We hope you all had a wonderful 4th of July holiday! Now that the fireworks and festivities are over, let’s get back to something much more mundane – economic data. I’ve been talking about this for several months, as the headline economic data seems to come out strong. Meanwhile, if you look under the surface, the data is not nearly as robust as it would appear.
This just came into my email inbox this morning, as if the well-regarded economists at First Trust knew what I wanted to write about. They too have been noticing a surprisingly weaker market than the headline data would say. Last week, Nonfarm payrolls rose by 206,000. Better than the expected 190,000. Good news, right? Well, sort of. There were two problems with the number.
The first was where the jobs were from.
- 70,000 in new government jobs
- 49,000 in health care
- 34,000 from social assistance
Not that those aren’t valuable jobs, but they are all related to government spending. That adds up to roughly three-quarters of the jobs from government sources.
The second issue is past revisions. This is a topic most people never hear about.
May jobs number came in originally at 272,000. If you remember, at the time it was a hot report and sent interest rates higher as well as the FED talking tough about the economy. Fast forward a month and the number has been revised down to 218,000. Still a good number but much closer to expectations. April also had a huge revision. The original announcement was for 175,000 new jobs, but it is now revised down to 108,000. If my math is correct, that is a reduction of 121,000 jobs in April and May from the reported numbers.
Those numbers are obviously far weaker than first reported. Will June’s be revised down next month?
Speaking of those revisions, I mentioned above about an email from First Trust. Here’s what they said.
I find it peculiar that the numbers have been so far off over the last couple of years. They have gone from a 6,000 average revision in 2022 to 49,000 reduction this year. That’s an every month average!
Meanwhile, the unemployment rate has hit a high-water mark since the FED has been raising interest rates. We have been saying that eventually high interest rates will slow the economy, caused by an increase in cost of borrowing, which in turn will slow spending.
Here’s the unemployment rate over time.
You can see that when unemployment turns up, the economy is either in a recession or will soon be in a recession. And what will the FED do? Cut rates, of course.
As you also know, we have been saying the FED is too restrictive and needs to cut interest rates. The reason we have been arguing this is so they don’t get behind the curve and are cutting rates into a recession. Our argument is if they cut rates a few times and get to a “normal” rate, then the economy can start to have a consistent monetary policy.
At the rate they’re going, they will again be behind the curve and have CAUSED a recession because they stayed too high for too long. In fact, I may have mentioned this before, but it’s good to revisit it. FED governor Michelle Bowman as of June 21st still thinks she is open to RAISING interest rates!
And these are the people in charge of monetary policy? No wonder we talk about driving the car from one ditch to another. Long time readers will know this is analogy that I find too perfect to ignore. They will likely be late to the interest rate cutting party and have to cut further than otherwise (just like when they were raising rates), only to see them spur more inflation down the road in the ‘whipsaw effect.’
Meanwhile the yield curve has steepened quite a lot in the last year. Here’s the 10 year-2 year.
Here is the 10 year-3 month.
They are still inverted, but much closer to “normal” than this time last year.
Wrapping it up, what’s not normal are the temps outside here in the PNW. Please be careful out there as this warm weather persists. Reach out if you have any questions!