Could July’s jobs report lead to a series of rate cuts?
In this episode, we dive into the latest U.S. employment report with Mike Feroli, Chief U.S. Economist at J.P. Morgan. Join Phoebe White, Head of U.S. Inflation Strategy, as they discuss the July employment data, its implications for the labor market, and what it means for the Federal Reserve's future actions.
Could
July’s jobs report lead to a series of rate cuts?
[Music]
Phoebe
White:
Welcome to Research Recap on J.P. Morgan's Making Sense Podcast Channel. I'm
Phoebe White, Head of U.S. Inflation Market Strategy at J.P. Morgan. And today
I'm joined by Mike Feroli, our Chief U.S. Economist. And we're here to discuss
takeaways from the July U.S. employment report, as well as the path ahead for
the economy and the Fed. Mike, thanks so much for joining us.
Mike
Feroli:
Good to be here.
Phoebe
White:
So, Mike, we have a lot to talk about today, but why don't you just kick it off
with some high level takeaways from this morning's report?
Mike
Feroli:
Yeah, So it was obviously a soft report. We had the unemployment rate increased
2/10 to 4.3%. That comes after three consecutive increases the prior three
months. The average workweek ticked down. Average hourly earnings growth slowed
to only 2/10. So pretty much across the board, it wasn't a terrible report, but
it was definitely softer.
Phoebe
White:
So we knew this had the potential to be a messy report due to weather effects,
Hurricane Barrel. But BLS did come out and say that that hurricane probably did
not have any impact. Is there anything that sticks out to you that could have
been distorted by weather?
Mike
Feroli:
So there could still be some weather effect, right? There was definitely a big
increase in people who are on temporary layoff, which would be consistent with
a weather effect. That being said, usually when you have a big weather effect,
that kind of biases average hourly earnings growth upward. And this month we
got a actually a downward surprise to average hourly
earnings growth. So you can't say no effect, but it doesn't seem to be the only
thing going on in this report.
Phoebe
White:
Okay. So let's talk about what is going on in this report. I think there's been
a lot of debate recently about how much signal to take from the move up in the
unemployment rate, whether it was largely driven by increase in supply, labor
supply specifically, or whether there was real weakening in labor demand. So
maybe can you just touch on the supply side first, anything that sticks out in
terms of participation rate and supply factors?
Mike
Feroli:
Yeah, so the participation rate did increase to 62.7%. It had fallen earlier in
the year and now it recouped that earlier loss. So that's certainly good news.
It doesn't seem to be the only thing explaining the move up in the unemployment
rate because the numerator in the unemployment rate, number of unemployed
people, did increase. And so that doesn't seem to be all new entrants. I would
say on labor demand, we probably get more of the signal from there from the
establishment survey where, as mentioned, not only did job growth slow, but you
had a decline in the average workweek. So it does look like labor demand is
also showing signs of weakening.
Phoebe
White:
And where I guess sectorially, do you see that? I
think we had a move down in the diffusion index. Is it fairly widespread?
Mike
Feroli:
Fairly widespread, Right. You had most of your job gains concentrated in
construction, health care and government. And we suspect construction,
employment will roll over later in the year. As we've seen, the number of homes
under construction has peaked and is now moving down.
Phoebe
White:
So how do you square, I guess, some of this data, which seems to imply that
maybe high policy rates are starting to eat at the economy and yet we've had
fairly strong growth data recently. So how do you sort of square those things?
Mike
Feroli:
Yeah so, I think what we're seeing here is, again, some of the lagged effects
of higher rates certainly on labor demand. Right? And it seems like business
activity is softening, even though we did, as you point out, have a decent GDP
report for the second quarter. The overall broad sweep of the data to us looks
like it's softening, particularly when you take account of things like jobless
claims and continuing claims and things of that nature.
Phoebe
White:
Okay. So right now in your forecast, you have growth momentum continuing to
slow as we head into the second half. How would you think about risks to the
growth forecast in the second half?
Mike
Feroli:
Yes, we have 1% growth in the second half. Risks are starting to feel like
maybe they're tilting a little to the downside. Before they had been, we
thought, tilted to the upside. So we're not changing anything just yet. But it
does feel like we may be losing a little momentum as we go into the end of the
summer.
Phoebe
White:
Okay. Let's talk about what this means for the Fed. We did just have a meeting
this week where the Fed left rates on hold, but seemed to clearly signal a cut
in September.
Mike
Feroli:
Yeah.
Phoebe
White:
Seems like that's now a given. Maybe more a question about pace. So how are you
thinking about the Fed from here?
Mike
Feroli:
Yeah. So we do think the Fed probably picks up the pace or starts big if for no
other reason than, you know, when we look back at Wednesday, what was really
the most notable development was that the committee decided that the risks to
their mandate were basically in balance, the risk to either higher inflation or
a weaker job market. I think this reinforces that sense that they're in balance
and that there are risks to the employment side of the mandate. So if you know,
if your risks are in balance, you probably want to have a policy setting closer
to neutral, which is at the highest, maybe 4%. So we think they have a lot of
room to catch up to where they should be. Right? So you’re at five and a half
percent now. So it's a 150 basis point gap. So I think they'd probably want to
close that gap pretty soon. So we do think they start with 50 basis point cut
in September and follow that up by a similar sized move in November.
Phoebe
White:
And then once they get closer to that, 4 to 4 and a half level, how do you
think about speed from there? And I guess just from a risk management
perspective, is speed more important or is it kind of waiting to see how the
data come in?
Mike
Feroli:
Yeah. So I think after you get closer to the 4% range, you can probably slow
down a little bit and feel your way from there. We do think they would probably
continue using after that, but we see them slowing to a 25 basis point pace of
rate cuts beyond that.
Phoebe
White:
Okay. So that's starting to feel like what markets are starting to expect. We
have rates markets pricing about 43 basis points of cuts in September at the
time of this recording midday on Friday, August 2nd. We've seen a
big move and ten year yields were down about 40 basis points on the week, were
trading close to 382 and tens. The broad curve on the week is about 18 basis
points steeper. But, you know, rates markets are still priced for the Fed funds
rate only getting down to just under 3%. If you're right and things are
starting to get on a track of further weakening and we're in store for, you
know, a continued pace of 25 basis points per meeting through the end of next
year. That does imply that rates could fall even further from here. Mike, does
that sound about right?
Mike
Feroli:
It does.
Phoebe
White:
So with that, let me close, Mike, thanks so much for your time today. And
thanks to our listeners for tuning in. We hope you join us next month. For more
research insights, visit jpmorgan.com/insights/research.
[End
of episode]