Fed rate cuts on my mind.

Welcome to another edition of Sunrise Economix, where I’m sharing the freshest updates from the housing market, peppered with exclusive insights and valuable information tailored just for you.

It isn’t Georgia that is on my mind these days, though that is a great song! With less than two weeks to go before the highly-anticipated Federal Reserve (Fed) meeting on Sept. 18, there is a foregone conclusion that the Fed will begin the process of cutting its interest rate targets. The big question is whether this cut will be 0.25 or 0.50% (25 or 50 basis points/BPS). What do the first cuts of these cycles have in common? January 2001, November 2002, September 2007, October 2008, and March 2020. They were all 50 BPS cuts. Only August 2019 saw the first cut at 25 BPS. Clearly, the Fed isn’t afraid to start big.  

This week continued to add fuel to the 50 BPS prospect with anemic jobs data throughout the week, culminating in Friday’s Bureau of Labor Statistics (BLS) Jobs report for August. Despite being shortened by the Labor Day holiday on Monday, we still had an action-packed series of reports. Each of them continued to show weakness in the labor markets. That has been the Fed’s recent focus.

Wednesday brought the first of the big job reports with the Job Openings and Labor Turnovers (JOLTS) report. This report includes a couple of important metrics. The most consequential is the number of job openings (postings). In the post-COVID world that sees many “work from home” jobs able to be done from anywhere, employers are now regularly posting the same job in multiple geographic areas. This leads to an overstatement of true job openings. Despite this overstatement, we are still seeing weakness. July’s openings fell from 7.9M to 7.7M, but we also saw an additional revision downward to the month of June by 330K. The market was expecting 8.1M jobs, so this was quite a miss. Also, this is down about 12.5% from last year and is the lowest number since January 2021. Remember, this still includes those multiple job postings for the same job.

Another metric in the JOLTS report is the Quit rate. This measures people quitting their job, likely because they found a better one. This rate is 2.1%. If we remove the COVID years, this is the lowest rate since 2018 and shows that people don’t think they are likely to get a better job right now.

Thursday brought the August ADP employment report. ADP is one of, if not the biggest private payroll company in the U.S. Because of this, they have unique insight into hirings and firings throughout the private sector. The BLS Jobs report includes government jobs that tend to not follow the economic changes of the marketplace. The August number came in at 99,000 jobs created versus 145,000 expected. Again, July was revised lower by 11,000 jobs. All job growth occurred in businesses with over 50 employees.  

The Challenger Gray report came out with an analysis of what businesses anticipate doing with job openings in the future. They have been tracking this metric since 2005, and as of August, it’s at a record low with regard to hiring plans. This is similar to the level seen in 2008 before the Great Recession.  

The Fed also published its Beige Book on Thursday. The Federal Reserve is actually a system of 12 regional banks in different geographic areas. Each of these banks tracks the economic conditions in its region. Those reports are published eight times each year in what’s dubbed the Beige Book. This week’s report showed that 9 of 12 districts saw “flat or declining economic activity.” This is a significant decline from the previous report that only showed 5 regions in the same situation.

Friday’s BLS Jobs report came in worse than estimates at 142,000, while 160,000 jobs were expected. In addition to this, the BLS revised the two previous months’ reports down 86,000 jobs. This jobs report is comprised of two different reports: the business survey and the household survey. The business survey surveys businesses that have more than 50 employees, but for businesses with under 50 employees they use statistical modeling called the birth-death model. This model estimates the creation and closure of small businesses and extrapolates job creation and loss. As we discussed above, ADP knows the actual small business numbers because they handle their payroll. ADP told us that small businesses lost 9,000 jobs. The birth-death model said 100,000 jobs were created. Clearly, the business survey numbers of 142,000 are suspect and are likely even worse. This will almost certainly be revised downward.
  

The household survey, which establishes the unemployment rate, contains data from actual phone calls to households. On the surface, this data would appear to be good for employment because the unemployment rate dropped from 4.3 to 4.2. If we dig a little deeper, though, we find this is actually due to the fact that part-time jobs increased by 527,000, and at the expense of 438,000 full-time jobs. With this continued terrible employment data, the die is cast, and all eyes are on the Fed.  

Looking Ahead: 

With the Fed focused on Job data, next week’s inflation news may not move the markets much, but we could still see some surprises:

Wednesday: Consumer Price Index (CPI)- Consumer inflation; 10 Year Note Auction

Thursday: Producer Price Index (PPI)-Wholesale or producer inflation; 30 Year Bond Auction

Friday: University of Michigan Consumer Sentiment