Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Factory Job Cuts Hit Levels Not Seen Since 2008
Transcript
- Lucas: So there is a new report from S&P out today that I think deserves more attention than it's getting. Factory job cuts in June are running at levels we haven't seen since the financial crisis and the early pandemic. Luna: That is a pretty stark comparison. How bad are we talking exactly? Lucas: S&P looked at planned layoffs in the manufacturing sector, and the pace in June so far is comparable to 2008 and to the spring of 2020. We're talking about tens of thousands of job cuts announced in just the first three weeks of the month. Luna: And this is happening even though the headline jobs numbers still look okay. Nonfarm payrolls just hit 159 million, up from 158.8 million last month. Lucas: Right, the aggregate numbers still show growth, but manufacturing is clearly an outlier. The JOLTS data from April actually showed job openings jumped to 7.6 million from 6.9 million — a big increase. But that's across all sectors. In manufacturing specifically, openings have been flat or declining. Luna: So the factory sector is cutting while the rest of the economy is still hiring. That seems like a disconnect worth watching. Lucas: Absolutely. And the S&P report highlights that the cuts aren't just in one subsector. Auto, machinery, electronics — all seeing reductions. It suggests a broader industrial slowdown that might not be temporary. Luna: What's driving it? Is it demand weakening, or are companies overcorrecting after the post-pandemic buildup? Lucas: Probably a mix. Consumer spending has shifted back to services, so goods demand has softened. Plus, there's the lingering effect of higher interest rates. The Fed funds rate is still at 3.63 percent, and that makes capital-intensive manufacturing expansions more expensive. Luna: And we also have the Iran sanctions waiver story today — potentially lowering oil prices. That could help manufacturers on the input cost side, but the damage from higher rates may already be baked in. Lucas: That's the word from analysts covering the Hormuz situation: the economic toll is already baked in. So even if we get relief on energy, it might not reverse the layoff decisions companies have already made. Luna: It makes you wonder what the Fed is looking at. The labor market overall seems resilient, but these factory cuts are flashing a warning. Lucas: The Fed's dual mandate is price stability and maximum employment. On the price side, core PCE is at 129.6 — up from 129.3 last month. So inflation is still sticky. But if manufacturing employment starts to deteriorate meaningfully, that could tip the balance toward rate cuts sooner than the market expects. Luna: The bond market seems to be pricing that in already. The 10-year breakeven rate dropped to 2.23 percent yesterday — that's down from levels earlier this year. Lucas: Right, the breakeven is the market's expectation for average inflation over the next decade. At 2.23, it's still above the Fed's 2 percent target, but it's come down. And that suggests bond investors think the economy is cooling enough to bring inflation down gradually. Luna: But the yield curve is still inverted. The 10-year is at 4.48, the 2-year is at 4.25 — that's a positive spread now? Actually wait, the 10-year is 4.48 and the 2-year is 4.25, so that's actually a positive spread of about 23 basis points. Lucas: Yeah, the curve has normalized a bit recently. But it was inverted for so long that the recession signal may already be in the pipeline. Factory job cuts could be the first tangible effect of that inverted curve from a year or two ago. Luna: Speaking of the show — if walking through the economy with us has made something click, I should mention something. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. Lucas: Yeah, it's a small group, but it keeps the whole thing ad-free and independent. We don't have any sponsors, so listener support is what makes this possible. Luna: Exactly. So if you find value in these daily conversations, that's how you can help. Now back to the factory cuts — Lucas, is there any historical precedent for a sector-specific slump like this not spreading to the broader economy? Lucas: There are examples. In the mid-1980s, manufacturing went through a sharp contraction while services kept growing. The economy avoided a recession then. But the difference now is that interest rates are higher and the Fed is less willing to cut. Luna: And the unemployment rate is still at 4.3 percent, which is low historically. But initial jobless claims dipped to 226,000 last week, so the overall labor market isn't cracking yet. Lucas: Right. But if factory layoffs accelerate, that could change. The manufacturing sector employs about 13 million people directly. If even a fraction of those cuts materialize, it adds up. Luna: And the knock-on effects on services that support factories — logistics, maintenance, even local restaurants near plants. Lucas: Exactly. So the S&P report is a canary. It doesn't mean recession is certain, but it's a signal that the industrial part of the economy is under real stress. We'll get the June jobs report in a couple of weeks, and manufacturing payrolls will be a key number to watch. Luna: Will the Fed acknowledge this in their next statement? They've been focused on services inflation and wage growth. Lucas: They may nod to it. The Fed has been saying they're data dependent. If factory employment starts to decline, that's a data point they can't ignore. But they also don't want to overreact to one sector. Luna: So the next few months are critical. Either this is a isolated adjustment, or it's the beginning of a broader slowdown. Lucas: Exactly. And the bond market seems to be leaning toward the slowdown narrative, given the breakeven drop. But the stock market is mixed — the S&P 500 is down 1.4 percent over the past five days, but small caps are up 1.9 percent. So investors are rotating, not panicking. Luna: That rotation into small caps could be a bet on domestic-focused companies that benefit from lower rates. But if factory cuts spread, that thesis might get tested. Lucas: Right. And average hourly earnings just hit $37.50 — up from $37.41. So wages are still rising, which supports consumer spending. But if people lose factory jobs, they may not find equivalent pay in services. Luna: That's the real risk: a mismatch between where jobs are being cut and where they're being added. Manufacturing pays above average, so a factory worker laid off might have to take a pay cut in a different sector. Lucas: And that feeds into the inflation picture too. If workers accept lower wages, that could ease services inflation. But it also means less spending power, which could slow the economy further. Luna: So the Fed is walking a tightrope. They want inflation down, but not at the cost of mass layoffs. The factory cut data might force them to choose sooner rather than later. Lucas: Yeah. And we'll be watching the next JOLTS release and the June payrolls report closely. For now, the S&P report is the most specific warning sign we have. Luna: Good to have a concrete number to track. Thanks, Lucas. Lucas: Thanks, Luna.