In my 2022 analysis, I argued that the Federal Reserve will not change its course until the labor market shows signs of weakening. The Fed will have to engineer a slowdown in the labor market to justify any pivot in policy. This strategy, known as the “cover cuts” policy, aims to create a scenario where a rate cut is unquestioned. Following the latest jobs report, which included negative revisions, it is evident that the upcoming Fed rate cut will be widely accepted.
Despite three rate cuts earlier this year, the Fed’s policy remains restrictive. We are still a long way from any natural pivot, as the discussion has just begun on transitioning the rate-cut cycle to a neutral stance. If the Fed believed the economy was deteriorating, they would provide hints about what an accommodative rate policy might entail. Currently, there have been no rate cuts, but the first one is expected this month.
According to the BLS, “Total nonfarm payroll employment increased by 142,000 in August, with the unemployment rate remaining steady at 4.2 percent. Job gains were observed in the construction and healthcare sectors.”
The unemployment rate stands at 4.2%, with the lowest level recorded at 3.4% in January and April 2023. It’s important to note that an increase in the unemployment rate can occur even without job losses, indicating a growing labor force with individuals actively seeking employment. Notably, the current unemployment rate for individuals without a high school diploma is 7.1%.
The latest jobs report reveals an interesting dynamic in job creation and loss. While manufacturing experienced a decline, the construction sector saw growth. Despite concerns about the risk to residential construction workers, the data has not shown significant growth in this area. Recent months have shown fluctuations in job numbers, with the most recent data indicating job creation and strong new home sales figures.
Reflecting on the BLS jobs report, the data suggests a cooling trend in the labor market. Over the last three months, job growth has slowed, with averages of 116,000 and 164,000 jobs per month over the last 3 and 6 months, respectively. These trends have contributed to the current low mortgage rates, as the bond market anticipates economic shifts.
Jobless claims
Monitoring jobless claims data is crucial in assessing the potential for a job loss recession. A four-week moving average nearing the critical level of 323,000 would indicate sustained job losses and economic stagnation. While jobless claims have not reached alarming levels, they are no longer at their lowest points in the cycle.
Job openings
Job openings data has declined from its peak of 12 million to 7.6 million, although it remains above pre-COVID-19 levels. However, indicators such as the quit ratio and hires appear fragile, signaling potential challenges in the labor market. With these factors in mind, the Fed’s decision to cut rates seems justified.
Conclusion
The labor market has shown signs of softening in recent months, prompting the Fed to consider rate cuts. As the labor market weakens, the Fed must act swiftly to fulfill its dual mandate. Looking ahead, the impact of lower mortgage rates and a more accommodative Fed policy on sustaining economic expansion remains to be seen.
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