Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why the Fed Watches the Jobs Report So Closely
Transcript
- Lucas: So the July jobs report landed this morning, and the headline was a genuine surprise: the U.S. economy lost 23,000 jobs. That's the first negative print we've seen in years. Luna: Yeah, that caught a lot of people off guard. The whisper number was something like 100,000 added, and we got a contraction. Lucas: Right. But here's the thing I keep coming back to: the unemployment rate actually ticked down to 4.1 percent, from 4.2. So you have fewer jobs, but fewer people unemployed? That's the puzzle we need to unpack. Luna: How do you reconcile that? Fewer jobs but a lower unemployment rate usually means people are dropping out of the labor force. Lucas: Exactly. The labor force participation rate likely dipped again. That's the part that makes the Fed nervous—not just the headline payroll number, but the fact that people are stepping away. And when you look under the hood, private payrolls added just 44,000, according to ADP, which was also below expectations. Luna: So even before the government report, we had a signal that the private sector was cooling off. And then the official number comes in negative. That's a pretty consistent message. Lucas: It is. And I think that's why the market reaction was so interesting. The S&P 500 is up about 1.9 percent over the last five days, even after this report. The ten-year Treasury yield actually fell to 4.65 percent, down about 0.8 percent on the week. Bond markets are starting to price in a higher chance of a rate cut. Luna: So the market sees this as a reason for the Fed to ease, not a reason to panic. Lucas: Exactly. And that's the lens we should use. The Fed has a dual mandate—maximum employment and price stability. For months, inflation was the bigger concern. But now, with core PCE still sitting at 2.26 percent on the ten-year breakeven, and the actual core PCE index barely moving, the job market is becoming the more important variable. Luna: And that's a shift. A year ago, every data point was about inflation. Now it's about jobs. Lucas: Right. And that's why this jobs report matters beyond the headline. The Fed's own projections have the unemployment rate staying around 4.2 percent. We're already at 4.1. A sustained drop below that could actually push the Fed to act faster, because they don't want to see the labor market crack. Luna: But isn't there a risk that the Fed overreacts to one soft month? I mean, these numbers get revised all the time. Lucas: That's a fair point, and I think it's exactly what the Fed is wrestling with. On one hand, you don't want to chase a single data point. On the other, when you look at the trend—job openings have fallen from over seven and a half million to about seven point three million, and initial jobless claims have edged up to 199,000—you see a gradual cooling. Luna: So it's more like a slow leak than a sudden puncture. Lucas: That's a great way to put it. And the Fed is watching that slow leak carefully. The minutes from their last meeting, and the commentary we've heard from Chair Warsh, have been consistent: they're not in a hurry to cut, but they're also not going to ignore a clear deterioration. Luna: And what about wages? Average hourly earnings were up to 37.6 dollars, but that's basically flat month over month. If wage growth is stagnating, that's another sign of slack. Lucas: Exactly. Wage growth is a key input for the Fed's inflation forecast. If wages are flat, that takes pressure off the inflation side and gives them more room to ease. But here's the twist: the yield curve is steepening. The ten-year Treasury yield at 4.65 percent is well above the two-year at, what, around 3.7 percent? That's a big spread. Luna: A steepening curve usually means the market expects growth and inflation down the road. So how does that square with a weak jobs report? Lucas: That's the million-dollar question. One interpretation is that the market sees this jobs report as a reason for the Fed to cut rates aggressively, which would stimulate the economy later. Another is that the long end is reflecting real concerns about fiscal deficits and term premium, not just growth expectations. So the bond market is sending a mixed signal. Luna: And the Fed has to read through that noise. They can't just look at one indicator. Lucas: Right. And that's why I think the next few weeks are going to be really telling. We have the next FOMC meeting in September, and if the July jobs report is followed by another soft one in August, the pressure will be immense. But if August rebounds, this might go down as just a blip. Luna: So what should a regular person take away from all this? If you're not a bond trader, what does it mean for your wallet? Lucas: I think the honest answer is: it's still a good economy, but it's cooling. Unemployment at 4.1 percent is historically low. GDP growth last quarter was only 1.5 percent annualized, down from 2.1. So the economy is slowing, but it's not collapsing. The Fed is trying to navigate a soft landing, and this jobs report makes that landing a little more uncertain. Luna: And for anyone following the show, that's the kind of insight you can actually use. You know, it's funny—when we talk about these numbers, it can feel abstract, but it's really about whether people have jobs and whether prices are stable. Lucas: And that's why we do this every day. If walking through the economy with us has made something click, or if you find these daily conversations useful, the best way to keep them going is to support the show. You can buy us a coffee at buy me a coffee dot com slash fexingo. It's a small gesture that helps us stay independent and ad-free. Luna: Yeah, every little bit genuinely helps us keep the lights on. And we appreciate everyone who's already supported us. Lucas: Alright, back to the numbers. One thing I want to watch closely is the participation rate. If that continues to fall, it could mask weakness in the labor market, and the Fed might miss the real signal. That's a quiet risk. Luna: And that's a good reminder that the headline isn't the whole story. The details matter. Lucas: They do. So as we look ahead, I'm keeping an eye on two things: the next jobs report and the Fed's language at Jackson Hole. If they start talking about downside risks to employment, that's a green light for a cut. If they stay focused on inflation, then this jobs report might not change anything. Luna: So the next few weeks are going to be pivotal. Lucas: Absolutely. And that's the kind of stuff we'll be digging into every day. Thanks for listening, and we'll see you tomorrow. Until then, keep an eye on those yields.