Saturday, August 3, 2024

July jobs report shows slowdown, not recession. But still shows Fed screwed up

I had mentioned that Friday's US jobs report would be a big one, given that an election is on the horizon and that there had been evidence of economic growth slowing down. And that report definitely moved the needle.

Omigod! Are we now thinking about RECESSION? Especially when the increase in unemployment has now triggered one Rule that says we are already going down!

But then others were saying we this time may be different. Including the economist who set the Rule.

Sahm admits the trend in unemployment is not our friend, which I would agree with. However, I would also point out that the unemployment rate is actually 4.25% . And while that may sound like lame hair-splitting, I wonder what would be said if unemployment was at 4.24%, and reported as 4.2%, which would not have triggered the Sahm Rule.

There's another reason why this time may be different, and that's because the main source of the rise in unemployment isn't fewer Americans identifying as working, but instead is due to growth in the labor force. This was true in both June and July, where the number of "employed" grew in both months, but the labor force grew by much more, and UW Econ Professor Menzie Chinn notes that it is different than when we in the 2 non-COVID recessions in the 2000s.

Let's also note that jobs still grew in July (which usually won't happen in a recession), but the lower amounts of jobs being added is worth acknowledging. Job growth has kept getting smaller throughout the Biden presidency, and while we knew the post-vaccination and stimulus job booms of Biden's first 18 months in office were going to fade, growth has also declined in each 6-month period for the 2 years since then.

It's also the first time that we've had 2 straight months in the post-COVID world where the 3-month average for job growth was under 200,000 jobs a month. As you'll see, we are now back to a level of job growth that is similar to what we had in most of the Trump years, and in the year prior to Trump taking office. I'm going to give extra weight to the job totals from this year, along with 2019, which was Trump's last pre-COVID year in office.

The US stock market saw Friday's jobs report, and it freaked out.

The S&P 500 sank 1.8% for its first back-to-back losses of at least 1% since April. The Dow Jones Industrial Average dropped 610 points, or 1.5%, and the Nasdaq composite fell 2.4% as a sell-off for stocks whipped all the way around the world back to Wall Street.

A report showing hiring by U.S. employers slowed last month by much more than economists expected sent fear through markets, with both stocks and bond yields dropping sharply. It followed a batch of weaker-than-expected reports on the economy from a day earlier, including a worsening for U.S. manufacturing activity, which has been one of the areas hurt most by high rates.

It was just a couple days ago that U.S. stock indexes jumped to their best day in months after Federal Reserve Chair Jerome Powell gave the clearest indication yet that inflation has slowed enough for cuts to rates to begin in September.

Now, worries are rising the Fed may have kept its main interest rate at a two-decade high for too long. A rate cut would make it easier for U.S. households and companies to borrow money and boost the economy, but it could take months to a year for the full effects to filter through.

“The Fed is seizing defeat from the jaws of victory,” said Brian Jacobsen, chief economist at Annex Wealth Management. “Economic momentum has slowed so much that a rate cut in September will be too little and too late. They’ll have to do something bigger than” the traditional cut of a quarter of a percentage point “to avert a recession.”
Go back to one of the charts from above, and you can see that job growth in Spring and Summer 2024 is basically the same as the last half of 2018 and all of 2019. But as I've said a number of times before, there are a couple of notable differences in 2019 compared to today.

1. In 2019, the US unemployment rate was under 4%, and if anything, was going lower. In August 2019 it was at 3.6%, while today, unemployment is at 4.25% and has gone up 3/4 of 1% in the last year.

2. In Summer 2019, the Fed Funds rate was at 2.25-2.5%. And then in late July, the Fed gave in to Donald Trump's whining and started cutting interest rates below that. By comparison, the current Fed Funds rate is at 5.25%-5.5%, and the Fed decided against cutting rates in their late July meeting this year.

"But Jake, what about INFLATION?" When you're trying help businesses and consumers combat inflation, you need to be looking at how past inflation is causing injury (if it even has) and where is it going in the future. The real problem is that high interest rates are making it harder for businesses to borrow and invest, especially in home-building and manufacturing. Likewise, the high rates are keeping people from wanting to put homes with low-interest mortgages on the market, because it'll cost them more to move into a new place. This is causing the already-high cost of housing to be even higher and more out of reach for people that would otherwise want to buy a home.

It is also driving up the debt costs of a consumer that has helped to keep the economy moving along in 2023 and 2024, defying the "experts" who were predicting a recession 2 years ago. And with wage growth decent-but-not-great, you haev to wonder how much longer the consumer spending growth continues at the solid pace that we had in the first 2 quarters of 2024.

In addition, the inflation rates of Summer 2024 aren't all that much different than Summer 2019. We are told the the Personal Consumption Expenditures (PCE) Index is the number the Fed looks for when it comes to measuring what inflation is truly at. In 2019, PCE was hovering at or just below 2% through the Summer, after being above 2% for a sizable part of 2018. By comparison, since the Fed hiked rates to these multi-decade highs in mid-2023, PCE inflation has generally stayed at or below 3%, except for the first few months of this year, when corporations tried one last run of greedflation prices re-set for 2024 for many companies.

So if the PCE is maybe 1% higher in 2024 than it was in 2018, why are rates 3% higher now? Even if you go with a ratio argument ("PCE is 50% higher at 3% than 2%), explain to me why Fed Funds rates are more than double what they were 5 years ago. And that's BEFORE the Fed started cutting rates in the second half of Trump's last pre-COVID year.

Instead, the Fed has been looking backwards at what has happened with federal stimulus and post-COVID disruptions that spiked prices in 2021 and 2022, and is not looking at the post-COVID normal that we are in now. They have kept rates too high for too long, and now the jobs market has decelerated into "meh" largely due to that mistake.

Lastly, I'll repeat a Twitter observation I made that got a surprising number of responses.

Corporations, central bankers and other members of the Insiders Club had such success in keeping down wages and getting all the benefits of technology without having to pay more for it that they've gotten touchy now that we have a bit of balance returning to the working side of the equation. But I think 4% wage growth and 3% inflation is still fine, and the inflation side has been slipping down for the better part of the last 2 years.

Likewise, job growth is clearly lower and unemployment is creeping up. We aren't in a recession as of now, we are merely in a slower phase of growth compared to the Biden Boom that we had for most of 2021 through 2023, and 4.25% unemployment is still a level that we considered "full employment" up until Boomers started aging out of the work force in the mid-2010s. But it's still an avoidable error from the Fed to realize that we are in this lower-growth mode where keeping people in jobs and making it easier to pay their bils is more important than caring about whether inflation is at 2% or 3%.

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