The Fed is winning its war against the labor market. What does that mean for rates?


From BLS: Total nonfarm payroll employment increased by 206,000 in June, and the unemployment rate changed little at 4.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in government, health care, social assistance, and construction.

Bond yields fell after the report came out, which means the market interpreted it negatively. But why is that, when a healthy 206,000 jobs were created? First, we had negative revisions to the prior two reports. Even with that, we are still trending above my target of 140,000-165,000 as we get closer to 159 million people working on the nonfarm payroll data — which is where we should be after getting all the jobs back that we lost to COVID. But the unemployment rate did tick up and for the first time in a while we are above 4% now.

The negative revisions to the previous reports put the 3-month average roughly at 177,000. If you remove government jobs from the equation, we are running at 146,000 jobs per month on a 3-month average so we are getting closer and closer to my target.

The one thing about my target level is that the run rate of employment is higher now, meaning that if we don’t print big job reports, the unemployment rate will go higher, even without having jobs lost. I brought this up in last month’s article on the jobs report and have often talked about how we should expect higher unemployment rates in the future.

Below is the 12-month jobs creation data

The Fed has been worried that too many Americans are making too much with high wage growth. So, to keep this as simple as possible, the Fed would love to see wage growth back toward 3% because it doesn’t believe the productivity data is as strong as it is reported. Wage growth is cooling down, but they want to see more damage done here.

Below is the 12-month wage growth data, which peaked near 6% in 2022 and currently is at 3.9%. 

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The other labor data we had this week (job openings) shows that the Fed is getting some victories over the labor market. The job openings data is what the Fed hangs their hat on, and it is falling noticeably. As we can see in the chart below, we have a historical fall in this data line from 12 million to 8 million. The Fed has openly said that the job openings data shows the labor market is no longer tight. The black line below shows that the up trend in this data line is broken.
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The jobless claims data is the most crucial labor data line we have right now, and it rules them all. The Fed even commented on this data in a recent Fed meeting when they publicly said they follow jobless claims data, which had been heading lower. Well, they can’t say that anymore as jobless claims have been rising for a few months now.

The 4-week moving average of jobless claims data is 238,500. My line in the sand for a job loss recession is when this number breaks above 323,000 on the 4-week moving average. I am hoping the Fed doesn’t wait until we get above that level to pivot.

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Is the Fed winning the war against the labor market? Yes, it has been for many months now! So what is their next move? Do they wait until jobless claims break over 323,000 before sounding more dovish, or do they just hide their heads in the sand, let the job loss recession happen and chalk it up to the need for defeating inflation?

One thing I have stressed since 2022 is that the Fed is working off an old Fed model to defeat inflation by attacking the labor supply and forcing wage growth to cool down. So far, they can chalk up a lot of victories against the American labor market. So the question for the second half of 2024, is whether they will get more aggressive on talking dovish or keep using the token line “We need more confidence” before they act. I believe they want to see more labor market deterioration before they pivot. I hope I’m wrong on this premise — time will tell.



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