US Sep-24 unemployment tapers to 4.1%, rate cuts on track

7 Oct 2024 , 04:15 AM

JOBS DATA – SEEMS LIKE ALL IS WELL

In the last 2 months, the unemployment data has got more than its share of attention. In the US, it is 3.5% unemployment that is defined by the Bureau of Labour Statistics (BLS) as tantamount to full employment. That is where the level of unemployment was a little more than a year ago. However, while the unemployment rate had stayed steady for most part, the sharp spike was visible in the month of July (reported in early August 2024), wherein the rate of unemployment had spiked to 4.3%. Almost immediately, all hell broke loose.

The market sceptics pointed to the sharp spike in unemployment as an indication of the much feared hard landing of the US economy. There was really no confirmation but that data point forced the Fed also to expedite its move towards rate cuts, resulting in a massive rate cut of 50 basis points on September 18, 2024. However, the good news in the September data came from the sharper than expected increase in non0-farm payroll employment. It spiked to 2,54,000; sharply higher than the average gain of 2,03,000 in last 12 months. That was clearly some sign that the jobs situation was not as bad as in July.

QUICK SUMMARY OF SEPTEMBER JOBS DATA

The table below captures a quick summary of the key jobs related data for the last 3 months as well as a yoy comparison with the previous year.

Particulars	Sep-23	Jul-24	Aug-24	Sep-24
Civilian Population (in “000”)	2,67,428	2,68,644	2,68,856	2,69,080
Civilian Labour Force (in “000”)	1,67,897	1,68,429	1,68,549	1,68,699
Labour Participation – LPR (%)	62.78%	62.70%	62.69%	62.69%
Employed (in “000”)	1,61,550	1,61,266	1,61,434	1,61,864
Unemployed (in “000”)	6,347	7,163	7,115	6,835
Unemployment Ratio (%)	3.8%	4.3%	4.2%	4.1%

Data Source: US Bureau of Labour Statistics (BLS)

Here are some of the key takeaways from the jobs data for September at a macro level and its likely impact on the Fed policy rate action.

• The labour force participation rate (LPR) is almost flat at around 62.7% in the last 3 months, although it is lower compared to 62.8% in the year-ago period.
• The number of persons employed, in absolute numbers, has gone up compared to the last two months and also compared to the previous year. That is a good sign of job traction building up since July 2024.
• On the positive side, while the numbers of unemployed is sharply lower than the previous two months, it is still substantially higher than the year ago period. As experts have said time and again, this can be largely attributed to the rising population of immigrants into the job market in the US.
• As a result, the unemployment rate of 4.1% in September 2024 is lower than 4.3% in July and 4.2% in August. However, the rate of unemployment is still sharply higher on a yoy basis compared to 3.8% in the year-ago period. Also, the figure is sharply higher than the full employment figure of 3.5%. However, for the figure, the unemployment rate of around 4.0% would be consonant with pushing inflation down to the 2% mark.

Having seen the macro jobs data, let us get into the demographic break-up of the data, and also the industry-wise break-up of the jobs data for September 2024.

DEMOGRAPHIC BREAK-UP OF US JOBS DATA – SEPTEMBER 2024

Here are some quick takeaways from the Household Survey which looks at the US jobs data from a demographic perspective.

• For September 2024, while the unemployment rate was 10 bps lower at 4.1% (20 bps lower than July), the number of absolutely unemployed persons at 6.84 Million is also sharply lower than 7.12 Million in the previous two months. However, this is sharply higher than the year-ago period when the unemployment level was 3.8% and the number of unemployed people was 6.35 Million.
• In terms of major ethnic and other age groups of the jobs data; there was a fall in the unemployment rate across all groups, except for teenagers and Asians. The rate of unemployment for adult men was (3.7%), adult women (3.6%), teenagers (14.3%), Whites (3.6%), Blacks (5.7%), Asians (4.1%), and Hispanics (5.1%).
• Out of the unemployed numbers; people on temporary layoff fell sharply by 3,22,000 in September 2024, while the number of long term unemployed was also lower at 1.60 Million. However, this is higher than the 1.30 Million in the year ago period with them accounting for 23.7% of all unemployed people.
• The labour force participation rate (LFPR) was static at 62.7% in September 2024 (steady for third month in a row) as was the employment-population ratio at 60.2%. Interestingly, the number of people employed part time for economic reasons was lower at 4.60 Million, compared to 4.80 Million in August; but higher compared to 4.20 Million last year. These people were unable to find full-time jobs. Even the number of persons not in the labour force but currently wanting a job, was higher at 5.70 Million.

Scratch the surface, and the demographics of the jobs data has not changed much between July and September 2024. However, data has surely deteriorated over last one year.

INDUSTRY-WISE BREAK-UP OF JOBS DATA – SEPTEMBER 2024

Having seen the Household survey outcomes, we now look at the same jobs data from the perspective of the industrial and sectoral classification. It may be recollected that the non-farm payrolls increase in September 2024 was at 2,54,000, compared to 1,42,000 in August. More importantly, this is sharply higher than the 12-month average of 2,03,000. Here are some of the key takeaways from a sectoral analysis of the jobs data.

• Jobs in the food services & drinking places segment increased by 69,000 in September 2024, higher than the average monthly gain of 14,000 jobs in the previous 12 months. In September 2024, food was the big driver of jobs, compared to construction and civil engineering jobs driving the thrust in August 2024.
• The healthcare sector also added 45,000 jobs in September 2024, compared to just 31,000 jobs in August 2024, although this is lower than the average monthly gain of 57,000 over the last 12 months. Job accretions in healthcare came largely from home healthcare services, hospitals, and nursing and residential care facilities in that order.
• Employment in government continued its upward trend in September 2024, adding +31,000 jobs; albeit 33% slower than the average monthly gain over the prior 12 months. Local governments added 16,000 jobs and sate governments 13,000 jobs.
• Employment in social assistance and construction also showed positive increases of 27,000 jobs and 25,000 jobs respectively. Both these segments showed higher job creation compared to the average of the last 12 months, showing the jobs direction.
• In September 2024, average hourly earnings for all employees on private non-farm payrolls increased by 0.40%, to $35.36. If you look at on a yearly basis, the average hourly earnings have increased by 4.0%, which is fairly healthy by US standards.

The higher wage bill has been one of the key triggers for inflation sustaining at higher levels for a longer time frame. The Fed tightening was not having an impact on inflation due to substantial propensity to consume and the wages to back it. However, the wage increase of 4% is still quite high and more than the unemployment rate, the Fed would be keen to see that the wage growth rate comes down rapidly.

ARE THERE OTHER SIGNALS OF THE US ECONOMY SLOWING?

In the US, it is not just the labour data that is seen as a reliable indication of a likely recession. Normally, two other data points are also count viz. average GDP growth and yield spread between the 2-year bond and the 10 year bond. The unemployment rate had spiked to 4.3% in July, but has since tapered to 4.2% and 4.1% in August and September 2024 respectively. In retrospect, the 4.3% unemployment was more of a statistical aberration than a sign of slowdown. However, it was also a warning signal that conditions could worsen if monetary tightness was not relaxed. Accordingly, the Fed has already taken the first step in its last meeting of the FOMC on September 18, 2024; by cutting the Fed rates by a full 50 bps and also promising to further front-load the rate cuts.

Let us focus on the GDP data first. As of how we have full data for the first two quarters of the calendar year 2024. It may be recollected that in Q1-2024, the US economy had reported sharply lower GDP growth at 1.4%. This fall also gets pronounced when you look at last year’s Q3 growth at 4.9% and the Q4 growth in US GDP at 3.4%. However, the final estimate of GDP reported by the US Bureau of Economic Analysis (BEA) in end September shows the US economy growing by a healthy 3.0% in Q2. That is not all. Even the Fed Atlanta GDP projections for the third quarter of 2024 have pegged the economic growth at 3.0% to 3.1% in real terms. That means, the full year growth for 2024 should be well above 2%, as projected by the Fed. Clearly, there is not much to worry on the GDP front.

The other data point seen as an indicator of recession is the yield spread between the 2-year and 10-year bonds. This is the standard accepted definition of whether the yield spread is positive or negative. The normal situation is a positive yield spread where the 10-year yield exceeds the 2-year yield. However, when there is heightened uncertainty investors prefer the short end and avoid the long end of the yield curve. That is when the yield curve inverts. The yield spread (10Y-2Y), which was in the negative for most of the last one year, has turned positive since the start of September, and more importantly, it has sustained there. The Yield Spread at 15 bps is still lower than the long term average of 86 bps, but  the trend for now seems to indicate that fears of recession are passe.

What is the bottom line; is the risk of recession for the US economy real? The final call on whether or not it is recession in the US is taken by the Business Cycle Dating Committee of the National Bureau of Economic Research. However, one thing is clear. With the risk of a hard landing still not out of the way, the Fed is likely to maintain its aggressive dovishness.

WILL FED CONTINUE RATE CUTS; ASK THE CME FEDWATCH

In the September 18, 2024 FOMC  meet, the Fed not only cut rates by an aggressive 50 bps; but also guided for another 50 bps in 2024, followed by an additional 100 bps in 2025. That broadly syncs with the CME Fedwatch view. Here is how the CME Fedwatch changed after the unemployment data was announced on October 04, 2024.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500
Nov-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	97.4	2.6%
Dec-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	17.7%	80.2%	2.1%	Nil
Jan-25	Nil	Nil	Nil	Nil	Nil	Nil	14.8%	69.8%	15.1%	0.3%	Nil
Mar-25	Nil	Nil	Nil	Nil	Nil	11.8%	58.8%	26.0%	3.3%	0.1%	Nil
May-25	Nil	Nil	Nil	Nil	6.7%	38.5%	40.2%	13.1%	1.5%	Nil	Nil
Jun-25	Nil	Nil	Nil	3.9%	25.2%	39.5%	24.4%	6.3%	0.6%	Nil	Nil
Jul-25	Nil	Nil	1.3%	10.9%	29.9%	34.5%	18.5%	4.5%	0.4%	Nil	Nil
Sep-25	Nil	0.4%	4.6%	17.5%	31.5%	29.0%	13.6%	3.1%	0.3%	Nil	Nil
Oct-25	0.1%	1.4%%	7.6%	20.8%	30.9%	25.4%	11.1%	2.4%	0.2%	Nil	Nil
Dec-25	0.4%	2.7%	10.4%	22.9%	29.8%	22.4%	9.3%	2.0%	0.2%	Nil	Nil

Data source: CME Fedwatch (# – lower probabilities consolidated)

One quick observation is that the CME Fedwatch appears to have become a lot more logical and rational after the recent unemployment data underlined that hard landing was not really a concern. Here is a quick picture of how the rate cut probabilities panned out after the September unemployment data was announced. The Fed has triggered the process with the 50 bps rate cut. The good news is that even the CME Fedwatch is looking more credible. Here is what we read from the CME Fedwatch perspective.

• With the September rate cut of 50 bps done for now, the focus shifts to November and December FOMC meets. The CME Fedwatch gives a probability of 97.4% to 25 bps rate cut but there is a 2.6% probability that the Fed may not move rates in November.
• What about the first milestone of December 2024? By then, another 50 bps rate cut (100 bps in all) is looking with a probability of 97.9%. However, the probability of a 125 bps rate cut by December is now down to 17.7%, indicating low probability. Now, even the CME Fedwatch thinks it would be best-case of 100 bps by December 2024; something which even Jerome Powell had indicated in his Fed statement.
• Probabilities beyond 2024 are continuously evolving and will offer more clarity once the action points for 2024 are done and dusted. Let us turn to June 2025 milestone. The CME Fedwatch is assigning 93.1% probability for 150 bps rate cuts from the peak and 68.7% probability for 175 bps rate cuts from the starting point of the cycle.
• Let us turn to the final milestone of December 2025. At this point, the CME Fedwatch is estimating 88.5% probability for 175 bps of rate cuts from the peak and a probability of 66.1% for 200 bps of rate cuts by December 2025. Now, even the CME Fedwatch has veered around to the Fed view of 200 bps rate cut by end of 2025 to (3.25%-3.50%).

There are two issues one needs to understand here. Firstly, what are the risks to these estimates of the Fed and the CME Fedwatch (which are now approximately in sync)? The big risk is if inflation spikes, and that cannot be ruled out with the recent spike in oil prices due to worsening geopolitics. Core inflation is already under pressure. The second issue is; what this means for the RBI. The RBI policy statement will be out on October 09, 2024 and it remains to be seen if the RBI will also cut rates to avoid the risk of monetary divergence. On that front, there is still not much clarity!