Fed Eyeing a Weaker Jobs Market

Marc Zabicki (00:00):

The U.S. Federal Reserve is tasked with managing a delicate balance between stable prices and maximum employment, and the central bank moves its monetary policy in accordance with that balance. In recent years, stable prices and or inflation has dominated the Fed's attention. The Fed, however, is beginning to refocus its view on employment and for good reason. In this latest edition of LPL Street View, we'll take a look at some signs of weakening in the U.S. jobs market and other decelerating economic indicators, and translate that into what we believe will be the dominant policy direction for the Federal Reserve over the next 12 months.

Marc Zabicki (00:47):

We believe one of the most important indicators of trend direction in the U.S. jobs market is the weekly continuing jobless claims number, excluding the extreme data variation due to the COVID era, U.S. continuing jobless claims are the highest they've been since early 2018. Taking a more near term look. This chart shows a definitive pattern of weakness in the jobs market since indeed the COVID era. And while continuing jobless claims are not egregiously high, we believe the persistent rising trend is in part, causing policy makers to pay more attention to jobs data and less attention on what has been a decelerating inflation trend. Let's take a look at another chart, which is pointing to economic conditions that have led to some emerging weakness in the jobs market. This chart points to the ISM manufacturing activity and ISM services activity indices here in the U.S. When these indices are above 50, the sector is said to be growing, and when they are below 50, the sector is said to be contracting. Excluding the one-time shock of the COVID era,

Marc Zabicki (02:01):

both the manufacturing and the services sectors in aggregate are the weakest they've been since the Great Financial Crisis, with manufacturing actually firmly in contraction mode. This relative weakness is likely translating to rising unemployment and some slowdown in hiring plans. What does this all mean? Well, while inflation is still a bit above where the Fed would like to see it, we believe inflation conditions will indeed continue to subside. In our view, likely decelerating inflation trends coupled with trend weakness in jobs in the economy is the reason why the Fed has changed its interest rate course, and we expect that course to continue throughout 2026. Why might the Fed be on a definitive path to lower rates? One reason is that we believe the current rate of potential U.S. economic growth, estimated by the Congressional Budget Office at 2% per year over the next decade, is not robust enough to handle a fed funds rate that persists at levels between 3% to 5% for too long. With post-COVID fiscal stimulus now definitively fading, we expect the monetary policy engine will have to be restarted to keep the economy from reaching stall speed. Thanks for listening, and as always, allocate wisely.