Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why the July Jobs Report Signals a Fed Shift
Transcript
- Lucas: So Luna, the July jobs report is out, and it is a genuinely weird one. Unemployment dropped to 4.1 percent, but payrolls actually shrank by twenty-three thousand. That's the kind of split that makes you check the data twice. Luna: Yeah, that is bizarre. How do you get fewer people employed but a lower unemployment rate? That math only works if the labor force itself is shrinking. Lucas: Exactly. And that's the key. The unemployment rate comes from the household survey, while payrolls come from the establishment survey. They're measuring different things. The household survey counts people, and the establishment survey counts jobs. When those two diverge, it tells you something about how people are behaving. Luna: So what's the story here? Are people dropping out of the labor force? Or is something else going on? Lucas: Well, the labor force participation rate is still below pre-pandemic levels. But in July, it seems like the drop in unemployment was more about people leaving the labor force than finding jobs. The participation rate ticked down, and that's a signal that some workers are just giving up or retiring early. Luna: That's a bit worrying. If people are dropping out, that's not the same as a healthy labor market tightening. It's more like a shrinking pool of available workers. Lucas: Right. And that's why the Fed is watching this so closely. They want to see wage growth and participation, not just the headline unemployment number. And speaking of wages, average hourly earnings were flat at thirty-seven sixty. That's not the kind of pressure that would push the Fed to hike. Luna: So with inflation cooling and wages flat, the Fed's on hold. But is there any chance they cut rates in September? The market seems to be pricing in some easing. Lucas: The market is always pricing something, but the Fed has been pretty clear that they want to see more data. The Fed funds rate is at three sixty-three, and they've been holding steady. The real puzzle is that inflation is cooling, but the labor market is showing these mixed signals. It's not the kind of picture that demands immediate action. Luna: And then you have the bond market. The ten-year Treasury yield is at four point seven percent, which is actually up a bit over the week. That's interesting because if the Fed is going to cut, you'd expect longer-term yields to fall, not rise. Lucas: That's a great point. The ten-year yield is more about growth and inflation expectations than the Fed funds rate. And we're seeing the ten-year breakeven inflation rate tick up to two point two seven percent. So the bond market is saying inflation isn't dead, and maybe growth isn't either. Luna: But GDP growth slowed to one point five percent annualized in the second quarter. That's a decent drop from the two point one we saw before. So where's the growth coming from? Lucas: Good question. The economy is in this weird spot where growth is slowing, but the labor market is still relatively tight. And you've got the budget deficit surging to its highest level since March 2021. That's fiscal stimulus, even if it's not labeled as such. That could be propping up demand and keeping yields higher than they'd otherwise be. Luna: So the Fed is stuck between slowing growth and a deficit-fueled economy that keeps chugging along. That's a tough spot. Lucas: It is. And that's why they're being so cautious. They don't want to cut rates and reignite inflation, but they also don't want to keep rates too high and tip the economy into recession. It's a balancing act. Luna: And the job openings data — JOLTS — that fell to seven point three six million in June. That's a pretty big drop. Is that a sign that the labor market is loosening? Lucas: Yes, and that's actually one of the more consistent signals we have. When job openings fall, it means employers are pulling back on hiring. It doesn't necessarily mean layoffs, but it does mean less demand for labor. And that's the kind of thing the Fed is watching for to confirm that inflation will keep cooling. Luna: But if job openings are falling and payrolls are shrinking, why is unemployment going down? That seems counterintuitive. Lucas: Because the labor force is shrinking faster than employment. People are leaving the workforce, and when they do, they're no longer counted as unemployed. So you get this weird situation where the unemployment rate drops even as the job market softens. It's a statistical artifact, but it's also a real sign of demographic shifts and maybe some discouraged workers. Luna: So the household survey is telling us something about the labor force, and the establishment survey is telling us about jobs. And they're telling different stories. Lucas: Exactly. And that's why it's so important to look at both. If you only look at the unemployment rate, you'd think the labor market is strong. If you only look at payrolls, you'd think it's weak. The truth is in between. Luna: And that's why the Fed is so focused on the labor market right now. They're not just looking at one number. Lucas: Right. And you know, this kind of data-driven analysis is exactly what we try to do here on the show. We dig into the numbers, look at the context, and try to make sense of it all. And if you find that valuable, you know, it's a lot of work to put together every day. We do it because we love it and because we think it matters. But we couldn't do it without listener support. So if you're in a position to help, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a small way to keep the show ad-free and independent. No pressure, just if you can. Luna: And we really appreciate it. It helps us keep digging into these stories and bringing you the context that matters. Lucas: Anyway, back to the labor market. The other thing that stands out is initial jobless claims. They ticked up to two hundred nine thousand for the week of August eighth. That's up from two hundred thousand the week before. It's still low by historical standards, but it's a sign that layoffs might be creeping up. Luna: So we've got jobless claims rising, job openings falling, payrolls shrinking, but unemployment falling. It's a mixed bag, to say the least. Lucas: Yeah, and that's why the Fed is in a tough spot. They have to weigh all these signals and decide what they mean for inflation and growth. And they're not going to get a clear picture from any single report. Luna: So what should we be watching for in the coming weeks? What would tip the scales one way or another? Lucas: I think the next few CPI and PCE reports will be key. Core PCE is still running above two percent, and the Fed wants to see that come down. But also, if jobless claims keep rising, that's a sign that the labor market is weakening faster than expected, and that could push the Fed toward a cut. Luna: And the ten-year yield at four point seven percent — that's pretty high. If that starts to fall, it might signal that the bond market is pricing in a slowdown. Lucas: Exactly. The bond market is always a good reality check. And right now, it's telling us that inflation expectations are anchored but not dead, and that growth is slowing but not collapsing. It's a delicate balance. Luna: So the Fed is basically waiting for more clarity. They don't want to act too early or too late. Lucas: That's the game. And the market is trying to read their minds. But honestly, the data is so mixed that anyone who says they know exactly what the Fed will do is guessing. Luna: Well, we'll be watching. Thanks for breaking it down, Lucas. Lucas: Anytime, Luna. The macro picture is always evolving, and we'll be here to make sense of it.