2025 Q3 - Ken Entenmann

Welcome to Quarterly Market Insights, a special series part of CenterState CEO's podcast Talk CNY, presented by NBT Bank. This quarterly series will provide a data-driven economic analysis and how it could impact you and your business. Welcome back to Quarterly Market Insights. Ken, great to have you here. Looking forward to our conversation, we've got a lot to talk about in short session, and let's dive right in. I know we wanted to start off talking about some of the jobs numbers that we've been seeing recently and what that looks like potentially for impacts on the market.

Yeah, so I think the labor market is softening certainly as it relates to the unemployment numbers where we were running post-COVID at payroll, increases of 200,000 started softening and we were expecting around 75,000 we got in the twenties. So it looks like new payrolls are decreasing or softening, if you would. Hard to tell some of the vagaries of the way the statistics are calculated, but it's clearly softening. So that's a concern for the Federal Reserve. Initial claims today were a little bit more than expected, so people initially filing for unemployment came in around 270 versus 238, so it's pretty clear that the employment market is softening. I do not think because we haven't experienced any material layoffs that I think this is really, we're getting back to a point where we're normalizing. I know it's a long time ago, but COVID just kind of blew up the statistics and there's still a lot of noise, and I think we're starting to normalize.

I do not think that we're on the brink of a recession. I think the economy is still in pretty good shape. I think the employment market is softening. Part of that is also AI and kind of productivity kind of filtering in. But until I see really big layoff announcements, and I don't see that happening, I think this is kind of a readjustment, but clearly it's softening. Why is that important? Is the Fed has, the Federal Reserve Bank has two mandates. One is to maximize employment, the other is to maintain a stable dollar or control inflation. The inflation data we got just recently this week, we got producer prices, which was much weaker than expected, which was a surprise because we would expect any kind of tariff pricing to kind of pass through producer prices and then filter its way into consumer. So the producer prices were weaker.

The consumer prices came in pretty much as expected, and consumer prices core, which backs out energy and food, came in at 0.1%. So that 3.1%, it's not accelerating materially, which is good news, but it's still well above the 2% target of the Fed. So I think it puts the Fed in between a stuck between a rock and a hard place because you have a softening labor market, which is one part of their mandate, and they have a kind of sticky inflation environment. But the market has clearly concluded that the Fed is now going to embark on some rate cuts. So we've been talking about that for well over a year, and it is, according to the trading markets, a hundred percent probability that the Federal Reserve will cut interest rates at least 25 basis points or a quarter point. And given the inflation data combined with the last employment, there's talk about maybe even a half a point cut or a 50 basis point cut.

So I think we're starting to embark on a rate-cutting cycle, which the equity markets have been desperately calling for. I guess my word of caution is, while I certainly agree, the Fed has a green light to cut interest rates, I think you need to manage your expectations on interest rates. I don't think, and what I tell people is we don't want to go back to 0% interest rates because when we had 0% interest rates, it was because we had a major financial crisis and a horrible pandemic.

Not exactly something we would hope for. And so yet there seems to be this idea that interest rates are going to go down precipitously. Mortgage rates, in particular, where the housing market, we've talked a lot about that, and certainly mortgage rates have come down six and a half-ish from up in the high sixes and sevens. I don't know that we're going to go back to 3% mortgages, and I don't know particularly on the long end of the interest rate curve that I think that's going to remain a little bit stickier. Even if the Fed aggressively cuts short-term rates because of the inflation story and because of the debt and deficits, we're really not making any serious inroads on that, and that might impact long-term rates. So yes, we think interest rates are going to be cut, manage your expectations. They may not come down as much as people are hoping for.

Let's spend a little time on that because I think sometimes it can be confusing for folks that the federal interest rate that the Fed sets is not necessarily directly correlated with what you're going to get from your mortgage because those are more tied to the 10-year treasury, right?

Correct.

So, typically, you might see those flow together, but they don't have to.

That's correct.

So we look at the federal funds rate, which is the rate that the Fed when they announced their cutting rates, they're announcing a cut in the federal funds rate, which is essentially an overnight lending rate that banks use to trade their surplus capital. So it's overnight. That's as short as you get, right? And it typically has an immediate impact on short-term investments, say CDs or deposit accounts, things like that. But the longer you go out and maturity, the more inflation becomes a factor and the more the supply of debt becomes a factor. So even if the Fed is cutting rates, we have a pretty challenging environment when it comes to federal debt and deficits, not only here in the United States, but around the world.

So that massive supply, if there's more debt that has to be absorbed, investors demand a higher rate. And then similarly, if inflation's going to remain sticky and at 3.1%, that's not horrible, but it's higher than the 2%.But at 3%, if the markets anticipate that that long inflation rate is going to be stickier, while that has a much bigger impact on longer-term maturities and short-term maturities. So you're likely in a situation while rates will come down probably across the board, they'll probably come down more in the shorter maturities and the longer maturity has some other factors other than just the Federal Reserve Bank. But what's important is from an economy, for businesses, most of our lending and borrowing occurs on the longer-term security. So if you think of your typical car loan, they used to be, we would say two to three years, now they're being extended out to 7, 6, 7, 8 years because the price of the car is so expensive. If you think of your typical business loan, they're typically in the five to 10-year maturity. And then if you think of mortgages, it's typically a 15 or a 30-year mortgage. So the things that the economy works on, those longer term rates, and they're more important to the pricing of that, the majority of the borrowing that goes in the economy. So while the headline is the Federal Reserve, we really need to think about the longer term rates and the impact on that.

And part of that is when the investors are looking at it or looking at taking on that debt, they have to consider that rate of inflation and what that does year over year to those dollars. And they have to bake that into the return they're getting.

Absolutely, a dollar today is not going to have the same purchasing power as a dollar 10 years from now. So you have to calculate that in. And obviously the higher inflation, the more you discount that and meaning lower price, higher yield. So it's a challenge, and we're forecasting interest rates, but it's more of a, it's not that it's a horrible situation, but it's stickier than what the Fed would like.

And I think for what the general consumer that means, and we've talked about this a lot, is that we're so used to over the last however many years from 2008, 2009, seeing sub 5% mortgage rates, even as low as two and a half, three, four, we're probably not going to go back to that, as you said. And so people need to start thinking about what that means for their purchasing power and not necessarily weight.

Yeah, I think that's right. And I think what we're starting to see in the housing market is prices are starting to come down a little bit, or they're not going up as fast as they were. So maybe we're reaching an inflection point where the combination of the house price and the mortgage rate blends into what I would call the affordability of a home. Prices we know in the NBT footprint in the Northeast are up 41% over the last four or five years. So you've had big increases in home prices, and you had a major increase from three to seven. Economists call it the recency effect.

So the recent experience for home buyers was you get a mortgage of 3%, but when we look at a longer-term time period, six and a half is a pretty good rate. And so I think what's starting to happen is while potential home buyers might've been delaying the game, hoping for lower interest rates, well, quite frankly, life gets in the way. Babies are born, people die. All of that happens. And at some point, push comes to shove and you have to do it. So I would encourage anybody who's thinking about buying a home is don't try to time the interest rate if we are wrong, that it's unlikely that rates go back to 3%, getting six and a half is not that bad of a number, and if it does, you refinance.

Exactly.

So I wouldn't... playing it cute and delaying the game a little bit. I get, but sooner or later, life moves on.

And I also, I think it's important to note too, and we'll talk about this a little bit more about what we're seeing globally versus what we're seeing here regionally. Yes, that rate of increase is slowing down on real estate across the board, and particularly in the northeast too, across your footprint. But we're still seeing some significant growths on rents and some other things here in the Central New York market. And I think I can tie that a little bit to, while we're seeing that softening in the jobs market nationally, we're not seeing that here in Central New York. In fact, I was just talking to Jared Shepherd, our Director of Policy and Research, and over the seven months of 2025, we have consistently seen between six to 8,000 more jobs in that month than the previous year, which puts us roughly on about a 3% growth of jobs right now. We haven't seen that in Central New York since the late nineties.

And New York State as a whole right now is about 1%, and we're one of the leading metros in all of New York, not just upstate for the Syracuse MSA. So I think that's a positive sign for us here as it relates to what's happening in Central New York. I think we've all been talking about it and feeling this sense of optimism and growth. Certainly, we can't ignore what's happening in the global marketplace because a lot of the businesses that are here and the jobs that they create are serving that global marketplace. And so that's an interconnected thing. And so we have to be mindful of that. But I do think that's driving some of that continued increase in home costs, some of that continued optimism and those job growth numbers that we're seeing. But it's important to note that you track what's happening on the macro scale, but you also, when you're thinking about your own personal decisions, you have to think about what's happening, the micro.

Yeah, and I think there's, my personal opinion is I think the economy's in pretty decent shape, and I could make the case that we're kind of at a turning point where it might actually accelerate. And the reason why I say that is the rapid fire policy changes that came out of the Trump administration, really across the globe were breathtaking and created just massive amounts of uncertainty.

So you go back to April 2nd, where we had Liberation Day, oddly named, but nonetheless, Liberation Day, where we assigned all these tariffs and they were massive tariff announcements. And if you're a CEO and you just don't know what that means for your supply chain, you don't know what it means for your expansion plants, et cetera. And then also the Big Beautiful Bill, whether you like it or not, was uncertain. And it had major impact on potential corporate taxation as it related to the corporate tax rate, as it related to deductibility of capital expenditures and R&D. And importantly, as we think about Micron depreciation of fixed plant equipment, those three things are major stimulative things.

That just got passed in June or July, whenever the Big Beautiful Bill was passed. And on the tariff front, while there's still uncertainty, the general consensus is the worst is behind us. We're not going to have 145% tariffs on China, which effectively would've been an embargo. So it appears that the effective tariff rate is going to be somewhere in the 15%, give or take some say, 10, some say 18. Let's use 15 for the purpose. If President Trump announced across the board 15% tariffs in April, just about every corporation would've said, okay, we can manage, manage that. So I'm not saying it's a good thing necessarily. I do think there's a benefit of leveling the international playing field, but that uncertainty while it still exists is far diminished from the worst case scenario. The Big Beautiful Bill with all of its economic stimulus has passed and life continues to go on. And so even if you think about Micron here in Syracuse, which is if it comes to its full promise, it's transformational.

Absolutely.

And now we're to the point where we're ready to stick shovels in the ground. And so a couple short months, that regulatory grind is difficult, but you go through it all the environmental, all the different approval process, but we're ready to stick shovels in the ground. And I think the last time we talked, it was concerned that the CHIPS Act would be repealed or taken back. That's not happening. So the money's available for Micron. Micron had really good earnings, was upgraded yesterday. So I think there's reason for optimism not only on a global or a national level, but specifically here in Syracuse where we have that economic driver, IE, the Micron Development. While home prices are higher here, they're still relative to the rest of the world, rest of the United States specifically, still a pretty attractive market. And I think that's being reflected in the employment numbers that we're seeing.

Absolutely. I think we're seeing a lot of the positive impacts of that.

Yep.

We talked a little bit about the uncertainty, the tariffs were a piece of that. Hopefully, if we're getting to a place where there's some clarity around that, we can see some of the now intentional planning around that. Okay, I'm going to make these investments. I'm going to go after these markets, or I'm going to shift and go somewhere else. But one of the things that is a concern, I know you've expressed it, I have the concern as well. It's not an easy problem to tackle, but it really has to do with the debt and the deficit and the impact that that can have on the U.S. market, the U.S. dollar, the ability for the wheels of the economy to continue to turn, help us understand, help our listeners understand what we're really talking about when we're talking about the impacts of uncontrolled deficit and what that could mean.

Yeah. So the way that an uncontrolled deficit or excessive government spend manifests itself is really through interest rates. Because if you spend too much, you have to deficit spend. You are, by definition, increasing the supply of bonds. And as those bonds increase in supply, prices go down, interest rates go up, and it's not necessarily a one -for-one thing, but over time it starts to erode the capital base because there's a certain amount of capital available for investment. And if the government keeps siphoning off in bigger and bigger debt and interest rate services, you're siphoning away capital into the public sector that would've been available for the private sector. So all things being equal, if interest rates are higher, which they are, and the service of our debt, which is now over 37 trillion, is over 1 trillion a year now. We spend more on interest payments than we do on defense spending. That's a problem.

That's kind of the reason why I think the long end of the interest rate market may not come down in lockstep with the Fed on the short end because the market's starting to look at that, and it's becoming a problem worldwide. So just last week, or maybe it was even earlier this week, the French government collapsed largely over a debate over too much spending and trying to control it, and do you tax the rich to increase revenue? But the French have found out the higher they raise taxes, the more people exit their country and it's not working. And one of my biggest disappointments is the way that the Trump administration went around DOGE. The end result of DOGE is about a $9 billion cut in spending. The budget's $7 trillion. The debt is $37 trillion. The interest payment is $1 trillion. I hate to say $9 billion is a rounding error because $9 billion is a lot of money,

But in the scheme, but in Total scheme of things, it's a rounding error. And in the midst of a marketplace where that debt is clearly getting bigger, every politician, including Jay Powell, the Chair of the Federal Reserve, will say it's unsustainable. Yet when you start something like Doge to do it, nobody wants any part of it. And it goes back to in 2010, we had Erskine Balls and Alan Simpson. So Simpson Balls, it was called, Republican Senator, I think he was chief of staff of Bill Clinton, Democrat, come through, have this great powwow, and they present it to Congress. One of the things in that bill was there'd be a spending cap at 21% of GDP. Today, we're at 24, and Congress roundly rejected this bipartisan commission.

And so I had this discussion with a client where he said, I'm all in favor of cutting spend, and I just didn't like the rapid fire way that Trump did it. That's legitimate. But I challenged him to say, well, the slow, methodical, disciplined approach has seen our debt go from $9 trillion to $37 trillion in the last 20 years or so. So I'm very concerned that there's no political fortitude to address the spending and deficit spending, and therefore, I see an endless supply of bonds. And an endless supply of bonds means higher interest rates on the long end. And as we said just a few minutes ago, that's where we live, that's where the consumer and particularly businesses borrow is at the long end. And so the hope is that the Fed cuts interest rates and all interest rates go down a full percentage point. I'm not sure it's going to happen. And that's why the deficit is, it's a peeve of mine. I've been speaking about it since 1997. I'm kind of the boy who cried wolf on this matter. But when you look at France, you look at Europe, you look at Japan, China, serious debt issues, and maybe I'm worried that the chickens may be coming home to rest.

Sure.

Well, and I think it's interesting because it's not, as I said, it's not an easier or a simple fix or else we do it. But I think the continued political divide creates a lack of willingness to come to the table on some of these harder issues. The desire to maintain office and maintain your seat creates a willingness to be more focused on making people happy than making good decisions, slightly unpopular opinion, but things like term limits and stuff like that could have a real impact on that. But again, it's a really challenging environment that we're in when it's not a crisis now, it's really easy to say, oh, I'm going to focus on the thing that's now, which is let me make my constituents happy. Let me figure out how to continue to stay in this position of influence for the right reasons often versus looking at the long-term impact. And sometimes we as consumers make those same choices. Absolutely. And we see the results of that when people get themselves in trouble. So hopefully there's some opportunity there for some thoughtful and intentional movement on that.

And I would caution individuals to do a little bit more research because in government speak, a cut in spending is not necessarily a cut in spending.

So the example I give people is, if you work for me and you're making a hundred dollars just to make my math easy, and I say, you're doing a great job, Andrew, I'm going to try at the end of the year, we'll see how it goes, but I'm going to try to get you an increased 150. And at the end of the year circumstances be what they, may I come back and say, listen, I can't get you 50, but I'm going to give you 25. There's two sides of the same math equation. You could argue that you just got a 25% increase, you went from a hundred to 25, but if you base it on the promise of 50, you just had a 50% cut in spending.

Sure.

Well, it's up 25%. And to me, there's this political sophistory.

There's cuts to this or cuts to that. When they're not cuts, they're cuts in the rate of growth that's very different than an outright cut. Now we can debate what should be cut and what shouldn't, but I find it intellectually dishonest when a politician talks about a cut in the rate of growth as a cut in spending because it's not, and in my example, it's a 25% increase that is not going to help the debt and deficits come down. It's when you have a hundred and you cut it to 75. That's how the debt goes down. And yet I would caution people that there's some soft sophistry to it, which I get a little frustrated with the media because they kind of buy into it and it makes it very difficult to get a sound debate on what spending needs to be cut.

Yeah, absolutely. So as we look ahead over the next quarter, what else are we looking for as it relates to indicators for us?

I think the biggest focal point for me is that employment market. And while it's softened, and I do think there is this corporate timeout that we talked about that probably you were going to wait and see how the tariffs impacted you, what the tax bill, whether you were planning on hiring or not, you just call timeout.

And I think that timeout is more or less ending. So I'm going to look at initial claims, not so much the unemployment rate, that's impacted by immigration and aging populations. So the labor force changes and that affects the absolute number. But I think the initial claims numbers that come out every Thursday, they, that's where you're going to see any kind of major layoff announcement. And to date, we haven't. And yet it went from 130 was the expectation, 138 and came in at 275. So that was yet another reason why the Fed's going to cut interest rates. But I still believe that the economy is pretty fundamentally sound, and I have this gut instinct that that timeout is ending, and we're starting to see shovels in the ground with Micron. And if you think of the billions and billions of dollars that have been earmarked for really major developments, they're going to start happening.

And that should be a pretty good driver. And artificial intelligence seems to be helping productivity. So I'm a little optimistic, but I would watch the initial claims to see if in fact, the employment market is as weak as...

I was at a conference. I spoke at a conference this week in Newport, Rhode Island, and every hotel was sold out. Airlines are booked for the fourth quarter. Thanksgiving airline traffic is supposed to be record levels. So we have a consumer that's in pretty good shape, and we've talked about this in the past. Their two biggest assets are their home and their financial assets, namely 401k plans, retirement assets. Well, homes are up 41% and the stock market's up 12% this year and is up pretty substantially over the last four or five years. And their biggest liability was their mortgage, which they refinanced. So there's $170 trillion net worth, which I think provides a lot of stockpiles. So when you look at the consumer, it's kind of do as they do, not as they say, because what they'll say is, oh, we're really concerned. We have tariffs and we have taxes, and we have this in the employment market. I got to go. I got to get on a cruise. So you're spending like crazy. So you're saying you're concerned and rightfully so, but you're spending like a maniac. It's not showing up in a ledger, and it's just not there yet. And I think that cushion that we have in that household net worth is going to help sustain consumer spending, which is the primary driver for economy. So it's not that the economy can't weaken, but I doubt there's a recession. In fact, if you go to the GDP now, which is the Atlanta Fed's tracker for third quarter, GDP, their number is 3.3%. So if we get 3.3% growth in the third quarter, that's pretty far away from a recession. So I'm cautiously optimistic. The thing that would concern me is the employment markets, because when that weakens, that's what spooks the consumer. And if the consumer shuts their wallet, that's when economies really struggle. So I think that corporate timeout, as I'm calling it, I think it's about over. We've got certainty on taxes. We're getting certainty on regulatory relief. The tariffs, while still uncertain, are mostly decided and far from the worst-case scenario that the market tanked on in the first week of April. So I think we might be on the cusp of some bigger and better things.

Great. I hope you're right.

I do too.

Great.

Well, Ken, thank you so much. This has been great. I know that it's going to continue to be outstanding. Unfortunately, it's probably my last time in the seat here is I'm going to be moving on from CenterState, but I've really enjoyed our time together, the conversations, all the information. It's been informative for me and been enjoyable. And I know we're going to continue this with you. NBT Bank and CenterState, continue with this Quarterly Market Insights. Katie Zilcosky is going to be stepping in, who's the host for our regular Talk CNY podcast, and she'll do a better job than me, I'm sure. But thank you so much. I've really enjoyed it.

Well, you've done a great job and we're what, over a year into this, and everyone has been great fun. I find it equally informative because I am more of a macro guy, and I get a little bit more micro from you. So it's been a joy, and I wish you nothing but the best in your future.

Thanks, Ken.

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