Labor Market Cooling: Fed Dilemma and Investment Insights

**SPEAKER_1** (0:00)
But for more on what this could mean for the economy, the Fed's policy, and of course the overall market, we are now joined by Brian Jacobson, Chief Economist Strategist at Annex Wealth Management. Thank you so much for joining us, Brian. Now, of course, this report showed payrolls declining, and the prior months were revised, which I also thought was also pretty significant, but is this really evidence of a labor market that's gradually cooling, or one that's beginning to deteriorate more quickly?

**Brian Jacobson** (0:24)
Yeah, I think that you're absolutely right to point out that it was the back month revisions that were probably a little bit more notable because of the 103,000 total reduction, and it really brings the run rate for the labor market growth only to about 20,000 per month over the last three months, which is still positive, so I guess that's a good thing, but I think it is signs of slowing. We had a good start to the year with January. February was a big negative number, mostly probably weather related. Then we had like three months in a row of really solid gains.
Now, it's tapering off a little bit, and I think that's actually pretty consistent with what I'm seeing in terms of business activity. Good new orders numbers, so kind of the pipeline is full, and you're also seeing some investment, but for the most part, it does seem as though a lot of businesses feel as though maybe they're already all fully staffed up.

**SPEAKER_3** (1:19)
Brian, what did you make of the market reaction? If I kind of play play by play here, it seemed like out the gate, there was a pretty dramatic repricing of yields to the downside, and it's like as the morning and we've rolled into afternoon, the markets rethought that a bit, giving back the vast majority of that movement. Do you think the first move made sense, or do you think where we are now is the proper reaction?

**Brian Jacobson** (1:47)
I think that where we are now is probably the proper reaction. The first move was probably just the shock associated with a negative number with that headline, minus 23,000. But it didn't really take all that long to figure out why it was a negative. We had more than around 50,000 jobs lost at the local level, especially with education, probably related to seasonal factors with schools, summer schools. Also, we do know that there are a number of municipalities that are under some budget constraints and they have actually cut some of the headcount, unfortunately. Then you have the leisure and hospitality number. There wasn't a huge bump from the World Cup for the June and July. In fact, those numbers were actually negative. Thankfully, we are seeing slight positive numbers with manufacturing and construction, but these are not rip-roaring good numbers in terms of growth. So I think that, well, it's like the knee-jerk was, oh, now the Fed might need to cut.
As time went on a little bit here, it's like, no, they can still be pretty much singularly focused on inflation.

**SPEAKER_1** (2:52)
Okay, and so that actually speaks to my exact next question. So with, of course, inflation still above the Fed's target, job growth now, of course, slowing, then has the central bank become trapped between supporting employment and then fighting inflation?

**Brian Jacobson** (3:05)
Yeah, it is likely going to get to that point. That's going to be a major topic of conversation at the September meeting. They will get another jobs report. They'll get two more inflation prints, so a little bit more data to act on. But it does feel as though right now, if you kind of think about, if they do hike rates, what parts of the economy does that most immediately affect? Well, it affects companies that are asset heavy, that they have to finance that. That typically is manufacturing. What does it also affect on the consumer side? Cost of housing, cost of buying those new cars, financing them, credit cards. So it affects goods. And really, if that's the part that had been struggling, we're seeing a nascent recovery, 33 months in a row of that ISM manufacturing, unemployment sub-index being below 50, finally turning positive. Do they want to snuff that out? And in terms of, I think Warsh is going to have a really strong argument for saying, look, we want to be focused on inflation, but in order to do that, maybe rate hikes aren't the right tool. Maybe it's that balance sheet that they really need to focus on instead.

**SPEAKER_3** (4:10)
When you look at the job data today, even from a high level, not even getting into where and what, unemployment rate goes down, we have less jobs. So is that really a story of people just giving up as opposed to anything else? Like if I wanted to tout a strong labor market, I could point to the unemployment rate has decreased. If I wanted to point to one that's deteriorating, I can say that the workforce has shrunk.