Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / What the Fed Makes of Factory Job Cuts Near Crisis Levels
Transcript
- Lucas: Luna, I want to start with a number that caught my eye yesterday. S&P Global put out a report saying factory job cuts in June are approaching levels we haven't seen since the financial crisis and the early days of Covid. Luna: That's stark. And it's not just a few headlines — that's broad-based, right? Lucas: Right. And this is the kind of data point that the Fed is watching very closely. Because if manufacturing is shedding jobs at that pace, it raises questions about whether the broader labor market is about to soften more than the Fed expects. Luna: Especially after all the rate hikes we've had. But I'm also thinking — factory job cuts have been a lagging indicator in past cycles. Companies often hold onto workers as long as they can, then cut abruptly. Lucas: That's a crucial distinction. Let's dig into that. So the S&P report — it's based on their PMI data, which tracks purchasing managers' sentiment. The employment sub-index has been contracting for months, but the actual layoff announcements are now accelerating. Luna: So the PMI was the warning sign, and now the layoffs are the confirmation. Lucas: Exactly. And the scale matters. S&P said the June rate of job cuts is running at a pace comparable to 2008 and early 2020. Now, those were both recessionary environments. So the question is: are we already in a recession that hasn't been officially declared yet, or is this something different? Luna: What's the Fed's read so far? They've been pretty focused on the services side of the labor market, where wage growth has been sticky. Lucas: Right. And that's the tension. The Fed's latest dot plot from the June meeting showed they still expect two quarter-point rate cuts this year. But that projection was based on the outlook before this factory job cuts report hit. If the labor market deteriorates faster than expected, they might have to cut sooner or more aggressively. Luna: But then you have inflation still running above target. Core CPI came in at 336.1 in May, up from 335.42. And core PCE for April was 129.6, up from 129.32. That's not a clear disinflation trend. Lucas: No, it's not. So the Fed is caught between a labor market that's showing cracks in manufacturing and an inflation rate that's still stubborn. The ten-year breakeven rate is down to 2.21, which suggests bond traders expect inflation to moderate. But the actual CPI data isn't confirming that yet. Luna: So the bond market is pricing in a recession, but the inflation data isn't cooperating. That's a tough spot for the Fed. Lucas: Let's zoom in on the factory job cuts themselves. Which industries are being hit hardest? S&P flagged machinery, metals, and transportation equipment. These are cyclical sectors that are sensitive to interest rates and global demand. Luna: And a lot of that is tied to the housing market slowdown and the pullback in commercial construction. We've talked before about commercial real estate stress, and now it's showing up in the manufacturing supply chain. Lucas: Exactly. So when you see factory job cuts, it's not just about the factory floor. It's about the whole ecosystem. And the Fed has to weigh whether this is a temporary adjustment or a structural shift. Luna: What does history tell us? In past cycles, when factory job cuts spike like this, has the economy been able to avoid a recession? Lucas: It's rare. In 2015-2016, we saw a manufacturing downturn driven by the oil price collapse and a strong dollar. Factory job cuts rose, but the economy didn't tip into recession. The Fed even cut rates in 2016. But that was a different inflation environment — inflation was below target back then. Luna: So the Fed had room to ease. Today, they don't have that same room because inflation is still above 3 percent on core PCE. Lucas: Right. And that's the key constraint. The Fed's dual mandate is price stability and maximum employment. Right now, price stability is not yet achieved. So if the labor market softens, they have to decide which mandate to prioritize. Luna: And we've seen some Fed officials, like Governor Waller, say that they can't declare victory on inflation yet. But others, like Chicago Fed President Goolsbee, have been more worried about the labor market. Lucas: That division is going to become more pronounced if the factory job cuts continue. The next employment report, due in early July, will be critical. If we see a significant miss on payrolls, the pressure on the Fed to cut will intensify. Luna: But let's not forget — the overall economy is still creating jobs. The May nonfarm payrolls were solid. It's just that the composition is shifting away from goods-producing sectors. Lucas: That's a fair point. Services are still adding jobs. But the factory job cuts are a leading indicator for the rest of the economy. When manufacturing goes into a funk, it eventually spills over into services through reduced business investment and lower consumer confidence. Luna: So you're saying the Fed can't ignore this even if the headline payroll numbers look okay. Lucas: Correct. And I think that's what makes this episode timely. The Fed has been laser-focused on services inflation, but the factory job cuts are a reminder that the goods side of the economy is under real stress. And that stress could amplify if the trade situation worsens or if global demand weakens further. Luna: Speaking of global demand, we had that headline about Iran oil sanctions waivers — that's a geopolitical wildcard that could affect energy prices and, by extension, inflation. Lucas: Absolutely. If more Iranian oil comes onto the market, it could push gasoline prices down, which would help lower headline CPI. That might give the Fed some breathing room. But it's uncertain, and the Fed can't base policy on that. Luna: So, bottom line: factory job cuts are flashing a warning, but the Fed's hands are tied by inflation. What do you think they'll actually do at the next meeting? Lucas: My guess is they hold steady in July. They need to see more data. But if the August employment report shows factory job cuts accelerating, and if inflation doesn't reaccelerate, they could set the stage for a September cut. That's the consensus on the Street right now. Luna: If walking through the economy with us has made something click — maybe helped you understand why the Fed is so conflicted — that's exactly why we do this show ad-free. It stays that way because of listeners who find it useful. If you'd like to keep that going, you can find us at buy me a coffee dot com slash fexingo. No pressure, just a way to support what we do. Lucas: Yeah, and we really mean that. We put a lot of work into distilling these numbers into something you can actually use. So if today was helpful, that link is there. Now, back to the factory jobs — one more angle I want to hit. Luna: Sure, what's that? Lucas: This is also about the Fed's credibility. If they cut rates while inflation is still elevated, they risk losing the hard-won trust they've rebuilt since the 2021-2022 inflation surge. So the bar for cutting is high. Luna: That's a good point. And the market is already pricing in cuts — the two-year yield is around 4.26 percent, which is below the effective fed funds rate of 3.63 percent. That implies the market expects the Fed to cut soon. Lucas: Right. The market is basically saying the Fed will cave. But the Fed's own dot plot suggests otherwise. So there's a disconnect that will have to resolve one way or another. The factory job cuts data might be the catalyst that brings the Fed closer to the market's view. Luna: Let's keep an eye on the July employment report. If factory job cuts are still elevated, that narrative will only get louder. Lucas: Agreed. And we'll be back to break it down. For now, that's our take on the factory job cuts and what they mean for the Fed. Thanks for listening.