Investor Digest: Jobs growth comes in weak … the labor market forecast is soft … how will it impact the size of rate cuts in two weeks? … the Fed’s tightrope to walk
The labor market continues to weaken…
This morning, data from the Bureau of Labor Statistic showed that the U.S. economy created fewer jobs in August than Wall Street expected. Experts had been forecasting 161,000 but the number came in at 142,000.
Additionally, the number of jobs gains for the prior two months were revised downward. July’s total saw a 25,000 haircut, and June saw a downward revision of 61,000.
Because the labor force expanded by 120,000 people, the unemployment rate inched down from 4.3% last month to 4.2%. What the mainstream media outlets won’t be as eager to tell you...
While the financial media is trying to put a positive spin on this – for example, there’s the Wall Street Journal’s misleading headline “Hiring Improved a Bit in August with 142,000 Jobs Added” – the real story is that we’re rapidly trading out full-time jobs for part-time work.
This morning’s update of the household survey, which calls households to ask about the employment situation of its members, found that full-time jobs fell by 438,000 while part-time work increased by 527,000.
Does that sound like a labor market improvement to you?
Keep in mind, the 4.2% unemployment figure that slipped from 4.3% last month makes no distinction between full-time and part-time work. So, while you’ll likely see some talking heads proclaim that today’s 4.2% reading is a victory of some kind, ask yourself…
If you got fired from your full-time job, then picked up two part-time jobs to make ends meet, is that a victory?
What we can learn from the labor market forecast
In yesterday’s Digest, we noted that jobs placement company Challenger, Gray & Christmas reported that this was the worst August for layoffs since 2009. Let’s add some additional details from the report.
From CNBC:
Announced job cuts totaled 75,891 for the month, lurching 193% higher than July. Though the total was just 1% higher than the same month in 2023, it was the highest number for August going back to 2009, as the economy was still escaping the worst of the global financial crisis.
On the hiring front, companies said they were adding just 6,101 new workers, up by nearly 2,500 since July, but down more than 21% from August 2023. The year-to-date hiring announcements of nearly 80,000 is the lowest total in history going back to 2005.
And this comes directly from the Challenger, Gray & Christmas report:
U.S. employers have announced 79,697 hiring plans, down 41% from the 135,980 plans recorded through August last year. The year-to-date total is the lowest since Challenger began tracking in 2005. The previous lowest total through August occurred in 2008, when 80,387 hiring plans were announced.
Andrew Challenger, the firm’s senior vice president, summarized the data by stating the obvious: “The labor market overall is softening.” Will rate cuts on September 18th prevent further damage to the economy (and the stock market)?”
It’s a difficult question because the answer is multivariate and complex.
For example, yes, rate cuts will immediately help parts of our economy that are more sensitive to interest rates.
Take the financial sector, where lower rates goose lending margins… or real estate, where lower rates reduce mortgage rates, making housing more affordable which drives demand…then there are utilities, where lower rates reduce financing costs of debt-laden companies, which improves profitability and cash flow, which adds breathing room to dividend payout ratios.
But this isn’t a binary equation where “the beginning of rate cuts = all will be fine.” Even for interest rate sensitive sectors, there’s a sliding scale with shades of gray.
Depending on the size of the Fed’s cuts and how quickly they come, will that be enough to offset the potential damage that’s been set in motion by many quarters of elevated interest rates?
For example, let’s return to financial services.
Yes, rate cuts will help banks’ margins nearly immediately. But look at the size of the unrealized losses on investment securities held by FDIC-insured institutions, like banks, due to “higher for longer” rates.
It’s eyepopping, dwarfing the size back in 2009…
Source: Radar / FDIC
Now, to be fair, much of this comes from unrealized losses from bonds. And rate cuts from the Fed will help alleviate some of the pain. Plus, if these institutions can hold the bonds to maturity, they’ll be okay.
But if a liquidity crunch for whatever reason – say, lower-income consumers who are tapping out and unable to pay back loans – forces banks to liquidate some of these bonds, well, a handful of quarter-point cuts from the Fed over the next few months isn’t likely to save the day.
Meanwhile, rate cuts will take much longer to help other areas of the economy such as the industrial sector, energy, and healthcare
To what degree will those businesses hold up while waiting for the impact of rate cuts to filter through economy and take pressure off operations?
Famed economist Milton Friedman put the lag time between changes in interest rates and the impact in the economy at four to 29 months. Two more recent studies from the Fed put it at 18 to 33 months. Either way, this suggests more economic tightness for a notable chunk of our economy even after the first rate cut.
But as we shift away from the economy toward the market, we should enjoy a nice tailwind from cuts if for no other reason than sentiment.
Wall Street knows the historical market performance data in the aftermath of rate cuts is, overall, bullish. So, even if the economy is on a slippery slope, Wall Street may default toward shrugging it off as it looks farther out to healthier days out on the horizon.
But that prompts a follow-up question.
If Wall Street shrugs it off, goes big into stocks, and the economy sidesteps a recession or goes through a mild/brief recession, well, kudos to you, Wall Street…
But if Wall Street shrugs it off, goes big into stocks, and the economy suffers a prolonged recession that kneecaps earnings in 2025, well, get ready for fireworks as Wall Street furiously scrambles to shore up its bad bets come Q1/Q2 of next year.
The next question is what size of a cut will we get on the 18th, and how will the market interpret it?
The kneejerk logic goes “stocks like rate cuts? Great, then give us 50 basis points of cuts!”
But consider the optics of that move…
Actually, before we get there, let’s rewind to Federal Reserve Chairman’s Jerome Powell’s FOMC statement last month:
The unemployment rate began to rise over a year ago and is now at 4.3 percent—still low by historical standards, but almost a full percentage point above its level in early 2023.
Most of that increase has come over the past six months. So far, rising unemployment has not been the result of elevated layoffs, as is typically the case in an economic downturn. Rather, the increase mainly reflects a substantial increase in the supply of workers and a slowdown from the previously frantic pace of hiring.
Clearly, Powell was trying to paint the picture of a labor market that is largely holding up. After all, he put the blame for the rise in unemployment at the feet of “more workers” not “more firings.”
So, what would the Fed be signaling if it cut 50 basis points rather than 25? Especially after the unemployment rate edged down from 4.3% to 4.2%.
To me, the message would be “our actions are betraying our words.” And that risks spooking Wall Street.
But if the Fed cuts just 25 basis points, well, that means the Fed’s foot on the brake pedal of our economy continues to press heavy…at a time when we’re swapping out 438,000 full-time jobs for 527,000 part-time jobs.
As you can see, there are lots of intricate moving parts to this issue. But one thing is for sure: It will be fascinating to watch, and we look forward to navigating it with you.
