A Jobs Report With Big Numbers and Bigger Questions
Here's what I want to know, and would ask the Fed, after Friday's non-farm roll print hit the tape at 254,000.
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The Bureau of Labor Statistics released the results of its two monthly employment surveys on Friday morning. I often shoot holes in these reports, because there are often so many. This one not only runs from top to bottom, full of substantial improvement in conditions of demand for labor. We know that these surveys have been wildly inaccurate over the past few years, but we can do nothing about that right now. Recently, the Bureau of Labor Statistics revised its data for both gross domestic product and gross domestic income, going back to 2022. This forces us to ask a serious question.
If the economy is as strong, and has been as strong as we are being told, and if the employment situation is as strong as we are being told, then why on earth, with consumer-level inflation still running above target, is the Federal Open Market Committee easing monetary policy? It is small wonder that Fed Chair Jerome Powell looked uncharacteristically foolish on Sept. 18, in trying to explain why the Fed had cut its target for the Fed Funds rate so aggressively. I have written it before and been rebuked by folks who thought it incorrect to ask the next question.
Is it possible (I'm trying to be polite) that taking an aggressively easier stance on monetary policy just in front of a very close national election with a supposedly strong economy and supposedly strong labor markets, but still above target inflation, a politically motivated move?
Is it possible that taking an aggressively easier stance on monetary policy just in front of a very close national election with a supposedly strong economy and supposedly strong labor markets a politically motivated move?
How Else Can We Take This Report?
Hear me out. The Fed has a dual mandate. Price stability and full employment, which usually means price stability vs. full employment. Well, year-over-year inflation still runs above 2%, and aggregate annualized consumer level inflation since the start of the pandemic is something like 5.4%. The Fed recently shifted their priority from fighting inflation to supporting labor markets.
The problem is that anyone who has a minimal understanding of base effects can see that consumer-level inflation likely bottomed in September and starting with the current month, will show signs of accelerating again, even without striking dockworkers. This renewed acceleration should last at least into the second quarter of 2025, and maybe beyond.
So, the shift in priority was made because inflation was no longer a concern (even though cumulative inflation over the past four years has crushed the middle- and lower-income classes) and because labor markets were softening. Voila - labor markets have not softened, nor has economic activity slowed. Hmm, then did not our esteemed central bankers merely throw kerosene on the inflation side of the mandate? Just in front of a presidential election. Something definitely does not pass the smell test. Either the data is wrong, or the Fed is. Either way, you and I will be who pays the price.
Hmm, then did not our esteemed central bankers merely throw kerosene on the inflation side of the mandate? Just in front of a presidential election...
Job Creation
This is interesting. Those of you who read Market Recon know that I was looking for 145,000 non-farm payrolls (found in the Establishment Survey) after all of the adjustments were made. Consensus, according to Econoday, was for 132,500. The actual non-farm roll print hit the tape at 254,000. Usually, the new print is accompanied by downward revisions to past months (not the case this time) and a less robust print for "employed persons" in the Household Survey (not the case this time).
The fact is that this way above expectations (the highest professional estimate I saw was 180,000) brought with it aggregate upward revisions of 72,000 additional jobs for July and August, making the net addition for today a whopping 326,000. Even more impressively, the Establishment Survey showed 430,000 newly employed persons for September and a decrease of 281,000 unemployed persons.
The civilian labor force grew by a net 150,000, while 75,000 people left the labor force. This led to a participation rate of 62.7%, in line with August and July, while the employment to population ratio improved to 60.2% from an even 60% for both July and August.
Unemployment Rates
Headline unemployment (U-3) dropped from August's 4.2% to 4.1% (4.051% when not rounded). Unemployment was 4.3% back in July, so suddenly we have a trend. Underemployment (U-6) truly surprised us, to the upside. The underemployment rate dropped from 7.9% to 7.7%, after increasing from July into August. I had projected an 8% U-6, so I was way off on this one.
Those working part-time for economic reasons decreased by 206,000, while those working for non-economic reasons increased by just 5,000. The implication there is that there was bona-fide growth in full-time job creation and that is something that had been lacking for a couple of years.
Going over gender, racial and educational demographics. Most groups saw some improvement or at least held their ground in September.
Adult Men: unemployment decreased from 4.0% to 3.7%.
Adult Women: unemployment decreased from 3.7% to 3.6%.
Teenagers: unemployment increased from 14.1% to 14.3%.
Whites: unemployment decreased from 3.8% to 3.6%.
Blacks/African Americans: unemployment decreased from 6.1% to 5.7%.
Asians: unemployment held firm at 4.1%.
Hispanics/Latinos: unemployment decreased from 5.5% to 5.1%.
High School Dropouts: unemployment decreased from 7.1% to 6.8%.
High School Grads: unemployment held firm at 4.0%.
Some College or Associate Degree: unemployment held firm at 3.4%.
Bachelor's Degree & Beyond: unemployment decreased from 2.5% to 2.3%.
Wage Growth
Here's another projection where I was way off. Average hourly wages grew 0.4% on a month over month basis, down from growth of 0.5% in August that was revised up from 0.4%. On a year over year basis, average hourly wages increased a very surprising 4.0%, up from an upwardly revised 3.9%.
I am almost embarrassed to say that I had 3.3% on my bingo card, but I know professionals that had 3.2%, so I was not the lowest estimate. Actually, the highest estimate I saw was 3.8%, so the result topped the entire range of professional projections.
The only truly overt negative I see in this report, and you know that I do look for holes, is in the average workweek, which is an alternative measure for demand for labor. Part-timers are excluded, so this is an average of full-time workweeks. That number dropped to 34.2 for September from 34.3 in August.
34.3 was already pretty much as low as this metric goes, so 34.2 is a really, really low number. Perhaps that has something to do with the ISM surveys for September that in complete contrast to this report showed contracting conditions for demand for labor both across the manufacturing and services sides of the US economy. Things that make you go hmmm....
Markets & Policy
Equity index futures and eventually equity markets reacted quite bullishly to this surprisingly strong employment report. But other markets have reacted sharply and not all in a positive direction. Fed Funds futures markets trading in Chicago are now pricing in just a 9% probability for a half-percentage point rate hike on Nov. 7 and a 91% likelihood for a quarter-point rate cut. That's down from about a 35/65 split on Thursday. This market is now pricing in just a 69% probability for a total of a half-percentage point being cut through the end of the year. That's a change from earlier this week, when three-quarters of a percentage point worth of cuts were still being priced in.
These less dovish probabilities have forced the U.S. Dollar Index significantly higher and U.S. Treasury prices significantly lower, which means higher yields. I see the U.S. Ten Year Note paying a rough 3.96% and the Two Year Note a rough 3.88% as I type out this piece. The higher dollar valuation has taken WTI Crude and Gold off of their morning highs, though oil prices remain up on the day due to geopolitical concerns.
The question for the Fed is simple: Does it slam on the brakes as far as rate cuts are concerned? If the data is correct, then the answer is "of course." If the data is not to be trusted, and that is a big "if," then the Fed might proceed, but there is no way in heck that the Fed can be nearly as aggressive in implementing easier monetary policy. Especially, if as we suspect, inflation starts to perk up again, due to base effects, a still bloated money supply and of course the Fed's own actions on Sept. 18.
At the time of publication, Guilfoyle had no position in any security mentioned.
