Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Factory Layoff Spike That Contradicts a Strong Job Market
Transcript
- Lucas: There's a number in the data this week that stopped me cold. Factory job cuts in June have hit levels we haven't seen since 2008 and the worst of Covid. And yet the overall jobs market looks fine — 4.3 percent unemployment, job openings ticking back up to 7.6 million. So which story do we believe? Luna: That's a pretty stark divergence. The S&P Global report that came out Tuesday — they track purchasing managers and layoff announcements — is saying manufacturing is shedding jobs at a pace that's historically been a recession flag. Lucas: Right. And we've talked a lot on this show about the lag effect of the Fed's rate hikes. The fed funds rate is still at 3.63 percent, even though they've held steady for months. But manufacturing is the most interest rate sensitive part of the economy — capital equipment, inventory financing, commercial real estate for factories. It's the first domino. Luna: So the question is whether this is a canary in the coal mine for the broader labor market, or just a sector-specific shakeout. Lucas: Exactly. Let's look at the details. The S&P Global report said factory job cuts in June were the third-highest on record, behind only late 2008 and April 2020. That's not a normal cyclical adjustment. And it's happening while the rest of the economy is still adding jobs — nonfarm payrolls hit 159 million in May, up 172,000 from April. Luna: So the headline is fine, but beneath the surface, there's a real pocket of weakness. What's driving it? I mean, aside from rates. Lucas: A couple of things. One is the strong dollar. The dollar index has been elevated for over a year now, which makes U.S. exports more expensive. And manufacturing is heavily export-oriented — machinery, chemicals, aircraft. When the dollar is strong, foreign buyers pull back. Luna: And we're also seeing a shift in global supply chains. Some production is moving to Mexico and Southeast Asia, not necessarily because of tariffs anymore, but because companies decided during Covid that they wanted geographic diversification. Lucas: That's a structural headwind that doesn't go away when rates come down. So even if the Fed cuts later this year — and the market is pricing in maybe a cut in September — those factory jobs might not come back. The economy is rebalancing toward services, and manufacturing is bearing the brunt. Luna: There's also the inventory cycle. During the supply chain crunch of 2021-2022, companies stockpiled like crazy. Now they're working through that inventory, so new orders are weak. And weak orders mean you don't need as many workers on the factory floor. Lucas: That's a great point. The inventory to sales ratio for manufacturing is still above pre-pandemic levels. So even as consumer demand holds up — and it has, retail sales have been steady — factories aren't seeing the order flow they'd need to maintain headcount. Luna: And this is all happening while the services side of the economy is doing fine. The ISM services PMI has been in expansion territory all year. So we've got this two-speed economy — services humming, manufacturing in a mild recession. Lucas: That's the narrative that the Fed is wrestling with. If you look at the broadest measures — GDP growth, the unemployment rate, job openings — the economy still looks resilient. But the manufacturing data is flashing red. And historically, when manufacturing goes into a sustained downturn, it eventually bleeds into services. Luna: We saw that in 2007-2008. Manufacturing started contracting well before the rest of the economy, and by the time the financial crisis hit, it was already in deep trouble. But is this cycle different because the pandemic created such a weird starting point? Lucas: It might be. For one thing, the labor market overall is still tight. JOLTS openings at 7.6 million is still above pre-pandemic levels. Workers who lose factory jobs might be able to find work in logistics, healthcare, construction — the services sector is still hiring. So the unemployment rate might not spike. Luna: But the quality of those jobs might be different. Manufacturing jobs tend to pay higher wages and offer more stable hours than, say, retail or food service. So even if workers find new jobs, they might take a pay cut. Lucas: That's a real concern. Average hourly earnings for production and nonsupervisory workers in manufacturing are around $28 an hour. In leisure and hospitality, it's closer to $20. So a shift from manufacturing to services could mean lower income growth, which could weigh on consumer spending down the road. Luna: And that gets back to the inflation picture. The Fed has been watching wage growth as a potential driver of sticky services inflation. If workers are moving into lower-wage jobs, that might actually ease some pressure. But it's not a clean story. Lucas: Not at all. And I think that's the point of this episode — the macro data is sending mixed signals, and the Fed has to make a decision based on which signal they trust more. Do they focus on the resilient headline numbers and hold rates steady, or do they look at the manufacturing weakness and start cutting? Luna: The bond market seems to be betting on cuts. The two-year yield is at 3.69 percent, which is actually below the effective fed funds rate of 3.63 percent. That's an inversion at the front end — the market is pricing in rate cuts within the next year. Lucas: Right, and the ten-year yield at 4.41 percent is also down from its highs. But the ten-year breakeven inflation rate is 2.21 percent, which is actually below the Fed's 2 percent target if you account for the PCE bias. So the bond market is saying inflation is under control and the economy needs lower rates. Luna: Which is exactly the argument for cutting. But the Fed has been hesitant because core PCE is still running above 2 percent — the latest reading was 2.8 percent year-over-year. They don't want to declare victory prematurely. Lucas: And that's the tension. If factory layoffs accelerate and start showing up in jobless claims — which are still low at 226,000 — then the Fed might have to act faster. But for now, they're in a wait and see mode. Luna: So what should listeners watch in the next few weeks to see if this manufacturing weakness is spreading? Lucas: I'd watch two things. First, the ISM manufacturing PMI for June, which comes out next week. If it drops below 48 — it's been hovering around 49 — that would signal deepening contraction. Second, initial jobless claims. If they start trending above 250,000, that would suggest layoffs are broadening beyond manufacturing. Luna: And on the Fed side, we've got the FOMC minutes from the June meeting coming out in a couple weeks. That'll give us a sense of how much weight they're putting on the manufacturing data versus the services data. Lucas: Exactly. The bottom line is that the economy is not a monolith. You can have a strong headline and a weak underbelly at the same time. And for investors and workers, the question is which part of the economy you're exposed to. Luna: And if you're looking at the stock market, the divergence between the Dow and the Nasdaq tells a similar story. The Dow is up half a percent over the past five days, while the Nasdaq is down over 2 percent. That's partly sector rotation — out of tech, into industrials and financials — but it also reflects the uncertainty about where growth is coming from. Lucas: It does. And it's worth noting that the small-cap Russell 2000 is up 2.4 percent over the same period. That might be a signal that investors expect rate cuts to benefit smaller, more domestically oriented companies. But if manufacturing keeps weakening, those small caps could be the first to feel the pain. Luna: You know, as we drill into these numbers, it's moments like these that remind me why we do this show — trying to make sense of the crosscurrents. And if you find value in these conversations, there's a simple way to help keep them going and ad-free. Lucas: Yeah, absolutely. We've never run ads on The Macro Memo, and we'd like to keep it that way. If you're able to toss a few bucks into the tip jar, it genuinely helps us keep the lights on and the research flowing. That's buy me a coffee dot com slash fexingo. Luna: No pressure, really. Just if it's made a difference in how you think about the economy, we appreciate the support. And now back to the factory floor — because there's more to unpack on what this means for the Fed's next move. Lucas: So the Fed's next move — assuming they cut in September, which is what the futures market is pricing in — the question is whether a quarter-point cut is enough to stem the manufacturing bleeding. Probably not. Rate cuts take 12 to 18 months to fully work through the economy. Luna: So even if they cut in September, the impact on factory hiring wouldn't be felt until late 2027 at the earliest. That means the manufacturing slowdown could have more room to run. Lucas: Exactly. And that's why some economists are calling for a more aggressive cut — 50 basis points — to front-run the weakness. But the Fed has been burned before by cutting too early and then having inflation reaccelerate. Luna: The 1970s style mistake. They don't want to be the next Arthur Burns. Lucas: Precisely. So we're in this holding pattern where the data is conflicting and the Fed is cautious. The one thing that could tip them over the edge is a sharp rise in jobless claims. For now, that hasn't happened. But the factory layoff data is a warning that it could. Luna: And for workers in manufacturing, it's already happening. The question is whether the rest of the economy can absorb them quickly enough to prevent a broader downturn. Lucas: That's the million-dollar question. And I think the answer depends on how long the services sector can keep humming. As long as consumers are spending and businesses are investing in software and logistics, there's a buffer. But if those start to slow, the manufacturing weakness could become a contagion. Luna: We'll be watching the consumer confidence data and retail sales for early signs. Thanks for joining us on this episode of The Macro Memo. Lucas: Until next time, keep your eyes on the factory floor.