – Jefferies’ David Zervos

[Mmassive layoffs of people global 2020 recession]
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David Zervos, chief market strategist at Jefferies, warned of a potential economic future where the U.S. could experience robust growth with persistently higher unemployment rates.

“I think the Fed has to really be thinking about that scenario,” Zervos said in an interview with CNBC, highlighting the possibility of “a world of +3% growth with 5% unemployment.”

The strategist pointed to significant job data revisions as evidence the Federal Reserve had been operating with flawed information.

“We revised away almost a million and a half jobs over the last 18 months,” Zervos explained. “The Fed was flying blind, really flying blind for many, many meetings,” making decisions based on job reports that were significantly overstated compared to reality.

Zervos attributed this economic dynamic to technological advances, including early implementation of artificial intelligence.

“You can feel it everywhere you go,” he said regarding AI’s impact, while noting headlines from major companies like UPS (UPS [https://seekingalpha.com/symbol/UPS]) and Amazon (AMZN [https://seekingalpha.com/symbol/AMZN]) suggesting an ability to grow with fewer workers.

This emerging pattern mirrors aspects of the late 1990s technology boom, but with a crucial difference: “This time around, there are a lot less jobs to be created.”

On inflation concerns, Zervos emphasized the importance of long-term expectations rather than short-term fluctuations.

“The TIPS (TIP [https://seekingalpha.com/symbol/TIP]) market is telling you [that] basically, long term expectations have not budged. Even when we were at 9% inflation, they didn’t budge the long term,” he said.

The combination of technology-driven growth with lower employment needs represents what Zervos called “a real risk” for economic policymakers.

He suggested this scenario might require a more accommodative monetary policy approach, advocating for interest rates closer to “neutral,” which he estimated at “probably closer to 2.25-2.5 – where we were pre-COVID.”

MORE ON THE U.S. ECONOMY:

* Consumer confidence slips less than expected in October [https://seekingalpha.com/news/4509364-consumer-confidence-slips-less-than-expected-in-october]
* Richmond Fed Manufacturing Index turns less negative in October [https://seekingalpha.com/news/4509340-richmond-fed-manufacturing-index-turns-less-negative-in-october]
* FHFA house price index surprises higher in August [https://seekingalpha.com/news/4509327-fhfa-house-price-index-surprises-higher-in-august]
* Tuesday's Economic Calendar [https://seekingalpha.com/news/4508712-tuesdays-economic-calendar]
* Dallas Fed Manufacturing Index comes in slightly less negative in October [https://seekingalpha.com/news/4508765-dallas-fed-manufacturing-index-comes-in-slightly-less-negative-in-october]