Unemployment Rate Rises, The Fed Missed Badly

Preface

(Reminder: Yesterday I penned Jobless Claims Fresh Highs; Manufacturing Fresh Lows.)

As of today, we will have a Fed that is on the right side of the market as opposed to in opposition to it. That’s the silver lining. The Fed will cut.

Today we received the non farm payrolls (NFP) report and saw what many, including myself, have long feared.

Even with the unemployment, before today, at multi year highs, continuing jobless claims at multi year highs, credit card delinquencies at multi year highs, manufacturing employment PMI at multi-year lows, wage inflation at multi-year lows, and inflation at multi year lows, even then, the Fed did not cut rates two days ago (or several months ago).

Today we got worse news: the unemployment rose to 4.3% from 4.1%, and while participation rose 0.1%, still, the 0.2% rise points to old fashioned higher unemployment.

As Nick Timiraos noted:

At [the Fed’s] June meeting, the unemployment rate in front of Fed officials was 4.0%.

Only 3 of 19 projected an unemployment rate ending Q4 [2024] above 4.1% under their base case outlook (which assumed 1-2 cuts this year).

None had it above 4.3% in 2025-26.

The Fed’s forecasts are wrong, it was late cutting rates and the unemployment rate is on a bad trajectory.

Here is the chart of unemployment:

And, the rise in unemployment is NOT due to just temporary layoffs, so “the hurricane reduced employment” isn’t a full explanation.

Here is a chart from Nick Bunker.

(Joseph Brusuelas points out that in order for the Sahm Rule to be triggered, the unemployment rate needed to reach 4.260% and the unemployment rate out to three digits is 4.253% so its a narrow miss. I will leave it to you guys to argue over the merit of rounding up.)

Here is the rest of the data before some short analysis.

• US Non Farm Payrolls:
  • 114K vs 175K consensus and 179K prior.
• US Average Hourly Earnings YoY:
  • 3.6% vs 3.7% consensus and 3.8% prior.
• US Average Hourly Earnings MoM:
  • 0.2% vs 0.3% consensus and 0.3% prior.
• US Average Weekly Hours:
  • 34.2 vs 34.3 consensus and 34.3 prior.
• US Unemployment Rate:
  • 4.3% vs 4.1% consensus and 4.1% prior.
• US Labor Force Participation Rate:
  • 62.7% and 62.6% prior.

Story

At this point, I am simply repeating myself from several months ago.

What the Fed thinks about inflation and the economy are the only things that matter.

The data in and of itself doesn’t matter to the Fed and unfortunately we learned that several months ago.

So, what is there left to say?

At a snapshot, as if there were no trends, a 4.3% unemployment rate and +114,000 jobs in July is quite reasonable.

But trends do matter, and as I have said, once economic data takes on a trajectory it rarely (if ever) stops where we want it to.

I expect (or I hope) there will be a rate cut intra-meeting, perhaps at Jackson Hole in late August.

Here are the crucial charts and for all the “data dependent” talk from the Fed, they are not data dependent, they are narrative dependent, and nobody really knows what narrative they are following.

Here is the chart of unemployment (multi-year high):

Here is Continuing Jobless Claims (multi-year high)

Here is a chart of ISM Manufacturing Employment (Source) (multi-year low)

Here is the chart of PCE inflation (the one the Fed targets) (Source) (multi-year low):

Credit Card Delinquencies (multi-year high):

US Household cumulative excess savings (multi-year low):

Real Disposable Personal Income (YoY):

The odds of a “double” (50 basis point) rate cut in September have risen to 62.5%, from 11.8% two days ago and the overall odds of a rate cut (one or two) are at 100%.

Treasury yields are falling as investors pile into safe haven assets in a hedge against or preparation for a recession.

I still believe in the US consumer but the odds of a recession are rising.

Conclusion

The Fed was late to raise rates and is now late to cut rates.

I said so. Many others did too. But it doesn’t matter.

What the Fed thinks about inflation and the economy are the only things that matter.

The odds of a recession have risen.

The economy and stock market are now just derivatives of the actions taken (or not taken) by an inept Federal Reserve.

Recession is 50% reality and 50% perception.

If the Fed moves immediately we could save the perception half of a recession.

With strong Q2 GDP and at least positive job growth (i.e. positive payrolls), perhaps we escape a recession with a quick rate cut.

At a snapshot, as if there were no trends, a 4.3% unemployment rate and +114,000 jobs in July is quite reasonable.

But trends do matter, and as I have said, once economic data takes on a trajectory it rarely (if ever) stops where we want it to.

Thanks for reading, friends.

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