After today’s jobs report, which showed unemployment at 3.7%, it’s now clear that the Federal Reserve does not need to create a job-loss recession to bring down the growth rate of inflation. The Fed has much to answer for after their massive rate hikes and quantitative tightening policy. These were created to bring down inflation by impacting the labor market but they disproportionally affected housing in a negative way. The groundwork for rate cuts are now in place for 2024.
To understand what the Fed should do next, let’s do a quick review of the economic markers that got us to this point.
1. I published my COVID-19 recovery model on April 7, 2020, because at that early date the U.S. economy had already started to recover. That model worked like a charm and I retired it on Dec. 9, 2020, setting the stage for the second phase of the expansion to happen, which meant focusing on the labor market recovery.
2. In that next phase of recovery, I said job openings should get to 10 million. I doubled and tripled down on this call even when we had some big misses in 2021 in the jobs report. Job openings got all the way to 12 million in March 2022 and are currently at 8.7 million.
3. My forecast was that we would get back all the jobs lost because of COVID-19 by September of 2022; this timeline was 100% correct as this happened by that date.
4. The final part of labor recovery we needed after COVID-19 was not just the jobs we lost during the pandemic, but what we would have gained. Imagine we didn’t we have any COVID-19 and the economy had expanded at a normal level since 2020: our employment numbers would have been between 157 million-159 million today. So, until we broke into the 157 million camp, we were still in make-up demand mode while the job growth data was cooling off.
This would look perfectly normal to me as population growth is slowing so we really can’t have big jobs reports anymore if the economy is still expanding. What I believe people got wrong since early 2022 is that they assumed that job growth slowing down meant a recession in 2022 or 2023. That isn’t the right way to look at the economy: the labor market breaks when jobless claims data breaks.
For me that means jobless claims over 323,000 on the four-week moving average and as you can see in the chart below, that hasn’t happened.
What does all this mean for the Fed? They messed up and over-hiked, but they can correct their mistakes by talking dovish now, cutting rates toward the three, six, and 12-month trend of PCE core inflation, and landing the plane.
Their policy is still restrictive and the one sector of the economy that is back down to Great Financial Recession sales levels — the existing home sales market — needs a boost in demand. Let’s get America back on track and give up the stay-at-home economic housing policy of the Fed since March of 2022.
Now, on to the report.
From BLS: Total nonfarm payroll employment increased by 199,000 in November, and the unemployment rate edged down to 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care and government. Employment also increased in manufacturing, reflecting workers’ return from a strike. Employment in retail trade declined.
Here is the breakdown of jobs gained and lost; of course, the return of striking workers boosted the headline number in this report, giving a one-time boost to the data. However, the trend is still the same: job growth is slowing down as it should, but we haven’t broken yet.
In this jobs report, the unemployment rate for education levels looks like this:
- Less than a high school diploma: 6.3%
- High school graduate and no college: 4.1%
- Some college or associate degree: 2.8%
- Bachelor’s degree or higher: 2.1%
What a month for the 10-year yield, currently trading at 4.25% after the labor data got better.
What I want people to get out of this report isn’t the headlines you will hear today about how the recession isn’t here yet: we know that the jobless claims data is still not at 323,000 on the four-week moving average. The real story here is that the Fed was wrong about needing a job-loss recession to slow the growth rate of inflation down.
The housing market is still in deep recessionary sales levels, and it’s time for a dovish Fed to start talking about ways to get home sales to grow, because one thing we have seen now is that it’s not the 1970s. This is not the time to be old and slow.
