An eye-popping downward revision in jobs … full-time jobs are falling … the Fed continues to walk a tightrope … today’s AI event with Eric Fry
As I write Thursday afternoon, the market is trading lower ahead of the speech tomorrow from Federal Reserve Chairman Jerome Powell at the Jackson Hole Economic Symposium.
Let’s use this pause in bullish action as an opportunity to dig deeper into the shocking jobs revision we received yesterday.
While the size of the revision received all the attention, there’s another important story playing out underneath the surface.
If you missed it, yesterday, we learned that the Labor Department revised job growth down by nearly 30% for the period between April 2023 through March of 2024
That represented 818,000 jobs. This is the largest revision since 2009.
Here’s CNBC:
The report could be seen as an indication that the labor market is not as strong as the previous BLS reporting had made it out to be. That in turn could provide further impetus for the Federal Reserve to start lowering interest rates.
Now, we’ll get to the Fed and rate cuts momentarily. First, let’s get a better sense for what’s really happening in our labor market.
From a 30,000-foot perspective, there are two primary descriptors of today’s labor market: one, it’s relatively strong from a historical perspective; two, the trend is moving in the wrong direction.
To illustrate both points, below we look at the unemployment chart. On one hand, you’ll see that the rate itself – 4.3% – is low relative to data since 1970 (green dotted line).
On the other hand, its direction is headed higher (red arrow). And if we zoomed in, you’d see a recent steepening in the angle of the slope.
The direction/slope is more important than the 4.3% figure itself. After all, we want to evaluate where things are headed, not where they were last month.
But even if we focused exclusively on 4.3%, we’d have a big problem. As we’ve pointed out here in the Digest, in June, the Federal Reserve members forecasted that the median unemployment rate would come in at 4.2%…at the end of 2025.
Here we are, almost half almost half-a-year away from the end of 2024 and we’ve already blown past that number.
So, we already know there’s some degree of “thin ice” happening in the labor market. But let’s go one step farther.
The labor market weakness hidden by the data
When our government assesses the labor market, it makes some aggressive assumptions, the biggest of which is that even if you work only part-time, you’re counted as a worker. In other words, if you worked one hour last week, that gets the same weight as someone who worked 40 hours.
Then there’s the issue of those Americans who work two or more part-time jobs rather than working one full-time job. And this is where yesterday’s revision comes in.
For more, let’s go to legendary investor Louis Navellier from his Flash Alert podcast in Growth Investor:
Essentially, they take all the payroll data and match it with the tax data. This revision, which is annual, is designed to not count someone that has two jobs twice…
Here’s the deal: 15 months ago, unemployment was at 3.4%. Now, it’s at 4.3%. Now, it’s probably going to get revised a bit higher because we just lost 818,000 jobs.
If we dig deeper into this discrepancy between full- and part-time employees, what can we learn?
Here’s Advisor Perspectives:
In July, there were 8.402 million people working multiple jobs in the U.S. Multiple jobholders now account for 5.2% of civilian employment…
Multiple jobholders have accounted for 5.0% or more of total employed persons for 11 straight months, the longest streak since the runup to the 2020 pandemic (17 months) …
The monthly data points can be quite volatile, so we’ve added a 12-month moving average to highlight the trend… The moving average currently sits at 5.17%, its highest level since January 2010.
Let’s now zero in on what happened in July, the last month for which we have data.
From the U.S. Bureau of Labor Statistics:
Total nonfarm payroll employment edged up by 114,000 in July…
So far, so good. More payroll employment is a good thing. But then there’s this detail:
The number of people employed part time for economic reasons rose by 346,000 to 4.6 million in July.
These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs.
Now, remember, for the overall unemployment rate data (that 4.3% figure that’s troubling), these part-timers get the same weight as full-timers.
So, if we zero in on full-time employment – the real gauge for how healthy our labor force is – what do we find?
We’ve been losing full-time jobs (replaced by part-time jobs) since June of 2023
In the chart below, we have two lines. The red line shows “all employees, total nonfarm.” This is the broad number of jobs getting filled. You’ll see it continues edging higher.
The blue line is “employed, usually work full time.” And as just noted, it’s been edging lower since June of 2023.
Let’s be clear about what this means…
Our unemployment rate, which is already moving in the wrong direction at an accelerating speed, is masking a more sinister trend within our economy – we’re swapping out full-time employees for part-time employees.
That’s not healthy.
With all this as our background, what does it mean for the Federal Reserve?
Here’s Louis:
I think the Fed can now start to cut rates because they have to stimulate job growth. The Labor Department miscalculated 818,000 jobs…
I see the market rallying in anticipation of the Fed that will now have to cut more than previously believed.
Our hypergrowth expert Luke Lango from Innovation Investor holds the same opinion. From Luke:
The U.S. labor market – once viewed as rock-solid – is cracking.
Oddly enough, though, a weakening labor market is good news for stocks. That’s because it all but guarantees an interest rate cut at the Federal Reserve’s next meeting in September.
While we share our experts’ excitement at the prospect of what lower rates will mean for the investment markets, we remain cautious about the Fed’s precarious position today…
Remember the Fed’s tightrope walk
Will the Fed be able to “stimulate job growth” as Louis said without stimulating the inflation rate?
A huge part of the answer boils down to where the neutral rate is.
As we detailed in the Digest last week, the neutral rate is the rate that, theoretically, neither speeds up nor slows down the economy.
If the economy were growing at the exact speed the Fed members desired, then they’d set the fed funds rate to this neutral rate so as not to interfere with that ideal economic growth rate.
But getting the neutral rate correct is a challenge. The Fed estimates this number after running various analyses and making economic observations. So, it’s not a perfect, constant number where you can have certainty you’re right.
Today, the Fed believes the neutral rate is somewhere around 2.8%. But as we pointed out last week, from former Treasury Secretary Larry Summers believes it’s far higher.
From Summers (referencing the Fed’s 2.5% estimate before they upped it to 2.8%):
My best guess is [the Fed] is badly wrong that the neutral interest rate is 2.5%. My guess is that the neutral rate is 4.5%.
If the neutral rate is closer to 4.5% than 2.8%, that gives the Fed far less room to slash rates before it has an inflationary impact.
Just this morning, Kansas City Federal Reserve President Jeffrey Schmid called current Fed interest rates “restrictive, but they’re not overly restrictive.” That implies a higher rather than lower neutral rate.
This is the inflation challenge. But what about the recession challenge?
The majority narrative from economists today is that we’ll achieve a “soft landing.” And though that might happen, our confidence in such an outcome shouldn’t be emboldened by the volume of economists predicting it.
Below, we look at the chart below from Bloomberg from 1995 through the end of last year.
The spikes you’ll see represent the number of news articles proclaiming, “soft landing.”
You’re going to see huge spikes in 2000, before the Dot Com crash… 2006/2007 before the housing crisis… 2012, before a growth slow down… and then 2022/2023.
The chart’s subhead reads, “optimism tends to peak before a downturn hits.”
Again, we could pull off a soft landing, and I hope we do. But this is a reminder to approach the matter with caution. The Fed remains in a complicated situation today.
All that said, regular Digest readers know how we’ll end this discussion…
Mind your stop-losses, use appropriate position sizes, and maintain a diversified, balanced portfolio. But with those protections in place, keep riding your positions for however high they’ll take you.
While it’s critical to keep your eyes open as to what’s happening in the economy, you never want to argue against a bullish market that wants to push higher.
A final, quick note…
Earlier today, Eric Fry went live with his Road to AGI presentation.
The early numbers I’m seeing about attendees are enormous – and for good reason. Eric discussed what’s coming with AI, the right way to think about investing in this line-in-the-sand cultural/technological shift, and he even provided a three-part “future-proof” blueprint as well as a free stock recommendation.
If you couldn’t attend earlier, we have a free replay available right here.
Have a good evening,
Jeff Remsburg
