Employment Report Takeaways

Some quick takeaways from the employment report to chew on over the weekend:

1.) Employment growth has slowed markedly. I already believed this to be the case, but the latest employment report with its downward revisions for previous months make clear that job growth shifted gears in 2019 after accelerating in 2018. By January, the three-month average monthly job growth rate was 245k. As of July, it had fallen to 140k.

2.) Employment growth remains solid. The three-month average for job growth has hovered around these levels for four consecutive months. It is also consistent with Powell’s description of the labor market at this week’s press conference: “We expect job growth to be slower than last year, but above what we believe is required to hold the unemployment rate steady.”

3.) Fiscal stimulus didn’t have any legs. The slowdown in jobs growth and soft business investment make evident that the economy did not experience a supply side miracle as the result of the tax overhaul.

4.) Fed was right to cut rates. The Fed could have held rates steady on the basis of job growth sufficient at a minimum to hold unemployment steady (they tend to believe that they only need around 100k per month to hit that mark). That probably would have been a mistake. With job growth slowing and inflation still low, the Fed’s least risky move was to protect against further slowing. In addition, at least the December rate hike was likely premised in part on the hypothesis that fiscal stimulus would have longer-lasting impacts. Job growth was still accelerating at that point; the deceleration was clearly more rapid than the Fed anticipated. If the Fed was raising rates in part of a monetary offset to fiscal stimulus, they should reverse those hikes.

5.) Odds favor another rate cut in September. The labor market has clearly slowed, manufacturing is soft, and investment is weak. Moreover, the uncertainty cited by Powell this week clearly remains an issue as evidenced by President Trump’s renewed tariff threats. I don’t see it likely that the investment picture or trade uncertainty will moderate sufficiently to prevent the Fed from another rate cut in six weeks. It would be a bitter pill for the Fed hawks to swallow.

6.) Still, there is a risk the Fed holds steady. In June, the Fed clearly signaled a rate cut in July. In July, we don’t have such a strong signal for September. It’s not in the bag. Things that I don’t think the Fed has come to terms with yet: 1.) ┬áif they want higher interest rates in the future, they need to keep rates lower now and 2.) the whole idea of getting rates well above 2% in a world where the major economies can’t hold 0% is just not going to work.

Enjoy the weekend!