A glass half-full/half-empty August jobs report failed to point the Fed clearly to a 25 or 50 bps cut on September 18. Rates will stay fairly steady until markets receive clearer signals from the Fed on their intended path.
The Bureau of Labor Statistics reported that 142,000 jobs were added in August, below expectations of 165,000 jobs. In addition, they said 86,000 fewer jobs were added in June and July than previously reported. The three-month moving average of job growth has declined from roughly 500,000 per month two years ago and 200,000 per month a year ago to about 100,000 per month in August. Construction continues to add jobs at an increased pace.
The headline unemployment rate ticked down from 4.3% in July to 4.2% in August indicating that the labor market is indeed cooling but a small part of the increase from last month was due to hurricane effects. The unemployment had risen from 4.1% in June to 4.3% in July, just barely triggering the Sahm Rule, a perfect predictor recessions in the past, and creating a sense of urgency for the Fed to start cutting interest rates. On the surface, the declining unemployment rate in August shows that some of that increase was due to Hurricane Beryl effects, even though the Bureau of Labor Statistics had reported in July that they saw little hurricane effect. Indeed, temporary layoffs spiked in July to 872,000 and declined in August to 190,000. However, when we take the unemployment rate out to one more digit, we see that it went from 4.05% in June to 4.25% in July and 4.22% in August so a lot of the headline decline this month is actually just due to rounding. Overall, combined with the weaker than expected data earlier this week on job openings and quits, the labor market appears to be similarly weak to last month, but not getting worse.
Today’s data means that the size of the Fed’s first cut on September 18 is a toss up and the near term outlook for mortgage rates depends heavily on what the Fed decides to do with this data. Futures markets have the odds between a 25 bps cut and 50 bps cut at nearly 50/50. Next Wednesday’s inflation report may help to nudge the Fed in one direction or another if it is an outsized surprise. But based on the trends in inflation and unemployment these last few months, the risk of recession is higher than the risk of inflation re-accelerating. The Fed’s blackout period starts tomorrow and NY Fed President John Williams gave few hints in a Friday morning speech. Fed Governor Christopher Waller is expected to speak later on Friday. After that, any hints would need to come through press leaks (as it did in June 2022). It is also possible that the Fed will enter the September 18 meeting without having telegraphed the outcome, which would be highly unusual for the modern Fed.
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