Jobs Report / Fed Thoughts
A: Every macro and financial site/blog out there is reporting on todays jobs report and what it tells us about our economy, future fed moves, a soft landing, etc.. While the stock market rallies a bit on what appears to be a solid report with upward revisions, when you break it down it really is further proof that the US economy is a mature one with decelerating job growth! I just don't see this report being as strong as the headline seems. The emotional element is at play here (with a collective sigh of relief from traders that economy is not tanking), and I think this makes the next jobs report even more important for just how aggressive the fed will get with policy. For the upcoming meeting, I think there is a 50/50 chance of either a 1/4 point rate cut or NO CUT AT ALL; time/incoming data will tell whats after that.
Lets just see what I am talking about when I say the US economy is mature and as a result just can't grow as fast as some Int'l economies. Here is a chart showing the deceleration in jobs creation since January of 2006 (via Econoday):
NOTE: During the mature phase of an economic expansion, monthly payrolls gains of 150,000 or so are considered relatively healthy. In the early stages of recovery though, gains are expected to surpass 250,000 per month.
It's pretty clear that jobs growth is decelerating, but if that line chart is not enough, here is a breakdown of AVERAGE MONTHLY NON-FARM JOBS GROWTH FOR THE PAST FEW YEARS (via bls.gov statistics):
2004 = 172,000 jobs per month created
2005 = 212,000 jobs per month created
2006 = 189,000 jobs per month created
*2007 = 122,000 jobs per month created
*includes monthly jobs data up to September
So, its very clear that jobs growth is a concern and the questions that I have are:
a) do these jobs reports include the full effect of the recent credit squeeze
b) how long will this deceleration in jobs growth last for
c) will further revisions cloud recent months data
d) will big corporate write downs / job cuts last only 1 quarter OR spread to later quarters
e) soft landing instead of a recession
While the headline of today's jobs data sounds good, it really isn't! When you break it down like this, it's easy to make a case that the fed has good reason to cut the feds funds rate again at their next meeting, leaving future cuts after that up in the air. The bond market clearly sees today's jobs report as more bullish than expected and something that will limit the # of rate cuts that were expected; this interpretation is clear with bond yields rising as a result of fewer anticipated rate cuts. The US dollar is also seeing a bit of strength with this jobs report; as fed cuts rates, the dollar weakens as investments in other asset classes, like stocks, become more attractive.
Lets see what the blogoshpere thinks about this report and the changing macro environment:
Barry Ritholtz (The Big Picture)
The most interesting news in the report was the Average Hourly Earnings -- they rose 0.4% (0.1% more than expected) -- and were up a substantial 4.1% y/o/y. This may improve the outlook for consumer spending, but also reduces Fed Cut possibilities.Bill ??? (Calculated Risk)The US Dollar is rallying on the news, implying the odds of another Fed Cut are lowering. Rate cut odds for a 25 bps cut at the October meeting have fallen to 52% (from 72% as of yesterday). The odds of a total of 50 bps by yr end is down to 16%, from 40% yesterday.
Overall this is a stronger than expected report. Even the projected downward revision (that will be included in the January report) is smaller than expected.Jordan Kahn (In The Money)
This type of job growth is still below trend for a growing economy, but it is much better than the bears had feared, and not indicative of an economy on the brink of recession.The bond market agrees, and yields on the 10-year are up this morning to 4.61%. But this is still below the fed funds rate of 4.75%.
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