Is the Fed behind the curve with this labor market?

In 2022 I argued that the Federal Reserve will only run when the labor market breaks. This means that the Fed will have to create such a slowdown in the labor market that no one will question their actions when they turn around. This is what I call the “cover cuts” policy. After today’s jobs report and the negative revision of this report and the ones before it, it’s safe to say that no one, except the crazy people who want to see America go into a recession, are anticipating the Fed rate cut that will happen this month. will cast doubt.

But even if the Fed had already cut rates three times this year, it would still be pursuing a restrictive policy. So as far as I’m concerned, we’re far from a natural pivot; all we have done is start the discussion about bringing the rate cut cycle into a neutral position. I say this because if the Fed thought the economy was collapsing, it would drop hints about what an accommodative interest rate policy would look like. There are no rate cuts today, but the first will come this month.

From the BLS: Total nonfarm employment rose by 142,000 in August, and the unemployment rate was little changed at 4.2 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in construction and healthcare.

First, the unemployment rate fell after some adjustments to temporary layoffs in the past month. This stands at 4.2%, while the lowest level was 3.4% in January and April 2023. If the labor force grows, the unemployment rate could rise without job losses in these reports. This means that more and more people are looking for work, but not getting it. I want to leave this data line here for everyone: The unemployment rate for those who never completed high school is 7.1% today.

The section on job creation and loss in this report is interesting. Manufacturing took a big hit, but construction data grew. After the revisions, there is no real growth in the data, as at-risk housing workers – something I’ve been discussing on the HousingWire Daily podcast for a while – have not shown any real growth in the data. One of the past months did indeed see job losses in this sector, but this month we have created jobs and the latest new home sales came as a blow.

Regarding the BLS jobs report, after the data showed more than 157 million people were employed, I was looking for jobs to slow to a range of 140,000 to 165,000 jobs per month before we reached 159 million working Americans. That number represents the standard jobs curve without a COVID-19 recession. I’ve been wrong for a while, but now that the revisions have taken place, the data seems to be more in line with the range I was looking for. Things have become quieter on the labor market over the past three months.

• Average over the last 3 months: 116,000 per month
• Average over the past 6 months: 164,000 per month

It’s not shocking that mortgage rates are at their lowest levels this year because the bond market isn’t old and sluggish; they are leading the way.

Jobless claims

The key for me to seeing a job loss recession is obviously the unemployment claims data, and once we get to that critical level of 323,000 Based on the four-week moving average, we know we will have months and months of job losses with an economy that is no longer growing. Unemployment claims are subdued for now, but are no longer at cycle lows.

Vacancies

Job openings data has simply collapsed from an all-time high of 12 million to 7.6 million, but this data is still above pre-COVID-19 levels. However, the breaking of the data line, the quit rate and the number of new employees seem vulnerable. This has been a favorite data line of the Fed for a while, so it’s not shocking that they’re going to cut rates when this chart looks like this.

Conclusion

The labor market has become increasingly weaker, especially in recent months. As always, the Fed wanted to see this first before cutting rates. Now the cover cuts, as I call them, are ready to use. The labor market has become so weak that they must move quickly to keep up with their dual mandate. Going forward, we’ll see if lower mortgage rates and a more accommodative Fed can keep the expansion going.