Banananomics: The Truth About Recession And Jobs

The Truth About Recession And Jobs

Fed Chairman Jerome Powell said that payroll jobs "may be a bit overstated" at the June press conference after the Federal Open Market Committee (FOMC) meeting.

Inputs that matter: The Bureau of Labor Statistics uses the business births and deaths econometric model to adjust the monthly payroll data, and this model is known to be unreliable when the economy is transitioning to a recession.

• It's crucial to understand that this model fails to account for businesses that go bankrupt at the onset of a recession.

• Consequently, it overstates the payroll data, adding jobs based on the model's prediction, while the jobs could actually be lost.

• This insight is vital for making informed decisions in the current economic climate.

• According to Commodity Trading Advisor Samir Tokic of Macrotheme Capital Management, Powell's specific mention that the payroll jobs could be overstated implies that the Fed is aware that the economy is likely transitioning towards a recession.

The opportunity: However, June's S&P Global US Composite PMI survey data is more positive on the labor market, suggesting that payrolls should still come above 100K.

• In May, full-time employment decreased by 625,000, and part-time work increased by 286,000.

• Part-time jobs include gig work, such as those delivering with Uber, GrubHub, etc.

Zoom in: Futures on the S&P, Nasdaq, and Dow all rose slightly Friday after the release of the hotly anticipated monthly jobs report.

• The current unemployment rate at 4.1% could convince more Fed officials that a September rate cut is appropriate.

• It could also push officials to consider cutting rates more than once this year, which was their expectation as of last month's meeting.

• This possibility underscores the need to be prepared for a range of economic scenarios.

Between the lines: While officials "want to be more confident that inflation is moving sustainably down toward 2% before we start loosening policy," Powell said.

• "The labor market unexpectedly weakening is also something that could call for a reaction."

• This statement underscores the need to be alert and ready to respond to any unexpected shifts in the labor market.

• Economists expect the broader economy, including the labor market, to slow further in the year's second half but stop short of falling into a recession. 

Follow the money: Fed officials indicated in their latest economic projections that they expect to cut interest rates just once this year, which have been at a 23-year high for a year.

• November 2021 was the last time the unemployment rate was this high.

• Powell suggested that payroll jobs could be overstated, which signals that the Fed knows we could be at the transition point—or near a recession.

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