Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why the July Jobs Report Is the Fed's Toughest Puzzle Yet
Transcript
- Lucas: So Luna, Friday's jobs report threw a bit of a curveball. The U.S. economy actually lost 23,000 jobs in July. That's the first outright decline we've seen in quite a while. Luna: Right, and yet the unemployment rate ticked down to 4.1 percent. That's the opposite of what you'd expect. How do you lose jobs but have unemployment drop? Lucas: It's a classic survey disconnect. The payroll number comes from a survey of employers, while the unemployment rate comes from a survey of households. They can diverge, and when they do, it usually tells you something about the underlying data quality, not necessarily the economy's true direction. Luna: So which one should we trust more? Lucas: Well, the household survey actually showed a gain of over 400,000 jobs in July. So that's a big divergence. But let's not get too deep into the weeds. The bigger picture is that the labor market is clearly cooling, but it's not falling off a cliff. The three-month average of payroll gains is still around 150,000, which is solid, just not as hot as last year. Luna: And this comes right after the Fed's been on hold for a while. I mean, they've kept rates steady at 3.63 percent effective. So what does this report mean for their next move? Lucas: It puts a September cut firmly on the table. Markets had already been pricing in a pretty good chance, and after this report, I'd say it's almost a done deal. But here's the twist: the Fed's been talking about data dependence, and this is the kind of data that makes them move. Luna: But wait — core PCE is still running above target. It ticked up slightly to 130.3. So isn't that a reason for the Fed to hold off? Lucas: That's the puzzle. Core PCE is sticky, but it's not accelerating. It's been hovering around 2.7 percent for months. Meanwhile, headline CPI has cooled to 332.6, down from 333.98. And the ten-year breakeven rate is at 2.25 percent. So inflation expectations are anchored, but the actual inflation data is mixed. The Fed's got to weigh that against the softening labor market. Luna: And the bond market seems to be leaning dovish. The ten-year Treasury yield fell to 4.66 percent this week. That's down about six basis points. Lucas: Exactly. The bond market is telling you the Fed is going to cut. And when the ten-year yield falls even as stocks rally — the S&P 500 is up over two percent this week — that's a signal that investors are betting on easier policy ahead, not just strong earnings. Luna: So what's the risk? If the Fed cuts and inflation re-accelerates, they lose credibility. Lucas: That's the fear. But look, the Fed's dual mandate is maximum employment and price stability. With the labor market cooling, they can justify a cut as insurance. And if they wait too long, they risk tipping the economy into a recession. It's a delicate balancing act. Luna: And it's a balance that listeners get to see play out in real time. You know, if you've been following along with us and the macro picture has started to click — the way these data points fit together — we'd love it if you considered supporting the show. It's a couple of dollars a month at buy me a coffee dot com slash fexingo. That's what keeps these episodes ad-free and independent. Lucas: Yeah, it genuinely makes a difference. Even a small monthly contribution helps us keep digging into these numbers. And we appreciate every single person who's done that. Luna: Alright, back to the jobs report. One thing I found interesting is the ADP number earlier this week — private companies added just 44,000 workers in July. That was way below expectations. Lucas: Right, and ADP is often a noisy indicator, but when you see that and the payrolls number together, it reinforces the picture of a slowing labor market. The question is whether this is a blip or the beginning of a trend. The job openings data also softened — JOLTS fell to 7.36 million from 7.54 million. That's consistent with employers pulling back on hiring. Luna: But the unemployment rate is still historically low at 4.1 percent. So it's not like we're seeing mass layoffs. Initial jobless claims are still around 199,000, which is low. Lucas: Exactly. That's what makes this report so tough for the Fed. On the one hand, you have a negative payroll print, which is a clear red flag. On the other, the unemployment rate is low, claims are low, and the household survey is strong. It's a mixed bag, and the Fed has to decide which signal to trust. Luna: So what would you do if you were in their shoes? Lucas: I think they cut in September. The risks are asymmetric — if they don't cut and the labor market deteriorates further, they're behind the curve. If they cut and inflation stays sticky, they can always pause. But I'd also expect them to keep the door open for more cuts if needed, based on the data. Luna: And that's the kind of language they've been using — data dependent. Lucas: Right. And you saw that with Kevin Warsh in the past, the emphasis on data. But at the end of the day, the Fed's actions speak louder than words. If they cut, it's a signal that they're prioritizing the labor market over inflation concerns. Luna: So what should listeners watch for between now and the September meeting? Lucas: The next CPI print, for one. And any commentary from Fed officials. But also keep an eye on the bond market — if the ten-year yield keeps falling, that's a sign that the market is already pricing in a cut. And if we see jobless claims start to rise consistently, that would be a bigger red flag. Luna: And we'll be here to break it all down. Lucas: That's a wrap for today. As always, we'll keep watching the data.