Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why The Labor Market Is Hiding Its Weakness
Transcript
- Lucas: Look at the headline from Friday’s jobs report: only twenty-nine thousand new private sector jobs added in September. That is not just a deceleration; it is a near-collapse compared to the robust hiring we saw earlier this year. But here is the thing that keeps me up at night, it is not the total number. It is who stopped showing up. Luna: You mean the men? Because the CNBC pieces were all over that angle this week. Men are losing ground in the labor market, and the headline doesn't really scream that. Lucas: Exactly. The unemployment rate ticked up to four point two percent, which sounds benign if you are looking at it through the lens of twenty-twenty-two. But when you strip out the demographic shifts, specifically the steady erosion of male labor force participation, the underlying demand for workers is evaporating faster than anyone admits. We are seeing a structural break, not a cyclical blip. Luna: Right, and if you look at the JOLTS data from August, job openings dropped to seven thousand thirty-nine thousand. That gap between openings and unemployed workers has been closing, but this month it feels like it snapped shut. Lucas: It did. And I want to pull in the ADP private sector report from Wednesday, which showed ninety thousand jobs added. On the surface, that looks better than the government’s twenty-nine thousand. But ADP tends to smooth over the volatility in small businesses and the gig economy, whereas the payroll survey captures the big employers who are actually feeling the pinch of higher borrowing costs. When the big players stop hiring, the signal is real. Luna: So we have fewer openings, lower payrolls, and yet the Fed Funds rate is sitting at three point seventy-five percent. Are they worried about moving too fast or too slow right now? Lucas: That is the million-dollar question. The Fed’s preferred gauge, core PCE, came in at three percent for August. That is much lighter than expected, which should theoretically give them room to cut. But the labor market is the sticky part. If they cut rates while unemployment is ticking up and job creation is stalling, they risk reigniting wage pressures without fixing the growth deficit. It is a classic stagflation-lite scenario, where growth is weak but prices are still stubbornly above target. Luna: I keep thinking about the ten-year Treasury yield holding at five point two eight percent. The bond market is basically saying they don't trust the Fed to get inflation down without breaking something else. Lucas: Precisely. The bond market is pricing in a slower recovery. And if you look at the average hourly earnings, they went up to thirty-seven point eighty dollars. That is a slight increase, but when you factor in the declining purchasing power of those same workers, real wages are effectively flatlining. Consumers are spending, but they are doing it by dipping into savings or using credit cards, neither of which is sustainable. Luna: So we are seeing a divergence between the stock market, which is kind of hovering around these highs, and the actual ground-level reality of employment. How do you reconcile that? Lucas: You don't. Or rather, you acknowledge that the S&P five hundred is forward-looking and priced on AI productivity dreams, while the labor market is backward-looking and grounded in current demographics. The tech-heavy Nasdaq is up one point four percent over the last five days, while the Dow is down. This is a bifurcated economy where capital flows to efficiency, but labor flows nowhere because there are no jobs to flow to. Luna: It feels like the narrative has shifted from 'soft landing' to 'no landing' for a lot of folks watching the weekly claims data. Initial jobless claims are down to one hundred ninety-seven thousand, but that drop is mostly seasonal adjustment noise, isn't it? Lucas: It is almost entirely noise. The trend line for claims has been drifting upward for months. When you combine that with the fact that the unemployment rate is rising despite a shrinking labor force, it tells you that people are giving up looking. That is the hidden metric. The U-6 measure, which includes discouraged workers and part-time workers wanting full-time roles, is likely climbing even faster than the headline four point two percent suggests. Luna: Which brings us back to the Fed. Do you think Powell will hold rates steady in November, or does this weak jobs report force his hand? Lucas: I think he holds steady, but he signals aggressively. The FOMC needs to see more proof that inflation is truly tamed before cutting into a weakening labor market. If they cut now, and services inflation remains sticky—which it has been for three quarters straight—they will be blamed for causing a second wave of price hikes. So patience wins out over action. Luna: But patience is expensive for companies carrying debt at these rates. Have we seen the impact on corporate balance sheets yet? Lucas: We have. Look at the commercial real estate sector and regional banks. They are the canaries in the coal mine. When the spread between short-term rates and long-term yields stays inverted, as it has with the two-year at three point nine percent versus the ten-year at five point two eight percent, bank profitability suffers. They stop lending, which means small businesses stop expanding, which means fewer jobs. It is a chain reaction that started eighteen months ago and is only now hitting the employment data. Luna: It is fascinating how delayed the lag effect is. Everyone thought it would hit in early twenty-six, but it seems to be arriving in late twenty-six instead. Lucas: Because the Fed moved later than the market expected. They kept rates higher for longer to crush the last bit of inflation, and now the bill is coming due. The irony is that core inflation is at three percent, which is good, but it is not the two percent target. So they cannot relax, but the economy is relaxing on its own. That is a dangerous spot to be in. Luna: Yeah, and if consumer sentiment drops further, as we saw in those recent polls, spending could contract. That would make the labor market collapse happen faster than the Fed wants. Lucas: Exactly. And that is where the risk lies. We are walking a tightrope. One bad month of retail sales or a sudden spike in oil prices, and the Fed is forced to either hike again or watch unemployment skyrocket. Neither option is politically palatable for them. Luna: So what should listeners do with this information? Just wait and see? Lucas: Wait, but watch the monthly job openings data closely. When JOLTS reports come out, ignore the headline number and look at the quits rate. If people are quitting less, it means they are scared to leave their jobs. That is a leading indicator for wage moderation. And if the quits rate stays low while unemployment rises, it confirms we are in a cooling cycle, not a boom. Luna: Got it. Low quits, rising unemployment, and sticky inflation. It is a messy mix. Lucas: It is. And until the Fed finds a way to lower rates without letting inflation run hot, the labor market will remain under pressure. The twenty-nine thousand jobs figure is a warning shot, not the final bell. Luna: If walking through the economy with us has made something click... Lucas: the way these stay ad-free is listener support. Buy me a coffee dot com slash fexingo. Luna: It helps keep the research sharp and the analysis honest, so thanks for being part of that ecosystem. Lucas: Back to the data. Let's talk about the regional disparities. While national headlines focus on the aggregate, some regions are already seeing double-digit unemployment in manufacturing hubs. Luna: Right, the Midwest is taking a beating compared to the Sun Belt. Does that geographic split matter for the Fed's national policy? Lucas: It matters immensely. The Fed sets one rate for forty-six states. If the Sun Belt is still hiring in construction and tech, but the Rust Belt is laying off auto workers, a single rate path ignores half the country's pain. We might see a return to regional banking stress as local economies diverge. Luna: So the national average hides a lot of local misery. Lucas: Always has, but never this sharply. And as we move into Q-four, expect more volatility in the jobs reports as seasonal adjustments mask the true trend. Luna: One last thing on the inflation side. Core CPI is at three hundred thirty-seven point eight. Is that really coming down, or is it just plateauing? Lucas: It is plateauing. Services inflation is the anchor dragging the ship down. Unless housing costs stabilize completely, which takes another twelve to eighteen months, we are stuck with this three percent floor. It is not deflation, but it is not disinflation either. It is stagnation with a price tag. Luna: Stagnation with a price tag. That is going to stick in my head. Lucas: Good. Keep an eye on the next PCE print. If it stays above three percent, the Fed's hands are tied. If it drops, we might see a surprise cut in December. Either way, the labor market is the true test of whether the economy is healing or just surviving. Luna: Thanks for breaking down the silence behind the noise, Lucas. Lucas: Anytime, Luna. Let's see if October brings more clarity or just more confusion.