Understanding Friday's Job Report

We interrupt our usual scheduling to bring you this important message. Bennett looks ahead at interest rate hikes and Jon highlights a battle for the ages: the Fed vs Wall Street.

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01. The Fed vs Wall Street

From Jon Scott, Lead Author

I am not an economist, but my undergrad degree is in political science, and don’t think for a second that the job of Fed Chair isn’t as political (and psychological) as it is economic. I’d like to point out that neither Jerome Powell nor Christine Lagarde, the leaders of the Federal Reserve and European Central Bank respectively, have degrees in economics. However, they both hold advanced degrees in law (Powell’s undergrad degree is in political science). My point, I am not an economist and neither are the leaders of the world’s two most important central banks.

So why am I pointing this out? Right now the Fed is in a battle with Wall Street over credibility. Bloomberg Surveillance does an amazing job each morning of bringing together some of the leading minds on Wall Street, economics, and guests from the Federal Reserve. Their first two guests on April 4th, PGIM Fixed Income Co-CIO Gregory Peters and Renaissance Macro Research Head of US Economic Research Neil Dutta, did an amazing job explaining how Wall Street believes the Fed will lower rates despite the fact Powell is signaling rates will remain higher for longer.

So far it looks like Powell is following elements of Paul Volcker’s (former Fed Chair) approach to inflation. Powell is signaling rates will stay higher for longer to, in a sense, spook Wall Street. Robert Samuelson defines this in his book The Great Inflation and Its Aftermath, a book about the stagflationary period of the 1970s: The Fed must convince Wall Street and consumers that they will keep rates longer for higher and–even if things go south economically–rates will remain high, likely into 2025 according to Federal Reserve Bank of Cleveland President Loretta Mester. History, specifically the high inflationary period of the 1970s and early 80s, tells us that the most dangerous parts of stagflation were the deflationary periods. Inflation decreased several times through the 1970s only to rise again. The reason was that every time economic conditions sank, the Fed came to the rescue with lower rates only to see inflation crop back up again.

Volcker’s solution, once appointed to Fed Chair, was “shock therapy” which meant increasing rates so high as to convince Wall Street, businesses, and consumers across the country that there would be no relief even when economic pain came about. And there was pain. Spring 1982 saw bankruptcies reach 280 a day, the highest since World War II. The number of business failures peaked at 52,078 in 1984. Unemployment rose dramatically. President Reagan’s approval rating sank well below 50 percent. However, the result was a largely prosperous second half of the 80s.

The point I am getting across here is that to truly quash inflation, history tells us it will most likely be painful. If the Fed decides to stick to the 2 percent goal, rates will likely need to stay higher for longer. This means higher borrowing costs for business and consumers. If the Fed is serious, there will likely be no relief in terms of mortgage rates, car loans, and other consumer (and business) credit in the near future. What sort of pain this causes remains to be seen.

02. Are interest rates going higher?

From Bennett Fees, Economic Research Associate

Since WWII there are two main ways economists measure work hours and employment. One is the Current Employment Statistics (CES) survey known as the “establishment survey” and the other is the Current Population Survey (CPS) known as the “household survey”. Data from both survey’s are included in Friday’s news release, but it’s worthwhile to distinguish between the two.

The household survey’s key benefit is that it’s labor force statistics include more specific data like demographic information and has no duplication of idividuals (the establishment survey counts someone with multiple jobs as having multiple payrolls). On the other hand, the establishment survey is much larger and has a smaller margin of error regarding monthly changes. With little movement in the unemployment rate in March from the household survey, most analysts instead focused on the decline in payrolls seen below.

The takeaway? The deceleration of job growth is noteworthy but not large enough to stop the Fed from continued interest rate increases. The bond market understood this quickly and began pricing in a quarter of a percentage point hike.

That said, there was still some interesting elements within the household survey data. For one, the labor force participation rate, or the labor force as a percent of the population, rose to to 62.6%, the highest since before the pandemic. This indicates an increased labor supply which should ease wage pressure and inflation accordingly. On the demand side, job openings, released earlier in the week, declined more than expected. Since these two measures move inversely of eachother, a crossing point usually indicates a recession and is exactly what is happening currently.

To be clear, this is only one perspective of the labor market. For instance, Indexes of Aggregate Weekly Hours of Production and Nonsupervisory Employees, also from the establishment survey, has always and only been negative year over year during each recession but this point has yet to be reached. Additionally, the current CPS and CES data come from before the banking chaos that occurred last month which most analysts think will continue the loosening of the labor market.

So what next? The next jobs report is due May 5, a few days after the next FOMC meeting on the 2nd, but CPI data arrives in a few days which will all but solidify the Fed’s decision come May.

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