The benchmark threshold for job expansion/contraction isn’t zero - it’s 100k. That’s because of population growth. Anything less than that and we are actually contracting.
From October 2010 to February 2020, NFP averaged 194k per month.
# of months 112
# of months with job gains < 100k? 14
# of months with job gains < 0? 0
# of times Penn State beat Ohio State 1
Just 14 out of 112 months had <100k job gains…and never in consecutive months. And in no months did we see job losses. Fed Funds was at 0% for a lot of that time.
With that context, do you really think 5.5% is the right level now?
Last month’s already weak 114k gain was just revised down to 89k. The print we got on Friday was just 142k, which if revised by last year’s average downward revision of 68k, would be a gain of just 74k.
Even if I take the last three months at face value, the monthly average is just 116k. There was literally no three months during that 112 month time period with a 3 month average that low.
They won’t do it, but a case can be made for the Fed to cut to 3.25% next week. If the economy is no longer overheated, why do we need any monetary policy braking action? The slower they are to let off the brakes, the greater the risk of a deeper recession.
Also, that lone win against Ohio State came 17 days before Donald Trump was elected president. That was 8 years ago….and unfortunately for all Penn Staters, we play the Buckeyes every year.
Penn State hosts Ohio State this year just four days before the election. If we win, I guess Trump is a lock.
Unfortunately for Trump supporters, I watched Bowling Green absolutely torch Penn State’s defense this weekend so I wouldn’t hold your breath.
Last Week This Morning
- 10T: 3.70%
- 2T: 3.65%
- SOFR 5.34%
- Term SOFR 5.16%
- ISM Manufacturing PMI 47.2 vs. 47.5 expected
- JOLTs Job Openings Report 7.673M vs. 8.1M expected
- Beige Book – Two-thirds of Fed Districts report declining activity
- This is one of Powell’s favorite data points, so don’t overlook it
- NFP 142k actual vs. 160k forecasted
- It’s harder to win without knowing the other team’s plays, isn’t it Michigan?
“We do not seek or welcome further cooling in labor market conditions”
Powell said that at Jackson Hole. This statement has huge implications for the pace of cuts. I think people are underestimating the possibility for a rapid easing cycle next year. The labor market cooling is already here.
Back in 2022, Powell said there would be job losses as a result of the Fed’s hikes. "I wish there were a painless way to do that," Powell said. "There isn't."
Here we are, two years later, and the Fed has managed to do a pretty good job of bringing down inflation without throwing the economy off a cliff. Critics would point out that much of the inflation problem was resolved through supply chain thawing, but that’s a discussion for a different newsletter. Here’s where things could get interesting with jobs.
If we take the last three jobs reports, they average gains of just 116k per month. That’s below pre-covid levels.
Today 116k per month
2023 255k per month
2019 166k per month
Indeed’s Nick Bunker had a good research piece last week illustrating how much cooling the labor market has already experienced
There were points in 2021 and 2022 where the 3 month average was over 600k! It’s 116k today!
The Macro Institute highlighted that full time employment is negative. Notice how there’s only one time period where negative full time employment didn’t correspond to a recession…today. Before you say, “See! This time is different!” please remember that recessions aren’t usually declared until a year after they start.
Bloomberg had a good article that illustrated how much manufacturing employment gauges have contracted.
The cooling has already happened. So if the doesn’t welcome or seek additional cooling, they need to move quickly.
The Fed Should Just Cut to 3.25%
While the Fed will likely reduce in nice 25bps increments, I think they should consider cutting to 3.25%. Why?
If we don’t need or want any more slowdown, why are we applying the brakes at all?
Why not just let off the brakes entirely and start coasting?
Neutral, whether it’s 2.50% or 3.50%, is waaaaaaaaay below current levels. The longer it takes to get back to a neutral level, the greater the risk of breaking the economy.
Remember that first graph I showed you where NFP never dipped below 0 and rarely dropped below 100k? Here’s the Fed’s own guidelines for monetary policy.
During that period from 2010-2020, all the models agreed that a neutral Fed Funds was somewhere between 0% - 2%. Not surprisingly, Fed Funds was near 0% and ultimately peaked at 2.5% before we entered a recession.
The Fed has indicated it believes neutral is between 2.5% - 3.0%. Even if it’s 4%, shouldn’t they let off the brakes ASAP and get to 4%?
They obviously won’t cut directly to 3.25%, but I think it’s important to keep this framework in mind when considering how quickly the Fed might cut rates.
Cutting rates isn’t pressing on the gas pedal, it’s just easing off the brakes.
But Inflation!
“JP! Your reckless approach will cause inflation to reaccelerate!”
Well, inflation doesn’t react that quickly. Look how long we’ve been dealing with it falling. Plus, we don’t have an inflation problem any more.
CPI this week is expected to come in at 2.6%, down from last month’s 2.9%. Don’t forget that CPI typically runs about 0.5% higher than Core PCE so that’s roughly in line with the Fed’s inflation target.
Just as importantly, more than half of the current inflation is from supply side contributors, not demand side. Here’s the SF Fed’s measure where green is supply side inflation. The blue line, demand, is less than 1%.
Interest rates impact demand, not supply. Cutting rates won’t cause supply chains to seize up.
But keeping Fed Funds too high for too long can destroy demand and cause job losses.
Inflation, like Penn State beating Ohio State, is a once a generation event…
The Week Ahead
The back half of the week will include most of the data with CPI and PPI inflation data.
ECB will cut rates again this week, their second time.
