Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why The Fed Is Ignoring The Labor Market Right Now
Transcript
- Lucas: Look at the headline number for unemployment right now: 4.1 percent. It is down from 4.2 percent last month. On paper, that looks like a tightening labor market. But if you look at nonfarm payrolls, which actually shrank by twenty-three thousand in July, you get a completely different picture. The Fed seems to be staring at that shrinkage, not the low unemployment rate. Luna: Right, because the denominator keeps shifting as people drop out of the labor force entirely. So the unemployment rate isn't necessarily signaling strength here. Lucas: Exactly. And we have to remember that the Federal Reserve effective funds rate has been sitting flat at 3.63 percent since early August. Governor Waller just indicated he supports holding steady at this September meeting. He is not rushing to cut, even though the jobs report is getting worse. Why? Because they are watching something else. Luna: They are watching the stubbornness of inflation expectations rather than the softness of hiring? Lucas: Partly. But it is more about the mismatch in the data. Job openings actually ticked up to 7.27 million in July according to JOLTS. That is higher than the previous month. You have a situation where employers are advertising roles but not filling them. That usually means they are waiting to see if demand recovers before committing to payroll costs. Luna: So it is a hesitation cycle. Companies are hoarding labor potential but not spending on it yet. Lucas: Precisely. And that hesitation is keeping wage growth elevated. Average hourly earnings for private sector workers were 37.60 dollars in July, essentially unchanged from June but still running at a pace that exceeds productivity gains. If wages stay high while output slows, you get that nasty combination of stagnation and sticky prices. Luna: Which brings us back to the core PCE deflator. It is still creeping up, sitting at 130.7 in July. The Fed cannot afford to declare victory on inflation when the underlying price pressures haven't cracked. Lucas: That is the anchor. Real GDP growth for the second quarter was revised down to 1.5 percent annualized. That is weak. Yet the bond market is pricing in a slower decline in rates because they know the Fed will not panic-cut. The ten-year yield is hovering around 4.76 percent. Investors are realizing that 'higher for longer' might actually mean 'steady for a while.' Luna: It feels like the Fed is trying to engineer a soft landing by doing absolutely nothing, hoping the labor market cools without breaking. Lucas: They are hoping the data converges. If job openings continue to drift down and wage growth stabilizes near 3 percent, then the 1.5 percent GDP growth becomes sustainable. But if those openings stay above 7 million, we risk a resurgence in services inflation. Luna: And we have to consider the global context too. Eurozone inflation is back above 3 percent, forcing the ECB to keep rates tight. That limits their ability to ease, which keeps the dollar strong and exports expensive for us. Lucas: True. A strong dollar acts as a brake on our own economy by making imports cheaper but hurting our manufacturers. It creates a perverse incentive where the Fed might wait longer to cut because a weaker dollar would help exporters, but cutting too fast could reignite inflation. It is a trap. Luna: So they are stuck between a rock and a hard place. Do they risk inflation by cutting, or risk recession by holding? Lucas: That is the dilemma. But there is one more piece of data that matters more than anything right now. The initial jobless claims. They ticked up slightly to 206,000 in late August. It is a small move, but it is the first sign that the layoffs might be starting to trickle out of the tech and finance sectors into the broader economy. Luna: If claims start climbing sustainably past 220,000, that changes the narrative from 'cautious hiring' to 'active downsizing.' That would force the Fed's hand much faster. Lucas: Absolutely. Until then, they sit on their hands. We are seeing the S&P 500 push toward 7,754 despite the weak GDP. Markets are pricing in a relief rally, assuming the Fed will eventually pivot. But today, the pivot is delayed. Luna: It is frustrating for investors who want clarity. Instead, we get ambiguity masked as stability. Lucas: Ambiguity is the new normal when data is contradictory. Weak payrolls but high openings. Low growth but stable wages. The Fed is playing defense, waiting for one side of the equation to break. Luna: And until that break happens, all eyes are on the next CPI print in September. That will be the make or break moment for any rate speculation. Lucas: Agreed. But before we go deeper into what that September print might look like, I want to take a quick second to talk about how this show stays running. Luna: Yeah, if walking through these complex macro shifts with us has made something click for your portfolio or your career... Lucas: the way we keep these conversations ad-free and rigorous is listener support. If you find value in digging into the actual data instead of the headlines, please consider buying me a coffee dot com slash fexingo. It helps us keep the lights on and the research sharp. Luna: It really does make a difference. We appreciate every bit of support that lets us keep doing this work. Lucas: Thanks for that. Now, back to the data. Let’s look at the ADP private payrolls report from Wednesday. It showed only 38,000 private jobs added in August. That was well below expectations. Luna: Wow, that is incredibly weak. Even lower than the government's nonfarm payroll miss in July. Is ADP reliable enough to trust this trend? Lucas: ADP has had its share of errors, but when it aligns with JOLTS showing high openings but low hires, it confirms a structural slowdown. The 38,000 figure suggests that businesses are aggressively cutting back on discretionary hiring. They are not firing everyone, but they are freezing expansion. Luna: So the labor market is contracting at the margin, even if the total pool remains large. That is a subtle but critical distinction. Lucas: Yes. And that marginal contraction is exactly what the Fed needs to see to feel comfortable cutting rates without triggering a wage-price spiral. They don't need a crash; they need a cooling. Luna: But if the cooling turns into a freeze, we could see a sharper rise in unemployment sooner than expected. The buffer might be thinner than it looks. Lucas: That is the risk. The unemployment rate is at 4.1 percent, which is historically low, but it can move quickly. If we hit 4.5 percent by year-end, the Fed will likely accelerate cuts regardless of inflation. Luna: So the threshold is somewhere between 4.1 and 4.5. Everything in between is a waiting game. Lucas: Correct. And in that waiting game, volatility will persist. The VIX is reacting to every minor data point because the baseline expectation has shifted from 'growth' to 'stagnation.' Luna: It makes sense why investors are nervous. The rules of the game seem to have changed mid-play. Lucas: They haven't changed, but the variables have. We are no longer in a high-growth, high-inflation era. We are in a low-growth, sticky-inflation era. The playbook for the Fed has to adapt. Luna: Adapting means being more reactive to labor data than price data, since prices are already somewhat anchored by supply chains. Lucas: Or at least, that is what they are pretending. In reality, they are terrified of letting inflation back up. So they use the labor market as the pressure valve. Luna: Using unemployment as a tool to control inflation is a delicate balance. One wrong move and you get stagflation. Lucas: Stagflation is the nightmare scenario. But with real GDP at 1.5 percent, we are already flirting with the 'stag' part. We just need to ensure the 'flation' part doesn't bite back. Luna: It seems like the Fed is walking a tightrope over a very deep pit. Lucas: Exactly. And the audience watching this knows that for most businesses, cash flow is king right now. You don't need to predict the Fed perfectly; you just need to survive the ambiguity. Luna: Surviving the ambiguity means having liquidity and staying flexible. You can't lock in long-term bets when the macro environment is this noisy. Lucas: Flexibility is the only strategy that works. Whether it is inventory management or capital expenditure, hold back until the signal becomes clearer. Luna: Until the unemployment rate crosses that 4.5 percent threshold or inflation drops decisively below 2 percent. Lucas: Those are the two guardrails. Until one of them breaks, the status quo holds. It is a boring market, but boredom can be profitable if you don't try to beat it. Luna: Boring is better than broken. I think we can all agree on that. Lucas: Indeed. As we head into the rest of the third quarter, watch the jobless claims closely. That single weekly number might be the most important data point in the entire economy right now. Luna: Keep your eyes on the claims, keep your cash ready, and let the Fed do the heavy lifting. Lucas: Sounds like a plan. We will see you next time with another deep dive into the numbers that matter.