Monday, September 9, 2024

Another "meh" jobs report means we need a 50 point rate cut

Things have been hectic and odd over the last week in my life (mostly in a good way), but I did notice an important jobs report dropping on Friday before I hit the road for the weekend.

Meh. Pretty mediocre, and while it's not recessionary, it's also not strong by any means. We'd already seen downshifts in job growth in the monthly reports in 2024, and then we got news a few weeks ago that preliminary benchmarking from the Bureau of Labor Statistics would reduce job growth by 818,000 jobs through this March.

So if you apply that benchmark decline evenly for every month, it shows that growth has flattened out by quite a bit since 2022.

Most of the sectors of the economy still saw jobs added in August, which is a good sign for keeping overall growth going. Hiring in construction stayed strong, with another 34,000 jobs added last month, and is now 620,000 jobs above pre-COVID levels, even with the revised benchmarked numbers.

But manufacturing wasn't one of those growing sectors, losing 24,000 jobs in August. That decline came after the prelim benchmarks indicated that past job growth in manufacturing had been overestimated by 115,000 jobs, and if you distribute those losses over the 12 months of the benchmarks, it shows a significant shedding of manufacturing jobs from the start of 2023 to today.

And manufacturing is extremely sensitive to interest rates, as it frequently involves large purchases of machinery and consumers buying large-ticket goods. It doesn't seem like a coincidence that manufacturing jobs started to go down in the wake of the Fed aggressively raising interest rates in 2022 and the first half of 2023.

Heather Long of the Washington Post says that this middling August jobs report, the downward revisions of past job growth and increasingly tame inflation underscore that the Fed should be cutting rates, and by sizable amounts.
There’s an easy way for the Federal Reserve to stop this deterioration and prevent a recession: Cut interest rates decisively.

The Fed has its benchmark interest rate sitting at a two-decade high of nearly 5.5 percent. This has resulted from purposeful increases made over the past two years to fight inflation. And they worked; all the latest data indicate that inflation has come way down. Now the Fed must turn its focus to the labor market and take quick action to stave off a spike in layoffs. Over and over again, Fed Chair Jerome H. Powell has told the world that the Fed would do whatever it took to get inflation down. His message needs to be that the Fed will do what’s necessary to avoid more job losses.

I’ve covered the Fed for years, and I think it is very likely that Powell will choose the modest option of a 25-basis-point cut. He and other Fed leaders will say the economy still looks solid, and they don’t want to scare anyone. They will rationalize that they can take a first small step and follow it with more cuts later this year if the labor market >worsens. Already, Powell’s top deputies are laying out this case. New York Fed President John Williams said Friday that interest rates should move down “over time, depending on the evolution of the data.” Fed Gov. Christopher J. Waller put it this way on Friday: “If subsequent data show a significant deterioration in the labor market, the [Fed] can act quickly and forcefully to adjust monetary policy.”

This is a mistake. The biggest risk lies in not doing enough. By making a larger cut this month, the Fed could signal that it is taking the warning signs seriously and wants to prevent the worst-case scenario. It would quickly restore Americans’ confidence in the economy. What’s missing from Fed leaders’ speeches is any mention of who gets hurt if they get this calculation wrong.
I agree with all of this, and would add that a 50-point rate cut is also needed because the Fed needs to catch up from failing to cut rates by 25 points in July. Since then, we have seen inflation decline in June and the benchmark revision of -818,000 for previous job growth.

A rate cut also might mitigate the job losses we've been seeing in manufacturing (and encourage equipment purchases for all the new factories that have been built in the last year), and reduce the burdensome debt costs that are annoying so many Americans these days.

But like Long, I am also skeptical that the Fed will do the right thing, and not as much because they're out of touch with the reality of weak spots in our still-growing economy. But instead, I'd bet they decide on a 25-point rate cut largely out of fear of how much Donald Trump and other Republicans would whine about how this return to balanced monetary policy will make voters happier with the economy before the November election (and GOPs have no chance if voters are calm and happy).

That rate cut will at least be a step in the correct direction by the Fed. But it is worth worrying if it'll be enough to stabilize things and insulate the economy from some other negative event that might start a general decline in activity, and raise unemployment past the 4.2% we are at today.

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