Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Factory Layoffs Are Spiking Despite a Strong Jobs Market
Transcript
- Lucas: So the S&P 500 is down almost 2 percent over the past five days, and we've got a new headline that factory job cuts in June are approaching levels we haven't seen since the financial crisis and the pandemic. Luna: That is stark. Especially when you look at the overall jobs picture — job openings jumped back above 7.6 million in April. So we've got this split between manufacturing and the rest of the economy. Lucas: Exactly. And I think that split is the story right now. The factory layoffs aren't coming out of nowhere — we've been watching the ISM manufacturing index in contraction territory for months. But the scale is what caught my attention. Luna: Look, if walking through the economy with us has made something click — maybe it’s worth the price of a coffee. If today was worth a coffee to you, that’s the link: buy me a coffee dot com slash fexingo. Lucas: Yeah, honestly, listener support is what keeps this show ad-free and independent. So if you’ve gotten something out of it, that link matters. Okay — back to those factory numbers. Luna: The S&P report that came out yesterday says job cuts in manufacturing are closing in on the peaks of 2008-2009 and 2020. What’s driving that here in mid-2026? Lucas: A few things. First, the lagged effect of higher rates. The Fed funds rate is still at 3.63 percent — that's where it's been since May. But the cumulative impact on capital-intensive industries like manufacturing is significant. Companies that borrowed to expand in 2021 and 2022 are now facing much higher refinancing costs. Luna: Right, and we saw the two-year Treasury yield tick up to 4.26 percent this week. So short-term borrowing costs are actually rising again, not falling. Lucas: That's the opposite of what the market was hoping for earlier this year. The curve is still inverted — the 10-year is at 4.49, the 2-year at 4.26 — but the inversion has flattened. That's not a recession all-clear signal. In fact, some argue a flattening inversion can be a late-cycle warning. Luna: And the jobs data itself is tricky. JOLTS openings jumped to 7.62 million in April from 6.89 million — that's a big swing. But hires and quits didn't move as much. So companies are posting jobs but not actually filling them at the same pace. Lucas: That suggests a mismatch. Employers in services still need workers, but they're being pickier. Meanwhile, factories are cutting. The April data also showed that manufacturing employment actually fell by 4,000 jobs that month, and we know May payrolls were softer overall. Luna: The unemployment rate is still 4.3 percent — flat. So the headline looks fine. But the composition is shifting. If you're a factory worker in the Rust Belt, the labor market feels a lot worse than it does if you're in tech or healthcare. Lucas: And that's the thing about averages. The S&P 500 is at 7,365. The NASDAQ is down 3 percent in five days. But the Russell 2000 — small caps — is actually up 1.2 percent over the same period. So there's a real divergence between big tech and the broader economy. Luna: Small caps are more domestic, more exposed to Main Street. So that Russell gain might reflect some hope that rates will eventually come down. But if manufacturing is cutting jobs, that hope is fragile. Lucas: Let's talk about what the Fed sees. The 10-year breakeven inflation rate is at 2.21 percent — down from 2.23 yesterday. That's market-implied inflation expectations over the next decade. It's actually close to the Fed's 2 percent target. Luna: So the bond market is saying inflation will moderate. But the Fed is still stuck at 3.63 percent. Core PCE, their preferred gauge, was at 129.6 in April — up from 129.32. That's still running above target on a year-over-year basis. Lucas: Right. And core CPI came in at 336.1 in May, up from 335.42. So the inflation data isn't falling fast enough for the Fed to cut. But the real economy — especially manufacturing — is showing real stress. That's the dilemma. Luna: What do you make of the fact that jobless claims dropped to 226,000 from 230,000? That's low. So layoffs overall aren't surging — it's really concentrated in manufacturing. Lucas: Exactly. Claims are still historically low. That tells me the service sector is holding up. But the factory cuts are a signal about where we are in the cycle. Capital spending tends to be the first thing companies pull back when they're uncertain about demand. Luna: And we've had that headline about Iran oil sanctions waivers — that could lower energy costs, which might help manufacturers. But analysts say the economic toll is already baked in. Lucas: Yeah, the Hormuz relief story is interesting geopolitically, but for a factory in Ohio that's already cut its shifts, cheaper oil doesn't bring back orders. The lag is too long. Luna: So what's the actionable takeaway? If I'm an investor or just someone watching the economy, what should I focus on? Lucas: I'd watch the ISM manufacturing report for June — that comes out next week. If it stays below 50 and employment sub-index drops further, that's a confirmation. Also watch the weekly jobless claims — if they start trending above 250,000, that's when the factory weakness might be spreading. Luna: And the yield curve. If the 2-year goes above the 10-year again — a deeper inversion — that's the bond market screaming recession. Lucas: Right now the spread is about 23 basis points inverted. It's not screaming yet. But it's not normal either. The combination of factory job cuts, sticky core inflation, and a flat to inverted curve is a recipe for more uncertainty. Luna: It feels like we're in a waiting period. The Fed is waiting for inflation to come down. The bond market is waiting for the Fed to cut. And manufacturers are waiting for demand to pick up. Lucas: Exactly. And in the meantime, people lose jobs. The headline unemployment rate might stay at 4.3 percent for a while, but the mix is changing. That's worth keeping an eye on.