What does yesterday’s job review mean

A stunning downward revision to jobs…full-time jobs are falling…the Fed continues to walk the tightrope…today’s AI event with Eric Fry

As I write this Thursday afternoon, the market is trading lower ahead of Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole Economic Symposium tomorrow.

Let’s use this lull in bullish action as an opportunity to dig deeper into the shocking jobs review we received yesterday.

While the size of the review has received all the attention, there is another important story unfolding beneath the surface.

In case you missed it, yesterday we learned that the Labor Department revised job growth down nearly 30% for the period between April 2023 and March 2024

That represented 818,000 jobs. This is the biggest revision since 2009.

Behold CNBC:

The report could be seen as an indication that the labor market is not as strong as the BLS had previously reported. This, in turn, could provide additional impetus for the Federal Reserve to begin lowering interest rates.

Now, we’re going to get to the Fed and cut rates for now. First, let’s better understand what is really happening in our labor market.

From a 30,000-foot perspective, there are two primary descriptors of today’s labor market: one, it is 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 graph. On the one hand, you’ll see that the rate itself – 4.3% – is low relative to the 1970 data (dotted green line).

On the other hand, its direction is directed higher (red arrow). And if I zoomed in, you’d see a recent dip in the slope angle.

The direction/slope is more important than the 4.3% figure itself. After all, we want to gauge where things are going, not where they were last month.

But even if we focused exclusively on 4.3%, we would have a big problem. As I pointed out here, in Digestin June, members of the Federal Reserve forecast that the average unemployment rate would reach 4.2%…at the end of 2025.

Here we are, almost half a year away from the end of 2024 and we’ve already surpassed that number.

So we already know that there is some degree of “thin ice” in the labor market. But let’s take it a step further.

Labor market weakness hidden by data

When our government assesses the labor market, it makes some aggressive assumptions, the biggest of which is that even if you only work part-time, you’re considered a worker. In other words, if you worked an hour last week, it carries 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 instead of full-time. And that’s where yesterday’s review comes in.

For more, let’s go to the legendary investor Louis Navellier from his podcast Flash Alert in Growing Investor:

Essentially, they take all payroll data and match it with tax data. This review, which is annual, is designed to not count someone who 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 be revised a little higher because we just lost 818,000 jobs.

If we dig deeper into this discrepancy between full-time and part-time employees, what can we learn?

Behold Counselor perspectives:

In July, there were 8.402 million people working multiple jobs in the US. Multiple job holders now account for 5.2% of civilian employment…

Multiple job holders have accounted for 5.0% or more of total employment for 11 consecutive months, the longest streak since the pre-pandemic period of 2020 (17 months)…

Monthly data can be quite volatile, so we’ve added a 12-month moving average to highlight the trend… The moving average is currently at 5.17%, the highest level since January 2010.

Let’s now focus on what happened in July, the last month for which we have data.

From the US Bureau of Labor Statistics:

Total nonfarm payrolls rose by 114,000 in July…

So far, so good. More salary jobs 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 people, who would have preferred a full-time job, were working part-time because their hours were reduced or they could not find full-time jobs.

Now, remember, for the overall unemployment rate data (that 4.3% figure that’s worrying), these part-timers have the same share as full-timers.

So if we focus on full-time employment—the true indicator of how healthy our workforce is—what do we find?

We are losing full-time jobs (replaced with part-time jobs) from June 2023

In the graph below, we have two lines. The red line shows “all employees, total non-agricultural”. This is the large number of jobs filled. You will see it continue to rise higher.

The blue line is “employed, usually working full-time”. And as I just mentioned, it’s been down since June 2023.

Let’s be clear about what this means…

Our unemployment rate, which is already moving in the wrong direction at an accelerated rate, masks a more sinister trend in our economy – we are replacing full-time workers with part-time workers.

This is not healthy.

With all that as background, what does it mean for the Federal Reserve?

Here is Louis:

I think the Fed can start cutting rates now because they need to stimulate job growth. The Labor Department miscalculated 818,000 jobs…

I see the market rallying in anticipation of the Fed now having to taper more than previously thought.

Our Hypergrowth Expert Luke Lango from Investor in innovation has the same opinion. From Luke:

The US labor market – once seen as 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 investment markets, we remain cautious about the Fed’s precarious position today…

Remember the Fed’s tightrope walk

Will the Fed be able to “boost job growth,” as Louis put it, without boosting the inflation rate?

Much of the answer comes down to where the neutral rate is.

As I detailed in Digest last week, the neutral rate is the rate that, theoretically, neither accelerates nor slows down the economy.

If the economy is growing at the exact rate the Fed members wanted, then they would set the federal funds rate at this neutral rate so as not to interfere with the ideal rate of economic growth.

But getting the neutral rate right is a challenge. The Fed estimates this number after conducting various analyzes and making economic observations. So it’s not a perfect, constant number where you can be sure you’re right.

Today, the Fed sees the neutral rate as somewhere around 2.8%. But as I pointed out last week, former Treasury Secretary Larry Summers believes it’s much bigger.

From Summers (referencing the Fed’s 2.5% estimate before raising it to 2.8%):

The best guess is that (the Fed) is very wrong that the neutral interest rate is 2.5%. I assume the neutral rate is 4.5%.

If the neutral rate is closer to 4.5% than 2.8%, that gives the Fed much less room to cut rates before it has an inflationary impact.

Just this morning, Kansas City Federal Reserve President Jeffrey Schmid called the Fed’s current interest rates “tight, but not too tight.” This implies a higher rather than lower neutral rate.

This is the challenge of inflation. But what about causing the recession?

The majority narrative among economists today is that we will get a “soft landing.” And while this might happen, our confidence in such an outcome should not be buoyed by the volume of economists predicting it.

Below, we look at the chart below Bloomberg from 1995 until the end of last year.

The spikes you will see are the number of news articles proclaiming “soft landing”.

You will see huge increases in 2000 before the Dot Com crash… 2006/2007 before the housing bust… 2012 before the slowdown… and then 2022/2023.

The caption of the chart reads: “Optimism tends to peak before reaching a recession.”

Again, we could achieve a soft landing and I hope we do. But this is a reminder to approach the issue with caution. The Fed remains in a tricky situation today.

All that said, usual Digest readers know how we will end this discussion…

Consider stop-losses, use appropriate position sizes, and maintain a diversified and balanced portfolio. But with these protections in place, keep riding your positions for as high as they will take you.

While it’s essential to keep your eyes open on what’s happening in the economy, you never want to argue against a bull market that wants to push higher.

A final, quick note…

Earlier today, Eric Fry went live with his folks Road to AGI presentation.

The early numbers I’m seeing about attendees are huge—and for good reason. Eric discussed what’s next with AI, the right way to think about investing in this cultural/technological shift, and even provided a three-part “future-proof” model, as well as a free stock recommendation.

If you couldn’t attend earlier, we have one free play available right here.

Have a good evening,

Jeff Remsburg