Pro Perspectives 7/8/24





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July 08, 2024

The Fed has told us they are watching the job market “carefully” for “cracks” as a condition to start the easing cycle.
So, were there cracks in Friday's jobs report?
We'll take a look, but first let's revisit the challenges that the Fed has had with allowing this type of report to dictate policy. 
As we discussed over the past three years, the Bureau of Labor Statistics (BLS) has a history of making large revisions in the jobs data under the Biden administration.
Back in 2021, when the Fed was ignoring inflation, dismissing it as "transitory," the BLS was, all along, under-reporting jobs — to the tune of almost 2 million jobs from when Biden took office, until the Fed started (finally) raising rates.  The initial reports on jobs during the period gave the impression that the job market was weaker than it was in reality, and the Fed accommodated weakness by maintaining its stimulative position.
And as we know, the Fed got caught behind the curve on inflation.  
Then the Fed began the tightening cycle back in March of 2022, and the BLS has since over-reported jobs by 749,000 — giving the initial impression to consumers, businesses, investors and economists that the job market is hotter than it actually is. 
This, in part, has resulted in a Fed that has held the real interest rate (the Fed Funds rate minus the inflation rate) at historically tight levels for the past twelve months.   This stance has arguably put undue downward pressure on the economy, and employment.  And we may find that the Fed has followed its mistake of being too easy for too long, by being too tight for too long. 
So, given this context, what did we get in this past Friday's report? 
The BLS revised down the job creation of the past two months, by over 100,000 jobs.
The unemployment rate ticked UP to 4.1%.  That's an historically low rate of unemployment, but it's the highest since November of 2021.  And 4.1% is higher than the unemployment rate for the two years prior to the pandemic (2018-2020).
On the surface, a 4.1% unemployment rate and 206,000 jobs added in June doesn't seem like too much to be concerned about. 
But the pattern of revisions in payrolls and the rate-of-change in the unemployment rate should be a "ringing bell" for the Fed.
The unemployment rate is 7/10ths of a point above the cycle low (3.4%) of just 14 months ago.  The speed of this change in joblessness puts it in the unique company of the past four recessions (and consistent with related Fed rate cuts).
We'll find out tomorrow morning, if Jerome Powell considers that a "crack."  He'll give his semi-annual testimony to Congress at 10am.