I read (listened) the Musk biography last year. Fantastic book. One of the recurring themes is that Musk firmly believes when you make cuts of any kind, you should regret some of them.
If you regret firing some people, that’s a good thing. If you have to put some deleted code back, that’s a good thing. If you have to re-approve some expenses you just eliminated, that’s a good thing.
If not, you didn’t go far enough in the first place.
The approach we’re seeing right now is not a bug, it’s a feature. It’s how Musk has always done it. I don’t know if it’s right or wrong, but I do know it’s intentional.
Last Week This Morning
- 10T: 4.31%
- 2T: 4.00%
- SOFR: 4.35%
- Term SOFR: 4.32%
- Non-Farm Payrolls: 151k actual vs 160k expected
- Unemployment Rate: 4.1% actual vs 4.0% expected
- Fed Speeches
- Fed Chair Powell: "We do not need to be in a hurry and are well positioned to wait for greater clarity"
- Fed Musalem: “The outlook for continued solid economic growth looks good, the labor market is healthy, and financial conditions are supportive”
- Fed Williams: “My view is, based on what we know today, given all the uncertainties around that, I do factor in some effects from tariffs now on inflation, on prices, because I think we will see some of those effects later this year”
Jobs
The Unemployment Rate ticked up from 4.0% to 4.1%. No biggie, I get it. And statheads will point out that the UR has remained within a tight band since last May. But the Labor Force Participation Rate dropped from 62.6% to 62.4%. That’s 385k people that left the labor force. Had that remained steady, the Unemployment Rate would be 4.35%...which would have been rounded up to 4.4%.
Would Friday’s reaction have been “dang, that labor market is really hanging in there” if the UR had been 4.4%?
If the participation rate was the same as it was February 2020, the Unemployment Rate would be 5.4%.
I’m conflicted about the federal layoffs. I believe federal spending is out of control, government has crowded out the private sector, and all that money has artificially boosted job market strength as well as GDP. Nearly half of all job growth over the last two years has been subsidized by our taxpayer dollars and I refuse to believe those jobs should be viewed the same as small business hiring. The unwinding of that was bound to be painful. With a decently strong economy, maybe now is the time to bite the bullet.
But I am also increasingly concerned that these layoffs could be the sort of economic shock we’ve seen in the past that leads to a recession.
Peter Berezin, Chief Global Strategist at macroeconomic research firm BCA, “Recessions often begin when an economy becomes vulnerable to a downturn and is then hit by a shock. Once that happens, feedback loops typically emerge that reinforce the downward pressure on growth. Today, the US finds itself on the verge of such a cascade of bad economic news.” Maybe these layoffs are that shock.
Consider:
- Challenger Job Cuts were the highest level since covid and the worst February since the GFC.
- The three-month annualized growth in weekly payrolls is just 2.9% — the weakest three-month stretch since covid.
- The average workweek shrank to 34.1 hours, a level rarely seen outside of recessions.
- More workers are being pushed into part-time roles for economic reasons — the highest in four years.
In August of last year, Jay Powell said, “We do not seek or welcome further cooling in labor market conditions.”
If the Unemployment Rate was 4.4%, would the Fed believe the labor market had cooled in the last six months?
We’ve seen average monthly NFP slowly fall from 500k+ to 150k+ but keep talking about the strong and resilient labor market as if it hasn’t really changed at all. The Real Boss™ likens this to the frog in the boiling pot. You toss a frog in a boiling pot of water and it jumps out immediately. But if you drop it into a pot of water at room temperature and slowly turn up the temp, it doesn’t realize it’s being boiled alive.
Because monetary policy has long and variable lags, we don’t realize the labor market is hitting its tipping point and the cushion to absorb a shock is much less than it was a few years ago.
While I write about macro trends, it’s important to remember that if 800k people lose their jobs, they are real people and not just numbers. And I think it will take a long time for them to find work.
Everyone’s a tough guy until friends and family start losing their jobs.
Recession Ahead?
In the same report I mentioned earlier, BCA’s Berezin noted, "Although the metrics the NBER tracks to determine recession start dates still looked reasonably benign in January, more recent data suggest that the U.S. economy is reaching stall speed.”
He also reaffirmed his forecast that a recession is likely to begin in May. "That still feels right to us." 1
Last month, Richmond Fed economist John O’Trakoun and Philly Fed economist Adam Scavette published a new recession indicator, the SOS Recession Indicator. Before we dive in, can we give this team some kudos for coming up with a great name!
Using back testing, Scavette-O'Trakoun-Sahm-style (SOS) has correctly signaled the past seven recessions since 1971 with no false positives. It’s similar to the Sahm Rule, but uses weekly unemployment claims instead of monthly unemployment rate data. The increased frequency coupled with hard data vs survey data from the unemployment rate should result in more accuracy. 2
The good news is that it’s not flashing any warning signs yet. But with the federal layoffs just beginning, unemployment claims should start climbing and we might see a quick change in this recession predictor.
Rates
Meanwhile, the natural rate of interest (r*) is now estimated at 1.3% according to NY Fed's updated Laubach-Williams model. In the graph below, the blue line is r* and the brown line is economic growth (we will come back to that one in a moment).
Add Core PCE to that to solve for the Fed Funds that would neither encourage/discourage growth.
1.3% + 2.6% = 3.9%
As long as Fed Funds is above that level, the Fed believes it is applying the brakes to economy. Part of the reason they will be slow to cut this year is fear that inflation will tick up, which would push that 3.9% closer to current levels.
I believe the shelter component, oil, and slowing GDP will more than offset the inflation concerns, but I can understand why the Fed will be cautious for now.
It’s also interesting that r* and growth have diverged. Something has to give, right? Either r* moves up or growth moves down…welp…
The Fed is clearly on hold for now, but I still think we will see at least 0.75% of cuts this year. I wouldn’t be surprised to see a similar pattern to last year where the Fed maybe waits one or two meetings longer than they would otherwise.
The T10’s wild ride continues. We tested the 4.21% resistance level a few times last week, each time rebounding back towards 4.25%. The jobs report wasn’t weak enough on the surface to push the T10 to 4%, so Wednesday’s CPI will be the next test.
The Week Ahead
With the Fed in its blackout period ahead of next week’s FOMC meeting, the CPI report will be the main event…at least until Trump says something about tariffs.
Thank you to fellow Birds fan Craig for sending me amazing cutouts of Saquon and Jalen. I decided there was only one good spot for Saquon.
I promised to tone it down, not eliminate entirely…
