NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: August Payrolls Light as Fed Decision Looms

September 06, 2024
Shannon Saccocia, CFA, Chief Investment Officer—Private Wealth

We believe that the slowdown in hiring is not a cause for fear, but rather an indication of the normalization that it is necessary to achieve the soft landing scenario.

August’s non-farm payrolls release indicated that the U.S. economy added +142k jobs in the month – once again below the consensus of +165k. Admittedly, there were indications over the past two weeks that the risk was for a lighter print as ADP private payrolls and the ISM Manufacturing PMI survey pointed to a weaker level of hiring. Breaking down the data, this month’s gains were consistent with more recent prints, with leisure & hospitality, construction, health care, and government hiring leading the way; these sectors added +46k, +34k, +31k, and +24k respectively. Conversely, manufacturing hiring declined meaningfully, down -24k in the month –this is reflective of the low levels of activity reported via other sources. Revisions were to the downside as well, with June and July payrolls at +118k and +89k respectively. For context, the trailing 12-month average now stands at +202k.

The unemployment rate fell back to 4.2% for the month, as the participation rate remained steady at 62.7%. The decline in the unemployment was attributable in large part to the reversal of much of the spike in temporary layoffs in July’s release and was widely expected. Wages came in slightly stronger than expected, up +0.4% month-over-month and +3.8% year-over-year, and hours worked were also slightly higher, to 34.3 from 34.2 hours – reversing last month’s decline.

We believe consideration of other recent employment data points bears worth mentioning when drawing a conclusion on the impact of today’s release. Earlier this week, the July JOLTS report showed a marked decline in job openings to 7.7 million, marking the fourth decline in the figure in the last five months. However, initial jobless claims, which have historically been significant in forecasting a protracted weakening in the labor market, fell once again on Thursday to +227k; continuing claims were also lower. As mentioned above, manufacturing employment appears to be weakening as well, but the employment component of the ISM Services PMI, while admittedly down slightly from July to August, is still reflecting economic expansion in the more impactful areas of the U.S. economy.

When taken together, we believe that the slowdown in hiring is not a cause for fear, but rather an indication of the normalization that it is necessary to achieve the soft landing scenario so desperately desired and now widely expected. Cracks in consumer confidence and spending have appeared, but with wages pacing ahead of inflation, the sharp decline in the savings rate could stabilize along with CPI. The availability of full-time employment has historically been the driver of consumer confidence and we do not see enough signs today of the level of contraction necessary to hinder consumer spending to the magnitude that would be required to tip the U.S. economy into recession in the next few quarters.

In our view, the proverbial ball now sits in the Federal Reserve’s (Fed) court, and they are faced with a tough decision in their upcoming meeting which concludes on September 18th. Speaker after speaker has laid the groundwork for a cut but the decision to effect either a 25 basis point or 50 basis point decrease has implications for both equity and bond investors. While the rationale for a 50 basis point cut could be constructed, and would not be inconsistent with the Fed’s narrative, equity markets could look through that decision and interpret it as the Fed believing the economy slowing faster than anticipated – particularly given the strong performance of stocks already this year. Alternately, a 50 basis point cut could be celebrated by the markets, as it would point to a Fed that is attempting to avoid a policy error so often made – cutting too little too late. In addition, a stronger move out of the gate could be an appeasement to the members of the FOMC who believed a July cut was justified by inflation data even before the disappointing July jobs report was released.

With a little less than two weeks until their meeting, there is still a lot of ground to cover before the Fed makes its decision. Our view is that the Fed will likely cut 25 basis points but will indicate strongly that it will be aggressive in moving towards the neutral rate, even as the U.S. economy remains on fairly solid footing. This sets up for continued cuts through the end of the year and through the first half of 2025. As such, it is imperative to review in particular current cash positions to determine better opportunities for return. More broadly, with the Fed decision coming at the height of U.S. Presidential campaigning – a notoriously choppy time for markets – we stand ready to take advantage of the volatility to position portfolios in alignment with the best ideas of our teams.

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