How bad was the jobs report?

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Good morning. Should markets care that the president has sacked the head of the Bureau of Labor Statistics, Erika McEntarfer? The firing would be less serious if the president had simply accused Ms McEntarfer of incompetence. But he alleged she manipulated the job numbers for political reasons, without any evidence or any apparent intention of presenting evidence in the future (one White house official claimed, pathetically, that the revisions themselves are the evidence of fraud). Worse, the accusation makes no sense: as several people have pointed out, the pattern of revisions doesn’t seem to favour the Democrats over the Republicans. 

So the president has removed a public servant responsible for crucial economic data out of mindless spite or insecurity. Will markets care? Almost certainly not now, given their tendency to ignore the president’s most erratic behaviour. But in the long run, this sort of incident is a more serious threat to the premium valuation of US risk assets than, say, Trump’s tariffs. Those are ultimately just an example of very dumb tax policy, something US corporate capitalism has long accommodated. Disagree? Email us: unhedged@ft.com. 

The jobs report

As recently as last Thursday, Unhedged argued that “Rate cuts would be a bad decision right now,” and we have long supported the Fed’s decision to stand pat at 4.25 to 4.5 per cent. Well, after a bad jobs report on Friday, things look different, and the dissidents within the Open Market Committee look more prescient and less political. 

With a few days to think, though, the jobs report was a bit less bad than it looked at first. Everyone has by now seen a chart like the one below, giving a dire picture not so much of weak job creation in July, but of downward revisions that erased 258,000 jobs from the initial readings for May and June, leaving precious few new jobs created in those months: 

Crucially — given the shrinking work force, which makes the break-even job-creation number lower — the unemployment rate also rose from 4.1 per cent to 4.2 per cent, and missed being rounded up to 4.3 per cent by only a few basis points.

But the industry composition of the job slowdown tells a somewhat less dire tale. The sector that lost big in recent months was federal, state and local government:

In the past 6 months — roughly since Trump’s inauguration — the US economy has produced about half a million new jobs, half as many as were created in the six months before that. But of that decline, 40 per cent is down to lower government job creation. Yes, private job creation has declined a lot (June was terrible on that front) but without the fall in government hiring, the conversation about this jobs report would be much less dramatic.

This raises the tragic and farcical possibility that the president has fired the head of the BLS to scapegoat her for the success of one of his own signature initiatives — reducing the number of government workers. 

That wretched irony aside, the most important story in the employment numbers is not the fall in government workers. It is that economically cyclical industries have all but stopped adding new workers, a trend going back to the start of the year:

This is bad, but nothing in the July jobs report changed this picture; Unhedged wrote about it a month ago. 

Having zoomed in on the sectors, let’s zoom out again and look at the aggregate employment rate:

We can be reassured by the fact that the unemployment rate remains historically low, as low as in the great booms of the late 1990s and mid 2000s. Or we can be frightened that the direction of travel is bad, and that once the unemployment rate starts to rise quickly it tends to keep doing so (as 2000 and 2008 show). How to decide which is the right reading? It comes back to a question that will be very familiar to readers of this newsletter: are we in a cyclical slowdown, or a normalisation after the wild post-pandemic boom? If it’s the former, the unemployment trend should scare us, as it suggests a rising chance of recession. If the latter, we can focus on the level and relax.

Don Rissmiller of Strategas often points out, quite rightly, that it is hard for the US economy to drop into a recession unless corporate profits are falling. And, according to FactSet, S&P 500 profits are growing at 10 per cent (with two-thirds of the companies in the index having reported). That should have us leading towards the benign “level” interpretation of unemployment, not the spooky “rate of change” interpretation. But as my colleague George Steer reported in a nice piece over the weekend, that overall growth level conceals a split. Tech companies (AI mania) and financial companies (high rates, rising asset prices, high volatility) are increasing profits quickly, but at companies in other sectors, from consumer staples to materials, earnings growth is slowing notably. This may be the analogue to what we are seeing in the weak job growth numbers for cyclical industries. 

So is it quite right to say that the US corporate economy is thriving? More on this in days to come. 

One good read

The vintage king.

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