Rate Cut Expectations Soar After Harsh Jobs Report
The Federal Reserve now seems to be behind the eight ball as employment is falling short.
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There's not a lot to cheer about unless one is hoping for future rate cuts.
Is "good" really bad and is bad simply "good" again? You bet your tail that this is once again the case. After the Bureau of Labor Statistics released what was a weak looking employment report for August, bond traders took yields lower across the slope of the curve and stocks/futures traders took equity index futures higher almost immediately.
Ahead of the release of the two BLS labor market surveys, the agency announced that it was having technical difficulties. I noticed no slowdown in the release, so that potential issue seems to pass. However, former BLS Commissioner Erika McEntarfer was only fired a month ago. I doubt the agency, under new leadership, has had enough time to correct its models, so the accuracy of the data remains a questionable overhang and will remain so until the public has had time to regain confidence in the agency's seasonal and birth/death models.
OK, let's do what we do best and get down to the numbers...
Job Creation
This area was a doozy. Non-Farm Payrolls is, as always, considered to be the headline number for the monthly BLS release. For August, drawn from the Establishment Survey, the Bureau of Labor Statistics is reporting Non-Farm Payroll growth of 22,000 salted, peppered and seasonally adjusted positions. This was well below the already low-bar consensus view for 76,000 new jobs.
Looking back, July NFP growth was revised up 6,000 to 79,000, while June NFP growth was revised down another 27,000 to -13,000. That's right, June was a negative month for job creation as far as the Establishment Survey is concerned. That turns Friday morning's NFP print into a net 1,000 from where we thought we were. Not kidding. June had previously been revised down to the now erroneous 27,000 new jobs from an initial report of 147,000, for anyone wondering why someone needed to get fired at the BLS.
Private sector job creation, still from the Establishment Survey, printed at 38,000 in August as government rolls decreased by 16,000 positions. This almost compares to the 54,000 new jobs reported in the ADP report on private sector employment on Thursday. Oddly enough and basically out of left field, the Household Survey showed 288,000 new hires for August. Huzzah? Not really, that survey showed -260,000 new hires in July. Yes, that's a minus sign. That survey also showed 148,000 newly unemployed persons.
Key Data
The Unemployment Rate, which is drawn from the Household Survey, inched higher in August from 4.2% to 4.3% as participation ramped higher. Participation increased from 62.2% to 62.3%, which moves that metric off of an almost three-year low. For those wondering, the Employment to Population Ratio held firm at 59.6%.
The number of individuals working part-time for economic reasons increased by 65,000 persons while the number of individuals working part-time for non-economic reasons increased by 528,000 persons. With 593,000 part-time jobs created, the implication taken from the household survey would suggest 571,000 full-time jobs were lost. As we have been mentioning in these articles, it appears that full-time employment is continuing its multi-year downward trend. The Underemployment Rate (U-6 unemployment), alarmingly, increased from 7.9% to 8.1% in August.
The average workweek, which is a measure of labor market demand, printed at 34.2 hours. This was in line with July's downwardly revised 34.2 hours. That is a historically weak level as the 34.1 print this past January was a 15-year low. A 34.4 figure is considered normal for those who are new to economics.
Wage growth was disappointing as well. Average hourly earnings printed flat from July at month-over-month growth of 0.3%. However, on a year-over-year basis, average hourly earnings printed at growth of 3.7%. That was down sharply from 3.9% growth in July and below expectations for 3.8% growth.
Demographics
The unemployment rate along gender, ethnic background and education:
- Adult Men increased from 4.0% to 4.1%
- Adult Women increased from 3.7% to 3.8%
- Teenagers decreased sharply from 15.2% to 13.9%
- White held steady at 3.7%
- Black or African American increased from 7.2% to 7.5%
- Asian improved from 3.9% to 3.6%
- Hispanic or Latino increased from 5.0% to 5.3%
- High School Dropouts increased sharply from 5.5% to 6.7%
- High School Graduates improved from 4.4% to 4.3%
- Some College/Associate Degrees increased from 3.0% to 3.2%
- Bachelor's Degrees and more held steady at 2.7%
My Thoughts
Job creation has now been, after revisions made over the past two months, in a four-month slump. No, employees are not being laid off in huge numbers, but as we saw in the Beige Book, there's not a lot of hiring going on and wage growth is starting to falter.
The move from full-time employment to part-time work appears to be accelerating and is not very likely to be voluntary. There may be a considerable number of laborers in those numbers who are working more than one job in order to support their households.
We also, in this report, see a revaluation in higher education. That is something that has been weakening over years, but we see in August that teenagers and high-school dropouts really took it on the chin. Those who finished either high school or college appear to be holding their own. That said, those who started college, but did not finish do seem to be moving backwards at this time.
I find it troubling that unemployment appears to have increased so dramatically across the Black or African-American demographic. This group experienced a move from 7.2% unemployment in July to 7.5% unemployment in August. That's also up from 6.8% unemployment in June. This group has suffered an awful summer. Similarly, but to a less severe degree, the Hispanic or Latino community has seen its unemployment rate move from 4.8% to 5.0% to 5.3% over that same time frame.
On Policy...
Markets are telling investors all they need to know. Equities have rallied after the release, but not to the degree one might have thought. Yes, rates are likely headed lower, but that is due to a clearly decelerating economy and a clearly softer labor market. In anticipation of lower rates, the U.S. Dollar Index has dropped about 0.8% from where it was earlier and is down more than 1% since Wednesday.
Looking at the Treasury yield curve, I see the U.S. Ten-Year Note paying 4.09%, down from 4.16% on Friday morning and down from 4.31% earlier this week. The U.S. Three-Month T-Bill currently pays 4.02%, down from 4.09% earlier on Friday and 4.15% earlier this week. Gold, silver and Bitcoin are all rallying significantly as well.
It's really about fed funds futures right now. Fed Chair Powell has been reluctant to cut rates, and I had become sympathetic toward him after being hard on him once we saw that inflation was re-emerging. That said, even with September CPI likely to print with a "3" handle, we are behind the eight ball. The Fed needs to cut short-term rates, and they are now going to have to be aggressive.
With the target range for the fed funds rate currently at 4.25% to 4.5%, futures markets are pricing in an 88% likelihood for a 25-basis point rate cut on September 17 and a 12% likelihood for an emergency 50-basis point rate cut. There is now an 80% probability for a second 25-basis point rate cut on October 29 and a 74% probability for a third 25-basis point rate cut on December 10. That's 75-basis points of rate cuts fully priced in over the balance of the year, up from a wishy-washy 50-basis points earlier this week.
There are also another 75-basis points worth of rate cuts prices in for calendar year 2026. That takes the likelihood for the entire easing cycle from cuts of 125 basis points earlier this week up to 150 basis points.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
