I’ve said many times that no one should pay much attention to the monthly payroll figures because they are barely more than wild guesses, something the current administration’s economic team only recently discovered. Last week’s report for August, by itself, doesn’t mean much and will be revised so I wouldn’t put much emphasis on it. What investors should pay attention to with payrolls, as with most economic data, is the trend. There was a lot of commentary last Friday about how terrible the monthly figures were – which if unrevised were actually fairly unremarkable – and some commentary about the trend, which is pretty obviously down over the last year. And the last two years and the last three years so not that unusual on its face. But at some point, the downtrend goes so far that the level matters too and the last few readings come perilously close to being something other than benign noise.

If you choose to look at the trend YTD, it is obviously down. The December 2024 figure was 323k jobs added and every month since then has been less, starting with 111k in January and bottoming – maybe – at -13k in June before rising back to 22k in August. If your goal is to make a political point about the Trump administration’s economic policies, that is surely sufficient evidence to show that his economic policies have been awful. If your goal is to gain some insight about the economy, it is wholly inadequate. That 323k figure for December, for instance, was actually the highest monthly reading of 2024, although the monthly average was still 175.5K. That still doesn’t tell you much though.

The monthly average since May of 2020, when the monthly figures turned positive after the onset of COVID, is 509k/month, a number that tell us absolutely nothing about today’s labor market. Of course, job “creation” has been good since businesses started hiring back everyone who went home during the most severe part of the lockdowns. If you measure instead from January 2020 to today, a period that covers both the massive layoffs and the re-hiring, the monthly average is 119.2k. That monthly average, coincidentally or not, is almost exactly the monthly average since 1990. That period covers the dot com boom, 9/11, and the related wars, the real estate boom of the early ’00s, the financial crisis, the Euro crisis, Obama’s two terms, Trump’s first term, COVID, Biden’s term, and the first few months of Trump’s second term. In other words, that average covers a lot of bad things and the recoveries from them. It is darn hard to change the long-term employment trend no matter what is going on economically, politically, or geopolitically. That ought to give you some comfort that, come what may, we always seem to find a way back to the long-term trend.

There have been big changes in immigration policies and enforcement over that time, with a surge of newcomers under Biden and their unceremonious removal under Trump 2.0. In other words, those probably average out in the short term. However, if we are looking forward, the immigration policies of the current administration seem likely to continue to shrink the foreign-born population. Since the native-born population isn’t growing much that will likely have an impact on future economic growth, even if we can’t quantify the change today. By the way, various individuals in the administration, including the Vice President, the Labor Secretary, and most recently CEA chair Kevin Hassett, have been touting figures that show native-born employment up over 2 million since the beginning of the year and foreign born down by over 1 million. This is wrong. It isn’t just wrong, it is wildly wrong. It is so ridiculous that I can’t believe anyone with even a whit of common sense – or any other kind of sense – believes it. 

The Current Population Survey shows a fall in the foreign-born population since January of 2.2 million It also shows the native-born population rising by 3 million over the same time frame. I would note here that the annual rise in population ex-immigration is around 500k. Obviously, the foreign born population is down since the beginning of the year but 2.2 million? Seems unlikely. As for the native born population rising 3 million in six months, that isn’t just unlikely it’s impossible. There are numerous reasons these numbers shouldn’t be relied on to track trends in any subset of the population but the best one is that the Census Bureau itself says they can’t be used for that purpose. (If you are really interested: Exploring the Federal Government’s Estimates and Projections of International Migration, Census Bureau, September 2024). The VP and the Labor Secretary are obviously engaging in hyperbole for the purpose of political advantage. I’ll leave to your imagination why I didn’t include Kevin Hassett in that sentence.

But I digress, something regular readers should be quite accustomed to by now; back to the topic at hand. The trend in employment is obviously not a positive one right now with the latest month below every long-term average. The trend has been negative all year, averaging 102k YTD and just 53k since April. I think it is perfectly reasonable to believe that the President’s immigration and tariff policies have something to do with the slowdown. In fact, I warned about this before the election, albeit in politically neutral terms – a sweep of Congress and the White House by either side would be the worst outcome due to the uncertainty it would produce. Power corrupts and absolute power corrupts absolutely. One party control gets politicians to thinking they are actually smart and that the electorate wants them to make big changes. Big changes take time and create massive uncertainty which has an impact on the economy as businesses wait for clarity about government policies.

The economy has slowed this year to about 1.5% on an annualized basis, just below the long-term trend. We see that in the bond market where the 10-year Treasury yield has been in a downtrend all year, falling a total of 72 basis points from its peak in early January. The 2-year Treasury yield has been trending lower for longer, peaking in the fall of 2023 and falling steadily since. That is mostly a reflection of expectations for Fed policy but that is, in turn, driven by the economic outlook. The 2-year yield is down 91 basis points since its January peak. Looking at real yields, the 10-year TIPS yield is down 55 basis points since peaking January 14th.

The 10-year Treasury yield is a real time market estimate of future nominal GDP growth (NGDP = real growth + inflation). That being the case, the drop in rates since the January peak is mostly about real growth (real yields down 55 bps or roughly 3/4 of the drop in the nominal yield) but inflation expectations have come down modestly too, both of which one would expect in a slowing economic growth environment. Furthermore, the 10 and 2-year Treasury yields are still within the bounds of a range they’ve been in for nearly 3 years, although the 2-year yield is hanging on by a thread. The futures market is now pricing in pretty good odds of three rate cuts by the end of the year, which, believe it or not, is not good news. It seems unlikely the Fed would cut rates three times in four months unless the economy continues to slow from here. With growth already below trend that could put us very close to the dreaded negative sign. 

To get acceptable real growth we need NGDP to grow 4 to 4.5%/year, given the current trend in inflation. That would allow for 2% real growth and 2.5% inflation or some close equivalent of that. The 10-year Treasury yield tracks year-over-year NGDP growth pretty closely so trading between 4% and 5% indicates an economy operating within the bounds of what we find acceptable. Rates below 4% or above 5% are when I start to get worried. Above 5%, I worry about inflation. Below 4%, I worry about real growth. The 10-year closed Friday at 4.09%. Stay vigilant.

Joe Calhoun

Environment

I’m having some technical difficulties today so no charts.

The dollar was unchanged on the week and remains in an intermediate and short-term downtrend. Gold is making new highs for a reason.

The 10 and 2-year Treasury yields fell on the week, 14 and 11 basis points respectively. Both are still in the long-term range they’ve been in for nearly 3 years, but the 2-year is very close to breaking the range to the downside. 

Markets

Small cap stocks took the lead again last week with small cap value the best performing style box. The S&P 600 is up 9% for the QTD.

All markets are up for the quarter but bonds have been the best performers the last couple of weeks as the economic data has pulled rates down. REITs also perform well in a falling rate environment but only if there is no recession. They were the best performing of our asset classes last week. 

International stocks still lead YTD but have lagged the last few months. That has come as the dollar’s downtrend stalled; it will likely resume if/when the dollar resumes falling.

Sectors

Healthcare is starting to come off the mat and has now turned positive for the year. There are still a lot of headwinds but the trend is starting to look better.

Economy/Market Indicators

Mortgage rates continue to come down but the rate of descent is slow. Lower rates will only help if we avoid recession.

Economy/Economic Data

ISM manufacturing and services both were better than expected although the manufacturing version is still below 50 (indicating contraction). New orders in the manufacturing versions did climb above 50 and prices paid actually moderated ever so slightly. Services new orders jumped to 56.

Job openings fell to 7.2 million from 7.4 million and there are now more unemployed than job openings for the first time in the post-COVID era. Quits were essentially unchanged.

The trade deficit expanded as imports surged by $20 billion. These are July numbers so that is likely a function of the tariffs being delayed beyond August 1st.