Labor Market – Nonfarm Payrolls and Aggregate Payrolls

As of yesterday, Fed Funds futures were pricing in roughly six 25-basis point rate cuts by January 2025 and ten 25-basis point rate cuts by October 2025. That pace has been, at least in part, influenced by an overreaction to slowing payroll growth. While hiring has certainly slowed, in our view it is more likely that hiring has been returning to more normal levels while layoffs remain low. At a high level, most of the data we monitor suggests the economic environment is unlikely to move in a direction that would justify the current expectations for rate cuts.

The initial estimate for total nonfarm payrolls increased by 142,000 in August, up from the previous two months, following downward revisions that brought June down to 118,000 from an initial release of 206,000 and July down to 89,000 from an initial release of 114,000. On a y/y basis, nonfarm payrolls slowed to 1.51% from 1.55% in the prior month, its fifth consecutive month of sequential deceleration, and its third month in a row coming in below the average growth rate from 2015 to 2019.

Source: Macrobond.

Compared to the 2015-2019 period, the number of jobs remains below trend and the slope of the three-year trend has not been improving as m/m growth over the last four months has weakened. One of the trends we have been following related to the labor market is the below trend growth in nonfarm payrolls and above trend growth in aggregate weekly payrolls. This dynamic suggests that the growth in the number of people working, and the amount of hours worked, has lagged the increased cost of employing people since 2021.

Source: Macrobond.

There are two takeaways from this setup that are worth mentioning.

1. This should have been a positive for consumers as companies spend more on wages, but on an inflation-adjusted basis, average weekly earnings have been growing at less than 1% y/y since April 2021 but have been moving in a positive direction more recently.

Source: Macrobond.

2. If company earnings were to slow down, there would likely be an increased propensity to begin layoffs.

Source: Macrobond.

With those two points in mind, the weaker real earnings backdrop has not led to a meaningful slowdown in real spending, corporate profits accelerated in the second quarter, and initial claims have been below 250,000 since early August of last year. Given the inflation setup as we move into 2025, the data we track suggests that unless we see an increase in layoffs that results in a demand slowdown, the markets’ current expectations for the pace and amount of rate cuts from the Federal Reserve is likely aggressive.

With the FOMC meeting next week, we will provide an update on this developing situation as more data becomes available.

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.