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In 2022, I argued that the Federal Reserve won’t pivot until the labor market breaks. This means that the Fed will need to create such a slowdown in the labor market that nobody will question their action when they pivot. This is what I call the “cover cuts” policy. After today’s jobs report and the negative revision to this report and the previous ones, it is safe to say nobody outside of crazy people who want to see America go into a recession will question the Fed rate cut that will happen this month.
However, even if the Fed had already cut rates three times this year, they would still be in restrictive policy. So, we are far from any natural pivot in my mind — all we have done is start the discussion about putting the rate-cut cycle into the neutral stance. I say this because if the Fed thought the economy was breaking, they would leave hints about what accommodative rate policy would look like. Today, we stand with no rate cuts, but the first will come this month.
From the BLS: Total nonfarm payroll employment increased by 142,000 in August, and the unemployment rate changed little 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 last month. It stands at 4.2%, while the lowest level was 3.4% in January and April 2023. If the labor force grows, the unemployment rate can increase without jobs being lost in these reports. This means that more people are looking for work but are not getting it. I want to leave this data line here for everyone: the unemployment rate for those who never finished high school is at 7.1% today.
Now, the job creation and loss part of this report is interesting. Manufacturing took a big hit, but construction data grew. After the revisions, the residential construction workers being at risk — something I have been discussing for some time on the HousingWire Daily podcast — hasn’t shown any real growth in the data. In fact, one of the recent months did show a job loss in this sector, but this month we created jobs and the last new home sales came in as a big beat.
Regarding the BLS jobs report, after the data showed more than 157 million people employed, I had been looking for jobs to slow down to the range of 140,000 to 165,000 jobs per month before we hit 159 million Americans employed. That number represents the standard job curve without a COVID-19 recession. I have been wrong for some time now, but now that the revisions have happened, the data looks more in line with the range I was looking for. In the last three months, things have cooled down in the labor market.
The last 3-month average: 116,000 per month
The last 6-month average: 164,000 per month
It’s not shocking that mortgage rates are at year-to-date lows because the bond market isn’t old and slow — they get ahead of the curve.
Jobless claims
Of course, the key for me to see a job loss recession is jobless claims data, and once we are heading toward that critical level of 323,000 on the four-week moving average, then we know we will have months and months of job losses with an economy that isn’t growing anymore. The jobless claims have been tame for now but are no longer at the lowest levels of the cycle.
Job openings
Job openings data has simply collapsed from the all-time high of 12 million down toward 7.6 million, but this data is still above pre-COVID-19 levels. However, breaking down the data line, the quit ratio and hires look fragile. This has been a favorite Fed data line for a while, so it’s not shocking that they’re going to cut rates with this chart looking like this.
Conclusion
The labor market has become increasingly soft, especially in the last few months. As always, the Fed wanted to see this before cutting rates. Now, the cover cuts, as I call them, are ready to go. The labor market has gotten so soft that they must act quickly to keep up with their dual mandate. Going out in the future, we will see if lower mortgage rates and a more dovish Fed can keep the expansion going.
