In 2022, I argued that The Federal Reserve it won’t turn around until the labor market freezes. This means that the Fed will need to create such a downturn in the labor market that no one will question their actions when they pivot. This is what I call a “cover cut” policy. After today’s jobs report and the negative reviews in this report and before, it’s safe to say that no one but crazy people who want to see America go into recession will doubt the Fed’s rate cuts that will happen this month.
However, even if the Fed has already cut rates three times this year, it will still be on a restrictive policy. So, we are far from any natural pivot in my mind – all we have done is start a discussion about putting the rate cut cycle into neutral. I say this because if the Fed thinks the economy is collapsing, it will leave some assumptions about what the accommodation rate policy will look like. Today, we stand without a rate cut, but the first one will come this month.
From the BLS: Total nonfarm payroll employment rose by 142,000 in August, and the unemployment rate was little changed at 4.2 percent, the US Bureau of Labor Statistics reported today. Job gains are occurring in construction and health care.
First, the unemployment rate fell after some corrections to temporary layoffs last month. It stands at 4.2%, and the lowest rate was 3.4% in January and April 2023. If the workforce grows, the unemployment rate can rise without job losses in these reports. This means that there are many people who are looking for work but cannot find it. I want to leave this data line here for everyone: the unemployment rate for those who didn’t finish high school is 7.1% today.
Now, the job creation and loss part of this report is interesting. Production took a big hit, but construction data grew. After the updates, the housing construction workers at risk – something I’ve been discussing for a long time on the HousingWire Daily podcast – has not shown any real growth in the data. In fact, one of the most recent months has shown job losses in this sector, but this month we created jobs and the last new home sales came in as big.
Regarding the BLS jobs report, after the data showed that more than 157 million people were employed, I have been looking for jobs to slow down to 140,000 to 165,000 jobs per month before we hit 159 million Americans. That number represents the normal labor curve without the COVID-19 recession. I’ve been wrong for a while now, but now that the update has happened, the data looks more consistent with the range I was looking for. In the past three months, things have cooled down in the labor market.
- Last estimate for 3 months: 116,000 per month
- Last average for 6 months: 164,000 per month
It’s no surprise that mortgage rates are at a year-to-date low because the bond market is neither old nor fast — it’s ahead of the curve.
Frivolous claims
Of course, the key for me to see a recession in job losses is the data on the jobless claims, and once we get to that critical level 323,000 on an average of four weeks, then we know that we will have months and months of job losses and an economy that is no longer growing. Jobless claims are currently flat but not at cyclical lows.
Job openings
Job openings data fell from an all-time high of 12 million to 7.6 million, but this data is still above pre-COVID-19 levels. However, breaking down the data line, the dropout rate and the employment rate look fragile. This has been the Fed’s favorite data line for a while, so it’s no surprise that they would cut rates with this chart looking like this.
The conclusion
The labor market has softened considerably, especially in the last few months. As always, the Fed wanted to see this before cutting rates. Now, the cover cuts, as I call them, are ready to go. The labor market has become so soft that they have to act quickly to keep up with their dual careers. Going forward, we will see if lower mortgage rates and a stronger Fed can keep the expansion going.
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