Of course this changes everything! We’re done! Kaput! After a month where wild-eyed economists predicted that the U.S. would see 160,000 new jobs, and the economy could only spit out a measly 38,000, well, folks, we better wake up and smell the rotten cheese! Hmm…
For some this is vindication. This is the “see, things are a lot worse than they want us to believe!”… Okay, but that’s usually the refrain of folks who think the numbers ain’t the numbers — that the powers-that-be fudge the numbers every month to produce a bogus rose-smell to mask the true limburger. Umm… no… If they could indeed fudge the numbers—halfway through an election year (this election year!!)—I promise you there’d be a 2 smack dab in front of that 38k.
So is the Employment Situation Report perfectly accurate? Umm… no… it can’t be. It provides estimates derived from surveys of households and employers. It attempts to capture the number of folks employed and unemployed along with hours worked, wages, etc. And prior numbers often get revised — Friday’s report included a downward revision of 59k for March and April (again, would “they” show downward revisions if they were cheating?).
So then, looking beyond the imperfection of the report, and conspiracy theories, is it time to sound the alarm? Well, probably not just yet. You see, the jobs number is a noisy number. Here’s a look at it going back a ways (red shaded areas are recessions). click each chart then click again to enlarge…
Per the chart, prints like yesterday’s (which, in reality, we should add 35k to to catch the effect of the since-resolved Verizon strike) do tend to occur even when there’s no recession looming — and notice the huge upward spike following several of those mid-expansion disappointments (June’s number is going to be interesting!):
In Thursday’s video I said that a soft jobs number was my best guess and that below 150k might spark a rally. Now, when I said below 150k, I was thinking like 138k — wasn’t even dreaming 38k! Nor, I assure you, were any Wall Street traders. So, in knee-jerk fashion, the market traded down right out of the gate, with the Dow off 140+ points at its low. However, by day’s end stocks had scratched and clawed their way back to a mere minus 31 on the Dow. Suffice it to say that the market does not need to worry over the Fed raising rates come its June meeting.
But should it be (worried over the Fed) in general? Well, for the Fed, in my view things are potentially getting a bit precarious. Take a look at the monthly jobs chart with the Fed funds rate folded in:
And here’s the unemployment rate through the past few cycles:
For whatever reason(s), the Fed has passed on what history suggests were opportunities to create a more normal interest rate environment and, therefore, presently find themselves in uncharted waters.
Now they’re left hoping against hope that there’s an economic bounce in the offing that’ll give them one last chance to refuel (raise rates) and prepare themselves to navigate the inevitable tempest (next recession) to come. Next week we’ll take a deep dive into what history says about their odds.