Job Market Waves Yellow Flag of Caution

Jeffrey Roach (00:03):

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial with some talking points to explain the current job market. First official metrics. Now corroborates alternative reports. Investors had a tough time responding to the latest snapshot of the labor market. Businesses added just 73,000 to their payrolls in July, but the big surprise were downward revisions to the previous two months. Taken together employment in May and June were 258,000 lower than previously reported. Over the last three months, payrolls grew only 35,000 on average, and that's down from 232,000 at the start of the year. You see that in the orange line on the chart. So actually, these payroll numbers reflected what we already knew about hiring plans from the conference board, from National Federation of Independent Businesses, from ISM Data and the bevy of commentary within the Federal Reserve Board beige book. So the bottom line is this, the downward revisions were the most revealing in this month's jobs report.

Jeffrey Roach (01:04):

And as noted earlier, business demand for labor is slowing, adding uncertainty to the growth trajectory, but solid wage growth will support some consumer spending in the meantime. Second, the soft jobs report solidifies likely rate cut. Interest rate expectations changed materially after Friday's non-farm payroll release. Given the softness in the labor market, investors must recalibrate rate expectations. This solidifies our view that the Fed could cut rates in September if inflation metrics behave. Now over time, investor expectations do change wildly. This chart shows that after the Friday jobs, data investors expected a roughly 90% chance of Fed taking action next month. That's to lower rates to within a range of four and a four and a quarter percent. You see that in the dark blue line and just the day before investors were betting on just a 60% chance. You can see the day-to-day volatility in market expectations, and it underscores the wisdom needed to avoid need jerk reactions.

Jeffrey Roach (02:09):

The LPL research team believes the Fed has set the stage for taking action at their September 17th meeting. Now, practically what that means is rates could be lower in the coming months. Third, more firms citing weaker conditions. Over the past year, we've seen a material shift in business sentiment, specifically as it relates to managing headcount. Now, we still believe that firms could remain hesitant to hire, but also hesitant to fire. However, here's where the shift has taken place. In a previous period, firms were citing cost cutting measures as the reason behind layoff announcements. Now, firms are highlighting weaker economic conditions as the impetus and notice this shift happened before the risk of higher tariffs. I think this is worth highlighting because it shows firms are well prepared going into an economic slowdown. They are managing headcount in advance of a material slowdown in either consumer spending or business investment. And by the way, we see these things as yellow caution flags, not necessarily red warning flags. Now that's all for now. If you want more insights on global market trends, follow us on social media and take care.