The Non-farm Payroll number released today came in less than expected by 23 thousand and the prior two months were revised down another 86 thousand. The rounded unemployment rate fell 0.1% but, using another decimal, it fell just 0.03%; from 4.25% to 4.22%. The payroll number remained positive (no negative numbers yet) suggesting a recession hasn’t begun yet, but the slow deterioration suggests one is getting closer. Year-over-year growth in payrolls has slowed to 1.5%, which, in the last three non-COVID recessions (1990, 2001, and 2008) lines up with 07/1990 (start of that recession), 12/2000 (three months before that recession), or 01/2007 (eleven months before the Great Recession.)

Short-term interest rates continue to fall dramatically with the 2-year lower by 8 basis points today (3.66%), but I continue to have reservations about this move for four reasons:

1. The 2-year yield is 172 basis points less than Fed Funds which is a record of the last three (non-Covid) recessions before the first Fed cut. This means that the market has priced in more Fed easing now than those previous periods without a clear recession catalyst; as the stock market was in 2001 and the housing market was in 2007. Given the consistency of past recessions to this cycle; traders are front-running this one more than usual as more and more signs develop that a recession is coming.

2. The latest Beige Book, released on Wednesday, showed 5 districts contracting representing 42% of U.S. GDP1, but there were 8 districts contracting representing 56% of the U.S. GDP last December. This Beige Book doesn’t show a new level of weakness and less than half the country’s GDP is weakening.

3. As Mary Daly raised on 8/26/2024, initial jobless claims haven’t confirmed the acceleration upwards in the unemployment rate. They typically rise before the unemployment rate, yet initial jobless claims made a 7-week low this week.

    4. Economic data, on balance, has strengthened since the middle of July. My LDEI (Lantern Daily Economic Index), which measures how economic numbers compare to their previous values, has improved since 7/11/2024 (see red circle in chart below.) It rose today because wages increased and the unemployment rate fell with payrolls improving versus the last two months.

    Austan Goolsbee, President of the Chicago Fed, and Christopher Waller, Federal Reserve Board Governor, made comments today suggesting they might want to lower 50 basis points later this month (33 is priced in) to get ahead of what’s developing but I still think you need a jumbo amount of weakness in-hand to justify a jumbo rate cut; lest its effectiveness be weakened in the future. We aren’t seeing a jumbo amount of weakness yet. Before the next Fed meeting on 9/18, we will get another CPI, Industrial Production, and Retail Sales report. As-of now, I think the Fed will cut 25 basis points.

    1Fed District GDP share determined by assigning each U.S. county to a Fed district and applying 2022 BEA county-level GDP data to that.