Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why July Jobs Report Signals a Fed Shift
Transcript
- Lucas: So the July jobs report finally landed, and it was a genuine surprise. The economy lost twenty-three thousand jobs, according to the establishment survey, and that is the first negative print in years. We have been talking about a resilient labor market for so long, and now we have a number that just flips the script. Luna: Wait, we actually lost jobs? I thought we were still adding, just at a slower pace. What happened? Lucas: Right, that was the expectation. Consensus was for something like a hundred and fifty thousand new jobs. Instead we got a contraction, and it wasn't just the headline number. Revisions to May and June shaved off another chunk, so the underlying trend looks even softer. The unemployment rate did tick down to four point one percent, but that came with a drop in the labor force participation rate, which is not exactly a healthy sign. Luna: So the unemployment rate falling is actually masking something worse. People just stopped looking for work. Lucas: Exactly. And that disconnect is the key thing to understand here. The establishment survey, the one that counts payrolls, is saying we lost jobs. But the household survey, which is what the unemployment rate comes from, shows employment actually rising. You have two surveys telling different stories, and that makes the Fed's job a lot harder. Luna: That is a huge divergence. How do policymakers even know what to believe? Lucas: That is the million-dollar question. On one hand, the payroll number is notoriously noisy, especially in July, with seasonal adjustments and all that. On the other hand, we have seen other data lining up with the weakness. Job openings fell again, to seven point three million in June, the lowest in a while. ADP's private payrolls report also showed just forty-four thousand new jobs, well below expectations. So the broader picture is clear: the labor market is cooling, and maybe faster than we thought. Luna: So this isn't just a blip. It's a trend. And that has to change the calculus for the Fed. Lucas: It does, especially when you layer in the inflation data. The latest PCE reading showed core prices ticking up year-over-year, even as the headline number cooled. CPI also came down a bit, but core PCE is the Fed's preferred gauge, and it is stubborn. You have a cooling labor market and sticky core inflation. That is the exact combination that puts the Fed in a bind. Luna: Sticky inflation and a weakening jobs market. That sounds like stagflation-lite, not going to lie. Lucas: It is that classic dilemma. If they cut rates to support the labor market, they risk letting inflation re-accelerate. If they hold rates to fight inflation, they might be tightening into a slowdown. The Fed has been on hold for a while, with the funds rate at three point six three percent, and they've been saying they need more confidence that inflation is truly headed to two percent. Last month, the conversation was about the strength of the economy. Now it's about the cracks. Luna: And the bond market is already pricing in something. The ten-year Treasury yield jumped to four point seven percent this week. That's a big move, up about sixteen basis points over five days. Lucas: Yeah, that is interesting. You would think a weak jobs report would send yields down, not up. But the market is not just reacting to the jobs data. It's also looking at the core PCE uptick and worrying that the Fed might be behind the curve. There is a real debate right now about whether the next move is a cut or a hike, and the bond market is pricing in more uncertainty. Luna: A hike feels like a stretch, though, doesn't it? With the economy slowing and jobs falling? Lucas: It does, but you can't rule it out completely. The Fed under Warsh has been pretty hawkish. Remember, he has been clear that his priority is price stability, even if it means some pain in the labor market. And with core PCE still running above target, he might see this jobs report as a temporary blip rather than the start of a trend. The market is split, and that's why we're seeing this volatility in yields. Luna: So what's the actual data point that would tip the scales? Is it next month's jobs report, or something else? Lucas: I think it's a combination. The Fed will be watching the next couple of CPI prints, but also the JOLTS data, which has been trending down steadily. When job openings fall below seven million, that's a sign that the labor market is really loosening. And then you have the unemployment rate, which at four point one percent is still historically low, but it's creeping up from the lows. If we get another weak payroll number in August, I think the odds of a cut in September increase significantly. Luna: That makes sense. But let's talk about the average hourly earnings, because that was actually up a bit. Wages grew at a decent pace, which is good for workers, but it also feeds into inflation. How does the Fed balance that? Lucas: That's a good point. Average hourly earnings rose to thirty-seven dollars and sixty cents, up a couple of cents from the previous month. Year-over-year, wage growth is still around three and a half percent. That's not red-hot, but it's enough to keep the Fed cautious. If wages stay firm while employment falls, that's actually a mixed signal. It suggests companies are holding on to workers but not hiring, which is typical in a slowdown. The Fed will look at that and think, maybe the labor market is just normalizing, not collapsing. Luna: So it's not all doom and gloom. There's a case for patience. Lucas: Exactly. And that's why the market reaction has been so muddled. You have some analysts saying this is the beginning of a recession, pointing to the negative payroll print. Others are saying it's just a seasonal quirk, and the underlying trend is still okay. The truth is probably somewhere in between, and the Fed is going to need more data before they commit to any policy change. Luna: That's a really helpful way to think about it. So if we're looking at this as an investor or just someone trying to understand the economy, what's the one thing we should take away from this report? Lucas: I think it's that the labor market is no longer the pillar of strength it was a year ago. The cracks are real, and the Fed is paying attention. They're not going to panic over one report, but if the trend continues, we could see a policy shift. And that would have big implications for markets, from stocks to bonds to the dollar. So keep an eye on the next few data releases, especially jobless claims and the next CPI report. Luna: Yeah, and we should mention that initial jobless claims ticked up to one hundred ninety-nine thousand. That's still low, but it's moving in the wrong direction. Lucas: Good catch. That's the highest we've seen in months, and it's consistent with a labor market that's cooling. When claims start to rise while openings are falling, that's a classic sign of weakening demand for workers. It's not a crisis yet, but it's a trend worth watching. Luna: So, given all this, what do you think the Fed actually does at the next meeting? I know you're not a mind reader, but what's the smart bet? Lucas: I think they hold again, but the statement will change. They'll acknowledge the softening in the labor market, maybe even use the word 'cooling,' and they'll keep the door open for a cut later in the year. The market is pricing in about a fifty-fifty chance of a cut by September, and that seems fair. If we get another weak jobs number, then they'll probably move. But they want to see confirmation, not just one report. Luna: And if they do cut, what does that mean for the average person? Mortgage rates, savings accounts, that kind of thing? Lucas: A cut would be a signal, and it would likely bring down short-term rates, which could eventually trickle to mortgage rates, though not immediately. It would also mean lower yields on savings accounts, which is a downside for savers. But it would also be a vote of confidence that the economy isn't heading into a deep recession. So it's a mixed bag, but generally, markets like it stocks tend to rally on rate cuts, at least in the short term. Luna: It's funny, we spend so much time talking about the Fed, and at the end of the day, it's all about that one decision. But the data is what drives it, and this jobs report just made it a lot more interesting. Lucas: Absolutely. And you know, if people are finding this kind of analysis useful, we really appreciate it. The way we keep this show ad-free is through listener support. If today's episode helped you make sense of the numbers, you can support us at buy me a coffee dot com slash fexingo. It's a simple way to keep these conversations going. Luna: Yeah, we're a small team, and every bit helps us keep digging into the data. We're grateful for anyone who chips in. Lucas: So, back to the big picture. The next few weeks are going to be crucial. We have the CPI report coming out, and then the Fed's Jackson Hole symposium. That's where we might get more hints about their thinking. So stay tuned, because this is not over. The jobs report just opened a new chapter in the Fed's story. Luna: And we'll be here to break it all down. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening. We'll catch you next time.