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With today’s data showing the US inflation rate slowing to 2.5 per cent, conditions in America’s labour market remain all-important for the 25 vs 50 basis point rate cut debate facing the Federal Reserve next week.
Last Friday’s non-farm payroll numbers suffered from the drumroll both markets and the media had given it. The +142k jobs in August were slightly weaker than expected. It sparked a blue or gold dress-esque debate: some considered it strong enough, others emphasised that the earlier summer jobs numbers had been revised down, and that last month’s number could be too.
On balance, markets were neutral, leaving a 25 bps first cut priced in. FT Alphaville has often noted that there is a lot of noise in the NFP data, particularly following the pandemic. Here is our recent explainer. So, taking Jay Powell’s advice to look at the “totality of data”, we pulled out six charts that help put last week’s NFP numbers in context:
1) Employment is turning: The point of cutting rates is to prop up the economy before it falls. Unsurprisingly, historic US recessions have seen employment — as measured by NFP and the household survey (differences, here, again) — fall ahead of the downturn. Things look particularly ominous on the latter measure.
2) Is ‘the economy’ creating jobs, or is it the government: A still strong labour market should be spewing out high-paid, private sector jobs. But, since the beginning of 2023 the majority of NFP jobs have been driven by government hiring and care for the sick and elderly — not highly productive sectors.
3) Trading full-time for part-time: The chart below “tallies with the idea that the US is adding largely lower-paid, part-time jobs and is losing full-time, well-paid jobs, primarily through attrition — not replacing retiring or quitting workers,” said James Knightley, chief international economist at ING. “Every recession starts this way, unfortunately.”
4) A bit worse than normal: Many will look at the chart below and think “the labour market is normalising”. FTAV looks at it and asks, “yes, but, will it stop there?” Actual lay-offs remain low, but demand for workers — as reflected by the drop in openings — could soon be reflected in job losses (not just openings), with the job opening rate is back in line with where it was in 2019.
5) Rising unemployment may not be entirely benign: The triggering of the Sahm rule — which indicates the possibility of a recession — has not caused as much panic. That’s in part because many reckon rising labour supply (due to immigration) is driving it. That, the logic goes, is less benign than demand driven unemployment.
A recent note by Simon Mongey and Jeff Horwich at the Minneapolis Fed, adds nuance:
The unemployment rate is determined by both flows into unemployment (lay-offs and people joining the ranks of job seekers) and flows out of unemployment (job seekers findings jobs) . . . A key insight from academic work on the US labour market is that the large changes in the job-finding rate that occur over time (the outflows) are generally more important to the level of unemployment than inflows
The obvious explanation for the persistent rise in the unemployment rate seems more likely to be the factor that affects everybody in the pool: a persistent decline in the demand for labour and, thus, the job-finding rate.
The point? The burst in lay-offs that tend to come with recessions lags behind other drivers of unemployment. Just because it hasn’t happened yet, doesn’t mean it won’t. Dynamics in outflows from unemployment matter just as much as inflows.
6) Employers are wobbling: Close to 50 per cent of America’s private sector workers are employed by small businesses. That makes the hiring intentions of these organisations reasonably indicative for the trajectory of US employment overall going forward.
The latest NFIB data shows that net hiring (the percentage saying they plan to increase hiring minus those planning a decrease) has been dropping rapidly. It’s currently below its five-year moving average, which in the past, has coincided with recessionary periods.
So, zooming out from last week’s NFP numbers, only makes FTAV less comfortable about i) where the US jobs market is heading, and ii) how “strong” it has been recently.
Given the lags in interest rate policy — and the drop in inflation — making a hefty rate cut (50bps or a very dovish 25bps) next week may make sense, as an insurance against the rising possibility that the turning points and normalisation in the US jobs market suddenly go south. What do you think?