There has been precious little good news in the headlines this week. From Hurricane Helene’s destruction, to the longshoremen’s strike, to the escalation of tensions in the Middle East and the ongoing political (and societal) divisions in our country, it has been much easier to be negative about the current state of affairs than positive. Surely, the proverbial other shoe is ready to drop.
Perhaps I am alone, but I doubt it.
Then, this morning, like a bright ray of sunshine on an otherwise stormy day, the Bureau of Labor Statistics (BLS) announced the U.S. economy created 254K net, new payroll jobs during September 2024. This was a smidgeon short of 4 standard deviations to the right of the median estimate in the Bloomberg survey, which was 150K. Further, it was roughly a standard deviation higher than the highest estimate.
In layman’s terms, almost no one saw this short of strength coming. And why would they have? There has been precious little in secondary and supporting economic reports to suggest job growth would accelerate last month. The employment surveys in the ISM Reports on Business both implied a decline in job growth. The ADP Employment Change was 143K, and the previous estimate for August’s job growth was 142K.
As such, the path of least resistance would have been to put in a guess of anywhere from 120K to 160K. Given the mode was the same as the median estimate, 150K, it doth appear others concurred in my assessment.
Given how, let’s say, unusual the “Employment Situation” releases have been in 2024, my first reaction to the headlines was to think: “yeah, sure. The devil will be in the details, because I am confident there are all kinds of dark clouds in this report.” After all, as I have written in this newsletter, there has been a noticeable divergence between the “Household Data” and “Establishment Data” for quite some time now.
Basically, what individuals have been reporting to the BLS has been quite different than what their employers have been stating. Workers say job growth has been relatively stagnant, and their HR departments say it has been mostly full steam ahead.
So, I was certain I would simply go to the Household Data and find plenty of information with which to tear a large hole into that 254K headline. No sweat. It would be like shooting fish in a barrel, which is a pretty odd expression when you think about it.
I was wrong, very wrong. In fact, I might even argue the Household Data was even stronger than the Establishment Data. The Unemployment Rate fell. There was even more robust job growth. The number of people working part-time for economic reasons was lower. I mean, from top to bottom and stem to stern, there were no fish for me to shoot. Here I was trying to find something negative, and the worst I could find wouldn’t have held up to even the mildest scrutiny.
As a result, the aggregate report was pretty good. It was a little too good.
Apart from all other official economic data, this morning’s report doesn’t quite jibe with discussions I have had with business owners. It doesn’t mesh with articles I have read. It doesn’t reflect what I have seen in this city and others to which I have traveled.
I freely admit, that last paragraph isn’t as gloomy as it reads. The point I am trying to make is, from the full mosaic of information and experiences I have amassed, the current labor market is okay. It isn’t in the tank. We are not standing on the precipice. The world is not going to end. However, a sudden surge in job creation? A near about-face in the Household Data, from sort of gloomy to kind of groovy in one month? A dip in the official Unemployment Rate? Yeah, it is head-scratching.
Now, in case you were wondering, I kind of like “from sort of gloomy to kind of groovy.” I hope you do too, and please feel free to use it. There is no need to cite me. In fact, I would prefer you didn’t. There is a difference between liking something and being proud of it, sometimes a big difference. I digress.
In any event, my disbelief of the stated strength of the jobs numbers is neither here nor there. It doesn’t matter what I think or Goldman Sachs thinks or JPMorgan or anyone else. The BLS says the U.S. economy created 254K net, new payroll jobs and the Unemployment Rate fell to 4.1% last month. That is its story, which happens to be the story of record and final say in the matter, and that is all there is to it. If the investment industry doesn’t like it, we can canvass the nation’s employers and survey individual households ourselves.
No thank you. I will accept the official data as it stands, even with my misgivings, and plan accordingly. So, what does that look like?
First and foremost, given this number alone, there appears to be little reason for the Federal Reserve to be aggressive in cutting the overnight rate. To be sure, it will likely do so by 25 basis points (0.25%) at the next FOMC which concludes on November 7th. However, as I type this on October 4, 2024, the prospects of a 50 basis point cut, or even greater, at that meeting have dimmed significantly. By dimmed, imagine replacing a 75-watt bulb with a 25-watt one.
Obviously, that shift in sentiment will have an impact on the markets, as is has today.
254K new paychecks in an economy which is heavily reliant on consumer spending? What is not to like about that, unless you bet the farm on a recession and loaded the boat with deeply discounted 30-year bonds? Intuitively, all other things being equal, a stronger-than-expected economy is much better than the alternative.
Which is, according to what Washington feeds us, precisely what we have. An economy growing better than it should be, for longer than it should have, despite all of the negative global headlines and tailwinds.
Now, there might be some people reading this thinking: “Norris, dude, just the other week you wrote about how the Federal Reserve should be aggressive in cutting the overnight rate. That it should just go ahead and whack it 100 basis points because it would eventually get there anyhow. So, backtracking now are you, big guy?”
No, I am not. Once the Fed starts an easing cycle, it doesn’t just end it because of one strong report. We have a full month’s worth of data, including another “Employment Situation” release, before the FOMC meets again. Further, it will still likely cut at the next meeting, but it will probably be by less than what we previously though. Finally, yeah, go ahead and cut it 100 basis points. This morning’s report is the exception, and why not go ahead and get it done?
Let’s get this yield curve positively sloped from overnight to 30-years and let’s get after it! Let’s grow the economy so that no one looks askance at strong data. Let’s get this motor cranked and let the rest of the world try to catch up. I don’t want to hear the word “measured,” or read the phrase “deem appropriate.” No American should feel comfortable or satisfied with 2-3% Gross Domestic Product.
Competence should be the minimum. Period.
Yeah, those are the sorts of headlines I want to read.
Have a great weekend.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.