US unemployment at 4.2% in August; may trigger 50 bps rate cut

9 Sep 2024 , 12:39 PM

JOBS DATA – NOTHING TO WORRY, BUT NOTHING TO CELEBRATE

In a sense, the July 2024 data was a turning point for rate cut expectations. In early August, the July labour data had reported non-farm payrolls addition of just 1,14,000 workers. This was rather disconcerting as the average non-farm payroll addition in 2023 was above 2 Lakhs. In addition, the July unemployment figure had come in sharply higher at 4.3%, raising concerns over a distinct hard landing of the US economy and a slowdown in growth. The August unemployment rate is marginally better at 4.2%, but most of the numbers are almost flat in absolute terms. Whether or not this is a sign of a hard landing may be debatable, but the fact remains that the jobs data is looking a lot weaker than the previous year. Analysts are of the view that the Fed may have tightened labour conditions to balance demand and supply, but it might just have stretched a little bit more on the downside. One possibility it has raised is that rate cuts could be more aggressive starting September 2024.

The jobs data was a critical data point before the upcoming meeting of the Federal Reserve on September 18, 2024. The Fed is widely expected to cut rates by 25 bps to 50 bps in the September 2024 meeting, although we have to await the consumer inflation data for August, which will be the last data point before the Fed meeting this month. The quick take on the labour data is that it has not worsened from July, but then it has not substantially improved either. The non-farm payrolls addition of 1,42,000 was better than the previous month at just 1,14,000. However, there have been some serious downgrades of the reported non-farm payroll data for the months of June and July 2024. For instance, based on additional data flows; the change in total nonfarm payroll employment for June was revised down by 61,000, from +179,000 to +118,000. Similarly, the change in non-farm payroll employment for July 2024 was also revised down by 25,000, from +114,000 to +89,000. That is substantial downward revision and could have its impact on the August data too.

AUGUST 2024 LABOUR DATA ALMOST LIKE JULY

While the jobs data did not show any substantial deterioration over July 2024, the absolute numbers are almost constant. That means, the magnitude of the problem is still there . Consider some of the August 2024 jobs data presented by the US Bureau of Labour Statistics (BLS). Total nonfarm payroll employment increased +142,000 in August 2024, while the unemployment rate was 10 bps lower at 4.2% in August, compared to 4.3% in August. One quick takeaway is that the unemployment still remains sharply higher than last year. In the US, 3.5% unemployment is defined as full employment and currently, it is a good 70 bps above that level. We will not look at the jobs statistics from the Household Survey and the Establishment survey. While the former looks at demographic details of employment, the latter survey looks at the industry wise trends in employment. Here is a quick dekko.

DEMOGRAPHIC BREAK-UP OF THE US JOBS DATA

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

• For August 2024, while the unemployment rate was 10 bps lower at 4.3%, the number of absolutely unemployed persons at 7.10 Million was almost constant. However, this is sharply higher than the year-ago period when the unemployment level was 3.8% and the number of unemployed people was 6.30 Million.
• In terms of major ethnic and other age groups of the jobs data; there was little change in the unemployment rate of adult men (4.0%), adult women (3.7%), teenagers (14.1%), Whites (3.8%), Blacks (6.1%), Asians (4.1%), and Hispanics (5.5%).
• Out of the unemployed numbers; people on temporary layoff fell 190,000 to 872,000 in August, while the number of permanent job losers was unchanged at 1.70 Million. Even the numbers of long-term unemployed (jobless for over 27 weeks) was unchanged at 1.50 Million in August; accounting for 21.3% of all unemployed people.
• The labour force participation rate (LFPR) was static at 62.7% in August 2024 as was the employment-population ratio at 60.0%. Interestingly, the number of people employed part time for economic reasons was static at 4.80 Million, but sharply up from 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 static at 5.60 Million.

In short, the demographics of the jobs data has not changed much between July and August 2024, although there is a substantial deterioration compared to the previous year.

INDUSTRY-WISE BREAK-UP OF THE EMPLOYMENT NUMBERS

Having seen the Household survey outcomes, we now look at the same jobs data from the perspective of the industrial classification. It may be recollected that the non-farm payrolls increase in August 2024 at 1,42,000 was sharply lower than last year’s average of 2,02,000. Here are some of the key takeaways from a sectoral analysis of the jobs data.

• Jobs in the construction segment increased by 34,000 in August 2024, higher than the average monthly gain of 19,000 jobs in the previous 12 months. In August 2024, much of the job accretion in this segment came from heavy and civil engineering construction; and jobs in non-residential specialty trade contractors.
• The healthcare sector also added 31,000 jobs in August 2024, although this is half the average monthly gain of 60,000 over the last 12 months. In August 2024, the job accretions in healthcare came largely from ambulatory health care services.
• Employment in social assistance continued its upward trend in August 2024, adding +13,000 jobs; albeit 50% slower than the average monthly gain over the prior 12 months. The individual and family services added 18,000 jobs in August 2024.
• Amidst weak exports and rising automation, the employment in manufacturing edged down in August by -24,000, largely due to a fall in jobs in the durable goods industry. Manufacturing employment was largely unchanged. Even other goods and services did not a very meaningful change in the employment numbers.
• In August 2024, average hourly earnings for all employees on private non-farm payrolls increased by 0.40%, to $35.21. If you look at on a yearly basis, the average hourly earnings have increased by 3.8%

The higher wage bill has been one of the key triggers for inflation sustaining at higher levels for a longer time frame. The RBI tightening was not making an impact on inflation due to substantial propensity to consume and the wages to back it. Now, these numbers are tapering and that is opening the gates for a rate cut in the September FOMC meeting.

ARE THERE OTHER TRIGGERS 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 taken into consideration viz. average GDP growth and yield spread between the 2-year bond and the 10 year bond. The unemployment rate at 4.3% in July and 4.2% in August, may not be a sign of a slowdown. However, it is a warning signal that these conditions could worsen rapidly if the monetary tightness in the economy was not reduced. In short, the labour data does hint at the urgent need for a rate cut. Whether the rate cut will be modest at 25 bps or aggressive at 50 bps and the trajectory ahead will also depend on the yield spreads and the GDP growth data.

Let us focus on the GDP data first. As of how we have the Q1-2024 final GDP numbers and the first advance estimates and the second advance estimates for Q2-2024. 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 years’ Q3 growth at 4.9% and the Q4 growth in US GDP at 3.4%. However, the GDP data did show a bounce in the second quarter to 2.8% as per the first advance estimates of GDP. To further underscore the point, the second estimate of Q2-2024 GDP was further upgraded by 20 bps from 2.8% to 3.0%. This is significant because the higher real GDP growth was on the back of higher nominal rate of growth and lower consumer inflation. The GDP data does still look shaky, but not as disconcerting as it was in the first quarter of 2024. Also, the Atlanta Fed GDP for Q3-2024 is already pegging the GDP growth estimates for Q3-2024 at above 2.5%.

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 and investors want to remain concentrated at the short end and avoid the long end of the yield curve, then it is possible to have a negative yield curve wherein the 2-year yields exceed the 10-year yields. In early August 2024, we had seen signs of the yield curve inverting. If you look at the yield spread in the first week of September; it is slightly positive at 0.06%. This is better than the previous year average of -0.67%, but still lower than the long term average of 0.86%. Yield spreads may not be alarming, but the warning signals are still there.

Is the US economy standing on the throes of a recession and can that lead to aggressive rate cuts. At the end of the day, the final call on whether or not it is recession in the US will be taken by the Business Cycle Dating Committee of the National Bureau of Economic Research. Circa 2022; despite an inverted US yield curve, NBER did not declare a recession as the jobs data was very comfortable. For now, the focus will be on how the Fed will react to the combination of the jobs data, GDP growth and the yield spreads. Will the Fed cut rates more aggressively, or would it still prefer to adopt a cautious approach. We can check out the CME Fedwatch for clues on this front.

WILL FED CUT RATES AGGRESSIVELY – ASK THE CME FEDWATCH

In the last meeting that concluded on July 31, 2024, the Fed chair gave the first indication that rate cuts will start in September. This view was later ratified by the Fed minutes and by Powell at Jackson Hole. Let us first look at what the CME Fedwatch is indicating currently.

Fed Meet	250-275#	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525
Sep-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	30.0%	70.0%
Nov-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	17.6%	53.5%	28.9%	Nil
Dec-24	Nil	Nil	Nil	Nil	Nil	12.3%	42.7%	36.3%	8.7%	Nil	Nil
Jan-25	Nil	Nil	Nil	5.6%	26.1%	39.8%	23.8%	4.8%	Nil	Nil	Nil
Mar-25	Nil	1.8%	12.2%	30.5%	34.7%	17.7%	3.2%	Nil	Nil	Nil	Nil
May-25	1.7%	11.8%	29.8%	34.5%	18.3%	3.8%	0.1%	Nil	Nil	Nil	Nil
Jun-25	9.3%	23.4%	32.8%	24.1%	9.0%	1.4%	Nil	Nil	Nil	Nil	Nil
Jul-25	19.9%	27.7%	28.9%	17.2%	5.5%	0.8%	Nil	Nil	Nil	Nil	Nil
Sep-25	28.9%	28.0%	25.1%	13.4%	4.0%	0.5%	Nil	Nil	Nil	Nil	Nil
Oct-25	35.5%	27.4%	22.3%	11.2%	3.2%	0.4%	Nil	Nil	Nil	Nil	Nil
Dec-25	38.7%	26.8%	21.0%	10.3%	2.9%	0.4%	Nil	Nil	Nil	Nil	Nil

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

The CME Fedwatch was already aggressive about rate cuts till the end of 2025 and the supportive jobs data has only deepened the expectation of rate cuts. Probabilities of lower rate levels has become a lot stronger. CME Fedwatch was already ultra-dovish since the tepid inflation and the statement of Jerome Powell at Jackson Hole. Now, the labour data is also supportive of an aggressive rate cuts. Here are the key expectations.

• The CME Fedwatch is now assigning a high probability of 70.0% to a 50 bps rate cut in the September meeting; while 25 bps rate cuts is also taken as fait accompli. However, it is the future projections beyond September that are interesting.
• The CME Fedwatch has already assigned a probability of 100.0% to 50 bps rate cuts and 71.1% probability to 75 bps rate cut by November 2024. A 75 bps rate cut by November would entail a 50 bps rate cut in September itself.
• Let us look at the first milestone of December 2024. While 75 bps rate cut is assumed to be a certainty, it has assigned a probability of 91.3% for a 100 bps rate cut. In short, the consensus is that we could see the September 2024 rate cut surprise at 50 bps.
• Let us turn to the next milestone of June 2025. At this point, the CME Fedwatch is estimating a 98.6% probability for 175 bps of rate cuts and also a probability of 89.6% for 200 bps of rate cuts by June 2025.
• Let us come to the final milestone of December 2025. At this point, the CME Fedwatch is estimating a 96.7% probability for 200 bps of rate cuts and also a probability of 86.4% for 225 bps of rate cuts by December 2025. There is a 66% probability that the Fed could close year 2025 having cut rates by a full 250 bps from current levels.

While the final call would still be taken by the Fed, based on the FOMC deliberations, it now looks likely that September 2024 could lean towards cutting rate by 50 bps.

There is also a message in this for the RBI. They must be ready with their Plan-B, in case the Fed turns much more aggressive. After all, cost of funds is already a big headwind in India.