Last month, after the Bureau of Labor Statistics issued a weak employment report for July coupled with downward revisions for prior months, President Trump fired the messenger, the head of the Bureau. The August numbers released Friday were even weaker with a reported jobs growth of just 22,000 and negative revisions to prior months. This time there was no messenger to shoot as the nominated replacement hasn’t received Senate approval yet. The message from the White House was to wait until next year when lots of new plants would be in production. Let’s hope.
Let me repeat a mantra I have said often regarding monthly employment reports. You always want to see strong employment growth, even if a weak number accelerates the likelihood of future interest rate cuts. Jobs are the engine of our economy. People work, they receive wages, and they spend what they earn. If no one is working, spending must come out of savings, until the well runs dry. Thus, regarding the employment report, you can’t make a silk purse out of a sow’s ear. More jobs are good. Fewer jobs are bad. It’s that simple.
One might argue that an overheated economy leads to inflation which leads to a whole host of problems. But that isn’t the case here. Wages rose 0.3% in August ($0.10 per hour) and were just 3.7% higher than a year ago. To the extent there is any inflation, and we will get a CPI report this week, it has more to do with tariffs than anything to do with the labor market. And the tariff impact by itself won’t be long lasting.
The jobs numbers announced Friday are even worse than the headline numbers suggest. 89% of the job increases in the private sector in 2025 to date have been in social assistance and healthcare. The rest of the private sector has added less than 10,000 jobs per month. Manufacturing has lost jobs for four straight months. Construction jobs are down. While the White House trumpets the future benefits of policy actions, so far tariffs and uncertainty outweigh the benefits of Executive Actions and the Big Beautiful Bill.
While the slowdown has been happening, the Federal Reserve, always data dependent and, therefore, almost always backward looking, has kept policy constant. With the Fed Funds rate in a range of 4.25%-4.50%, that means restrictive, hence, a slowing economy. Economists speculate as to what the neutral rate might be, that rate which neither stimulates nor restricts economic growth. There is no precise formula to define that number but it is increasingly clear that the current Fed Funds range is well above neutral. After the last employment report, I suggested three rate cuts of 25-basis points each would seem appropriate over the last three FOMC meetings of 2025. After Friday’s report, Fed Funds futures suggest that is now likely. A 50-basis point cut at next week’s meeting is possible. What is at least as likely is a 25-basis point cut with several dissents opting for more. Reality suggests the size of any one-month cut doesn’t matter as long as the rate gets to a range that implies neutral reasonably soon. The only argument against more hasty action is uncertainty about policy, particularly related to tariffs. For instance, by year end will there be a broad trade agreement with China or will Trump get frustrated with the Chinese and put triple digit tariffs back on the table? Next week’s likely rate cut will be the start of a series of cuts. But the last thing the Fed wants is for a few sharp cuts followed by the need to hike rates should there be an unexpected spike in inflation. The Fed almost always opts for caution unless there is a crisis (e.g. October 2008 or the spring of 2020 amid the Covid shutdown), and is almost always late whether it be raising or lowering rates.
With that said, a one or two month delay in policy moves doesn’t create a crisis. The Great Recession was the result of too much easy money and too much leverage in the years leading up to the collapse of Lehman, AIG and Fannie Mae, not a delay in lowering rates by a month or two.
Wall Street’s reaction to the weak employment report was muted. There are several reasons. First a weak jobs report was anticipated although the numbers were even a bit weaker than forecasted. Second, Wall Street loves low rates. Low borrowing costs together with expansive fiscal policy are stimulative, at least in the short-run, as long as short-term borrowing costs stay within a reasonable range. Hopefully, ZIRP (zero interest rate policy) is something I don’t have to endure in my remaining lifetime. ZIRP inflates asset prices but also leads to excess capacity and economic inefficiencies. Yet in the short-run, lower but reasonable rates serve to elevate P/E ratios and will likely lead to a shift of monies from cash and money market funds into asset classes, like equities, that benefit from lower rates.
But let’s stop there. Without employment growth none of this works. Right now, retail spending is solid and, while the unemployment rate crept up to 4.3% in August, it was still historically low. In short, consumers haven’t lost their confidence to spend, at least for now. Corporations are still growing profits. Higher profits and lower short-term rates almost always lead to higher stock prices.
We know growth is slowing. So far, there are no signs of recession. I talked about equilibrium last week. It’s fair to say, our economy remains in balance, still growing, albeit slowly, with modest inflation. Lower gasoline prices and small increases in shelter costs are keeping inflation contained. But if job growth tips into a negative number and consumer confidence teeters, things can unravel surprisingly fast. Clearly, the risks today have shifted from what they were just a few months ago. Employment growth beyond social assistance and health care is now stagnant. On September 30, over 100,000 Federal workers who opted for early retirement, will stop receiving pay checks. More people will be looking for work and there will be fewer job offerings. Today, over 25% of those receiving unemployment benefits have been looking for work for over six months. That percentage is rising. The upper class doesn’t feel the pain thanks to record stock and home prices. But middle and lower class Americans are feeling the pinch.
Rate cuts are needed and they are coming. Can they reverse a slowing trend? Logically they can. Can the Fed get ahead of the curve? History doesn’t provide a good answer. Certainly, the tumult surrounding the Fed over the next 6-9 months won’t help. September is seasonally the weakest time for stocks. The corporate economic reality today is that there is tremendous enduring strength related to increased spending for technology, mostly related to the growth in artificial intelligence. But away from the tech sector and those industrial sectors supporting its growth, the picture isn’t as bright. Uncertainty is rising and that suggests a volatile period ahead. September seems like a time to be a bit cautious.
Today, Pink turns 46, born in Abington Hospital outside of Philadelphia. Senator Bernie Sanders is 84, and American novelist Ann Beattie turns 78.
James M. Meyer, CFA 610-260-2220