Slowing Job Growth Momentum Aids Rate-Cutting Argument

Sep 06, 2019
Job Fair

The August jobs report missed on the headline job growth number but wage gains were good enough to dim odds of a 50bps rate cut at the September 18 FOMC meeting.  Monthly job growth totaled 130,000, missing the 160,000 expectation and that included 25,000 new census workers. Private payrolls were even lower at 96,000 jobs, the lowest in three months.  Offsetting some of the headline job growth disappointment, monthly wages  increased 0.4% beating the 0.3% forecast and the YoY gain came better as well at 3.2% versus 3.0%  expected but off the 3.3% gain posted in July.  Wage gains seem to be plateauing around 3.2%-3.3% after running at 3.4% earlier in the year. The unemployment rate dipped 3bps lower but on a rounded basis stayed at 3.7% for a third straight month after touching 3.6% in April which is the low for this cycle. In summary, while the better-than-expected wage gains dim the odds of a 50bps rate cut later this month, the slowing momentum in job growth will allow the Fed to go ahead with the expected 25bps rate cut.  With the market still pricing in nearly 75bps in rate cuts by year-end the Fed could cut 25bps this month and follow it with similar cuts in October and December if inflation and job growth momentum continues to slow and “global uncertainties” dominate the outlook. After initially hesitating, Treasuries are recovering earlier losses and moving into the green and that seems the right direction given the unmistakable signs of slowing job growth momentum.


For the month, 130,000 jobs were created missing the 160,000 forecast and that number included 25,000 new census workers. The August number is a sequential decline versus July’s 159,000 that was revised lower by 5,000 jobs. In fact, the prior two months were revised down 20,000 adding to concerns that job growth is showing signs of diminishing momentum.   Over the past year, monthly job gains averaged 187,000 so the August results reflect a moderate drop versus that average and the  sequential drop adds to the sense that hiring momentum is decidedly slowing.


Away from the headline job growth numbers, the one bright spot in the report was a rebound in wage gains with average hourly earnings increasing 0.4% for the month versus 0.3% expected, while year-over-year earnings fell one -tenth to 3.2% from an upwardly revised 3.3% in July. With the one-tenth decrease in August,  wage gains appear to be plateauing in the 3.2% to 3.3% range versus moving materially higher as was the case earlier in the year.   February’s 3.4% YoY gain remains the  high for this cycle. As long as wages remain stuck around the current YoY level, demand-pull inflation is unlikely to accelerate and that should keep inflation docile enough to allow additional rate cuts given the Fed’s desire to prolong the economic expansion. 


Matching the pre-release forecast, the unemployment rate remained at 3.7% (actually 3.687% vs. 3.712% in July) for a third straight month after dipping to a cycle low of 3.6% in April.  The Household Survey—which is used to generate the various employment ratios— saw 19,000 persons removed from the ranks of the unemployed (6.044 million versus 6.063 million) while a whopping 571,000 person increase in the labor force denominator (163,922 million vs. 163,351 million) moved the unemployment rate down 3bps but that wasn’t enough to change the rounded result from July.


Meanwhile, the broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached divided by the labor force) rose two-tenths to 7.2% after dipping to a cycle low of 7.0% in July.   As mentioned, unemployed persons decreased by 19,000, but part-time workers increased by 397,000 and 86,000 and were added to the ranks of the marginally attached (those willing to work but not actively looking). Perhaps businesses are reacting to the uncertain trade and economic environment by adding part-time help rather than commit to permanent hires? The big increase in part-time workers and marginally attached detracts from the report and will get the Fed’s attention in addition to the slowing headline growth figures. 


The labor force participation rate (labor force divided by civilian population) rose two-tenths to 63.2% and that ties the cycle high set back in February.  The reading was driven by the aforementioned 571,000 increase in the labor force while the civilian population rose by just 207,000. While the current rate is at the cycle high, the rate still pales in comparison to the 66% level that prevailed pre-crisis. The 62.7% to 63.2% range over the past year appears to be the new full employment normal given the aging of the working population and slowing population gains.


In summary, while the release missed on the headline expectation, wage gains combined with the solid ISM Non-Manufacturing print from yesterday probably quells any serious discussion of a 50bps rate cut at the September 18 FOMC Meeting. And while wage gains increased 0.4% for the month, the 3.2% YoY gain was off one -tenth from July’s 3.3% gain. Wages seem stuck around the 3.2%-3.3% YoY range after increasing more forcefully earlier in the year. The slowing in job growth combined with the modest wage gains will allow the Fed to engineer additional rate cuts this year. In fact, fed funds futures are forecasting a year-end funds rate of 1.63% which reflects nearly three additional 25bps rate cuts by year-end.



line graph icon  Inflation Projections & Dollar Heading Wrong Way for Fed

With the domestic services economy still humming along, some Fed members will likely dissent from a rate cut at the upcoming meeting. The graph, however, illustrates a couple strong reasons the Fed will likely cut rates 25bps at the meeting and probably follow that with more in October and possibly December.  With the strength in the U.S. dollar and its deflationary impulse it has forced inflation expectations significantly lower. Cutting rates may stem some of the dollar strength and push inflation expectations up and both of those are reason enough to keep on with rate cuts. 

US Dollar Strength & Inflation Projections



bar graph iconMarket Rates

Treasury Curve Today Chg Last Wk. LIBOR Rates Today Chg Last Wk. FF/Prime Rate Swap Rates Rate
3 Month 1.95%  +0.02% 1 Mo LIBOR 2.06%  -0.03% FF Target Rate 2.00%-2.25% 3 Year 1.417%
6 Month 1.87%  UNCH 3 Mo LIBOR 2.11%  -0.03% Prime Rate 5.25% 5 Year 1.359%
2 Year 1.53%  +0.02% 6 Mo LIBOR 1.99%  -0.04% IOER 2.10% 10 Year 1.443%
10 Year 1.56%  +0.06% 12 MO LIBOR 1.90%  -0.07% SOFR 2.21%    


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