Fed officials agree: “the […] data no longer requires patience, it requires action.”
There was a lot of anxiety going into the release that the August payrolls report would flash a big red warning sign about the state of the US labor market and force the Fed into a 50-bp rate cut at the September meeting. We do not think the data were quite so bad. To be sure, amber warning signals had been flashing for months from pretty much every corner of the labor market, so the time for rate cuts is clearly at hand. But with September being the first cut of the cycle and the last meeting before the general elections, we think it is better for the Fed to go with the traditional 25 bp reduction approach. The good news is that FOMC members can use the updated SEP to signal materially more easing than they did back in June. Indeed, we expect the new median dot to show 75 bp worth of cuts in 2024 (some will probably show more!) and an additional 125 in 2025. That should be enough in one go.
Is there room for a 50-bp cut from the Fed this year? For sure! In fact, depending on how conditions evolve, there may even be room for two! However, we do not think one needs to happen in September.
The report leaned soft, but not every detail was soft. The biggest weakness was not the headline miss (the economy added 142k jobs versus 165k expected) but the 86k downward revision to the prior two months. This was the fifth downward revision in row and evidently raises concerns that next month we’ll pile on one more. But getting five same-sign revisions in a row is highly unusual. In fact, apart from the Covid reopening period (when the revisions were positive) this has not happened since late 2014 (that string of revisions was also positive). As such, it would not be at all shocking to actually get a positive revision next month. Time will tell.
Sector-wise, there were a few surprises but no real shocks. Goods-producing sectors added 10k jobs, which looks reasonable. But the split was odd in that manufacturing supposedly lost 24k jobs and construction added 34k. We think the data overstates the weakness in the former and the strength in the latter. Private service-providing industries added 108k jobs, exactly double the August number. The loss of retail jobs extended into the third month, which makes sense given softening consumer spending. By contrast, leisure and hospitality employment grew by 46k (vs 24k in July), likely reflecting some uptick in summer jobs. Elsewhere, the bleeding in temp employment slowed considerably, although it remains to be seen if this is just a one-month respite. Overall, the services data match well with signals from the household survey that showed an increase in employment and a decline in unemployment such that the unemployment rate ticked down a tenth to 4.2%. That being said, the broadest measure of unemployment—the U6 measure—rose another tenth to 7.9%; it rose half a percentage point in the past two months. This includes those employed part time due to economic reasons (i.e., they’d like to have a full-time job but cannot get one). It will be interesting to see what happens to this measure once the school year begins: were summer employment opportunities for students not so abundant this year and is that what drove this big move? Or is it more broad-based?
Now for the stronger parts of the report. It was good to see the average workweek rise 0.3% m/m after the prior decline. It remains decidedly soft but at least it didn’t shrink further. And, in light of the reported employment loss in manufacturing, it was good to see the manufacturing workweek up 0.3% and higher overtime.
Wages were stronger than expected but this may reflect the later end date for the survey, which tends to have such an effect. Still, in conjunction with higher employment and longer hours, average weekly earnings jumped 0.7% m/m, the most since March. This is very welcome given the savings rate has dipped to 2.9%. Unless spending rises enough in August to offset the bounce in labor incomes indicated by today’s data, the saving rate should improve a little in the next update. Both the total AHE (average hourly earnings) and AHE for production and non-supervisory employees increased 0.4% m/m in August, lifting the two respective measures of wage inflation by two tenths each to 3.8% y/y and 4.1% y/y, respectively.
The sensitivity around the employment data was partly due to a weak JOLTS update earlier in the week that showed July job openings down 237k from a downwardly revised June. The 7.673 million level was the lowest since January 2021. Perhaps most troubling, there were big declines in job openings in healthcare and social assistance, now the lowest since April 2021. There was also a sharp pullback in education job openings, although that looks to be more of a retracement of an anomalous big rise earlier. Still, given that education and healthcare have been the disproportionately large contributors to jobs creation over the past year, a visible retrenchment in labor demand in this space bears very close watching. It is fair to wonder: if job openings were already down to 7.7 million in July, how much further would they retreat by December, and what kind of employment growth would that support? That is, no doubt, the question on every FOMC participant’s mind. If the FOMC could only wave a magic wand and tell the labor market to “freeze where you are”, they would surely do it. Alas, they cannot. But they can wield a very effective tool: the Fed Funds rate. And Governor Waller made clear in his speech Friday that they will do so: “data no longer requires patience, it requires action.” AGREED!