Brusuelas: Weak September Jobs Report Will Force Fed to Hold Interest Rates

[00:00:00] Speaker 1: For more reactions to today's jobs report, we want to welcome in Joe Brousselis, principal and chief economist of RSM. To dive deeper into today's numbers, 29,000. I was very surprised. I'm not sure if you were surprised by this numbers. We were expecting closer to 90,000. What's your main takeaway first? And good morning. Good to see you, Joe. Good to see you too. So good morning [00:00:20] Joe: to everybody out there. You always want to see a stronger number, right? But here's the bottom line. We only need to generate about 35,000 jobs per month to keep the labor market stable. So when I take a look at what goes on inside the report, what I saw was a pretty big decline in government jobs and a pretty big decline in temporary help and just a soft month across the board. The increase in unemployment was due to people entering the workforce is what we call a virtuous increase in unemployment. People want to work. They want to take advantage of the higher wages. Moreover, when you break it, break the unemployment rate down to three digits, it's more noise. So my sense here is we got a reaffirmation of the low fire, low hire American labor market that's got a pretty big constraint on it due to long-term demographic realities that none of us can change and tight immigration policy that's just a decision of the Trump administration. So when you put all that together, we're not going to really see much growth in the labor supply. We're not going to see hiring really look like something that we've become accustomed to over the past 40 years, which is in that 200,000 a month range. Moreover, I think we really need to begin to think about the recent increase in energy prices. When we get to CPI on October 14th, not only are we going to dig through into the details of that report. We're going to be looking to see if basically wages have remained flat, which they have since March, or they're starting to go down again once you adjust for inflation. So I like that 3% rise, not a big deal. I'm not worried about second order effects, but I am beginning to worry about the overall health of the middle class as we just get months on with no real wage growth. [00:02:10] Speaker 1: That's a, so it's, you know, it feels like this is a tightrope bond. I'm glad because I literally was looking at wage growth and I wanted to ask you about that. So it offers some relief when you think about inflation at the same time for households. It's that balancing act when you're dealing with these elevated fuel prices. It feels like it's quite the tightrope there. An additional thought on that, [00:02:34] Joe: Joe? Well, I think that, um, Americans have been stretched for over five years now. And the, the, just these, uh, supply shocks that keep occurring one after another, you know, trade and tariffs, war induced energy prices, the unexpected rise of AI and the draw on basic commodities, goods used at earlier production, and the way in which it's crowding out other private and public sector credit demands are all leading to higher inflation and higher interest rates. So, you know, that I think that that's really a, uh, the proper framing of all of this. You know, when you take a look at these, these jobs numbers, it's important to remember that we're at 4.2% unemployment right now. That's a good description of full employment. So things are pretty good in the labor market. Albeit, I know there are some people, an increasing number of people who are facing longer bouts of unemployment, and it's important that we begin to try to understand why that is. But for the most part, when I look at this data, I see a three month average of 51,000. You know, no one's going to get really too worked up about this. And then in terms of the trading community, this basically will take an October rate hike off the table. I wasn't in that camp. I do think we're going to get at least two more in December and likely one in March of next year. But I think October now it was already moving that way, but this labor market data will really solidify that. It does seem that way because, [00:04:05] Speaker 1: um, we came into today and I'm glad you mentioned the expectations because I wanted to go Fed next. We had the Fed vice chair, Philip Jefferson speaking yesterday. And one of the things that stuck out to me was him saying needing more time, essentially, or wanting more time before, uh, raising rates. And that's to paraphrase what he said. Um, you know, but similar to what the Fed chair said, he said inflation has been too high for too long. So that, you know, kind of dovetails with what you're talking about, Joe, and then, uh, households dealing with this for five years now. Um, so it, it, so you already had the view that we wouldn't see a hike in October and this reinforces that this [00:04:45] Joe: jobs report. This really does, you know, you know, it just, there's no sin in the Fed attempting to ascertain what's going on deep in the bowels of the economy. Look, we had a pretty benign PCE. Although I did not like the core services X housing number, which increased four tenths of a percent. And that does imply that service sector inflation is just stubborn and sticky on top of the problems with energy that we have due to our policies in the Middle East. So my sense is, is that, yeah, they're gonna, they're not gonna hike in October. That'll give them an out just ahead of the election, but we'll be back to looking at it in December. And everybody out there in the trading community, don't hyperventilate over moves in the overnight index swap market, and especially the federal funds rate. Those are thin and illiquid markets. Policymakers tend to focus on them 48 to 72 hours in front of major policy decisions. I don't think anybody's really worried about what those markets say for December. It's good to talk about it. It gives everybody something to, to, to chew on, on the trading floor, but don't overdo it. Let me ask you this. I want to ask you about the revisions, [00:05:59] Speaker 1: because when you say, you know, we need to be, to generate 35,000 per month on average, for the labor market to still hold up. But still, you know, to me, it does stand out. These revisions for July was revised down to a loss of 10,000 jobs. Now, August was revised. We're still have a big gain for August, but 133,000 instead of 162,000. Does it worry you at all? [00:06:26] Joe: No. Because of the way in which the economy has been subjected to constraints from the policy sector, we're just going to have very slow growth in the labor supply. Because of the long-term demographic reality that none of us can do anything about due to the retirement of the baby boomers, we really need to think about, do we have enough native-born labor to meet demand? Now, my sense is, is that no, that these labor markets are pretty tight. We're not going to open up the borders to have people come in and work. And that's the decision that's been decided by the president and his administration. And that's just not going to change. So I take it as exogenous. So when I see a three-month moving average of 51,000, which by the way was, with the revised data, was the exact same three-month average last month, we're on pretty solid footing when it comes to the labor market. [00:07:23] Speaker 1: And then, Joe, let me ask you this. Let's zoom out to the entire economic picture. How would you characterize the overall health of the U.S. economy? [00:07:30] Joe: We're going to grow between 3.5% and 4% this quarter, probably with a little bit of upside risk. My sense is that the U.S. economy accelerated into mid-year, and we're picking that up in the data, whether it was the PMI or the ISM data. Things are looking a lot better than what we thought was going on in the first quarter of the year, the first four or five months. A lot of that was due to noise because of trade policy, to be quite blunt about it, and swings in inventory because of the uncertainty around trade policy. Now, we likely are pulling some economic activity into the third quarter of this year, and partially the fourth quarter, to avoid tariffs that have just taken place, like the ones on Canada and other ones that could take place. So next year, we may slow a little bit, but right now, growth's looking pretty strong. Moreover, when we really begin to drill down and look at what's driving growth in this economy, specifically related to artificial intelligence and the transformation of the underlying infrastructure of the economy, things look outright hot in those sectors, which is why you have otherwise dovish members of the Federal Reserve Board really beginning to get worried about that. Now, I know that low rates, liquidity, and leverage are the holy trinity of trading community out there. Leverage and liquidity is going to be sort of constrained going forward here [00:08:55] Speaker 1: for a bit, guys. Okay. All right. We'll have to leave it there for time. Thank you, Joe. That's Joe Brusuelos. He's the principal and chief economist of RSM US with his thoughts on both the jobs report and the overall state of the economy.