The Federal Reserve won’t pivot on rates until the labor market breaks and it will keep financial conditions as tight as possible until that happens — this has been my theme since 2022. Friday’s jobs report had one number which got people talking about a possible recession: the 4.3% unemployment rate.
Now, historically speaking, that is a low unemployment rate, but it has moved up from the recent lows of 3.5%. Of course, we aren’t losing jobs or having negative GDP prints, but more and more people are saying the Fed is behind the curve, especially as they chose not to cut rates in their meeting this week. So, is the labor market really breaking? Let’s take a look at all the data.
Jobless claims data
For the United States to have a traditional job-loss recession, where we see people losing jobs, negative GDP and total contraction in economic activity, I believe jobless claims have to break over 323,000 on the four-week moving average. That hasn’t happened yet, but jobless claims have been rising for some time now, and we are slowly moving up there. This is where the focus needs to be, and it’s a great data line that comes out each Thursday morning.
As more people lose their jobs, we will see more people filing for unemployment benefits. For certain people who are fortunate to have a nice severance package, the urgency to file might not be there, but if we really had an explosion of jobs being lost, jobless claims would be shooting higher. Right now those claims are just slowly moving higher.
Job openings
From BLS: The number of job openings was unchanged at 8.2 million on the last business day of June, the U.S. Bureau of Labor Statistics reported today. Over the month, both the number of hires and total separations were little changed at 5.3 million and 5.1 million, respectively.
One of the Fed’s favorite data lines has been job openings data — this tells them if the labor supply is balanced or not. They didn’t like the fact that job openings were running at 12 million because that would push wage growth to grow too fast, but now it’s fallen by roughly 4 million and is now down toward 8 million and that seems like an acceptable level for them.
The job openings report includes data lines like hires and quits, both which are running at pre-COVID-19 levels. I believe the Fed feels fine with the current job openings level as they often say now that the labor market supply is more balanced now.
BLS Jobs report
From BLS: The unemployment rate rose to 4.3 percent in July, and nonfarm payroll employment edged up by 114,000, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in health care, in construction, and in transportation and warehousing, while information lost jobs.
The unemployment rate has risen to 4.3%; how is this possible without losing jobs each month? The labor force has grown by roughly 1.3 million from a year ago. Now, the 114,00 jobs created needed to be included in estimates. Some will say the recent hurricane impacted the data; even if that is true, the trend is your friend. For now, the rise in unemployment can be attributed to that.
Here is a breakdown of the jobs report: construction employment is still kicking higher, which is critical for economic cycle timing. We traditionally see this sector lose jobs noticeably before every recession, but that hasn’t happened yet.
Wage growth
Wage growth is also slowing down. The Fed was concerned about Americans making too much money, so they have targeted wage growth hard. I have set a target level for them: I think they would love to see wage growth at 3%. Wage growth peaked in March of 2022 at 5.9% and today it’s at 3.60% year over year, so it’s getting closer to my target. We can start doing the countdown when it is under 3.5%.
Final conclusion
For many months, we have discussed the labor market becoming softer, which is what the Fed wanted. Getting softer and breaking are two different things. I know the frustration many people have with the Fed being too tight with their policy, but this was their entire plan since late 2022. They have targeted the labor market so they can get confidence when they’re cutting rates that their dual mandate will give them cover. As we all saw last week, the 10-year yield headed lower and closed at 3.79%, and mortgage rates are at the year’s lows. The Fed might be slow, but the bond market is not. I’ll be focusing on labor data more and more now because that’s how we’ll get lower rates with duration.
