Payrolls crashed to 57,000…why were markets cheering anyway…a trend Warsh really needs to see…
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I wish you a good evening,
Jeff Remsburg
As I write on Thursday morning, the Labor Department has just announced 57,000 jobs added in June, sharply missing the consensus of 115,000, and a sharp decline from May’s downwardly revised reading of 129,000.
The unemployment rate fell to 4.2%. But this isn’t really good news…
This decline was almost entirely the result of a decline in the labor force participation rate, which fell to 61.5%, its lowest level since March 2021. So, we can translate this number as “fewer people looking for work” rather than “more people finding it.”
Now, many of the speakers are taking a familiar stance – a soft jobs report takes the pressure off the Fed, interest rates are raised further ahead, onward and upward relative to the market.
But there are wrinkles…
The guy who runs the Fed has already told you, in his own words, that he doesn’t grade today’s number the way Wall Street does.
So how does he classify it?
Yesterday, Federal Reserve Chairman Kevin Warsh gave us an overview of how he thinks
Speaking on Wednesday at the European Central Bank’s Forum on Central Banking in Sintra, Portugal, Warsh again declined to indicate anything about this month’s meeting. But he did not remain calm about inflation.
Here are the workshops:
We’re all in the business of price stability…but if there’s one thing in common that I’ve heard over the last couple of days, it’s open-mindedness on these AI issues, open-mindedness on productivity, but we all looked around, and we saw that prices were too high.
Translation: Everything AI does to boost productivity doesn’t solve the inflation problem yet.
That’s the lens Warsh used in this morning’s issue — not “Did the payroll exceed consensus?” but “Is there anything here that changes my inflation calculations?”
The answer is unlikely to be “yes.”
There are other details from yesterday that are worth noting, in light of this morning’s data…
In the same appearance as in Sintra, Warsh described the job market as “flat.” Twenty-four hours later, salaries were delayed by more than half, and a large portion of the workforce stopped looking for jobs completely.
This is either an uncomfortable coincidence or an early sign of the delicate separation we are about to go through…
You see, yesterday Warsh also gave us a glimpse of where he wants the Fed’s full approach to data to go — and when:
My hope and ambition is that nine months from now we will be using new technologies to understand what is happening in the real economy in a contemporary way in real time.
This is not a Fed chairman who trusts the data he presents by default. He is the head of the Federal Reserve who is actively building his own alternative.
We reported on this shift three weeks ago
normal digest Our readers will remember June 16 issuewhere we show that Warsh is deconstructing the forward guidance itself — the dot plot, the press conference roadmap, and the entire architecture that Bernanke built and Powell expanded.
At his Senate confirmation hearing, Warsh stated plainly:
Unlike many of my colleagues, past and present, I do not believe in future direction.
I don’t think I should preview what the future decision might be.
Our conclusion was that if the Fed stopped telling you where it was going, the incoming data became a new dot plot. Every economic report gets bigger. Each release becomes a bigger event that can shake up the markets.
Today’s jobs report was the first real test of this thesis. Therefore, we should be careful not to interpret it too quickly.
Warsh has already told us what’s wrong with this morning’s number, but not what should replace it
In our June 25 digestWe’ve shown you that Warsh doesn’t rely primarily on headline personal consumption expenditures — he calls the Fed’s traditional measure of inflation little more than a “rough spoils.”
Instead, he monitors the Dallas Fed’s average personal consumption expenditures rate, a measure that strips out the extremes of pricing on either side to focus on what’s happening in the middle.
Warsh did not provide us with a parallel alternative that he preferred to the jobs report. But in his first news conference as chairman of the Federal Open Market Committee, on June 17, he made clear he felt just as uncomfortable about it.
A reporter pressed him about how much weight he placed on the preliminary payroll version. Here are the workshops:
What we are less interested in are the echoes of history.
Some of the data we receive – which we wait for on the first Friday after the month of the salary index or whatever – may be an echo of history which is very useful in its third revision.
We need to lower these error bounds because we have to make difficult decisions in real time.
Translating this from the words of the Federal Reserve, Warsh says that the number that appears on your screen the moment it is issued is not the real number. It’s a rough first draft that’s rewritten twice more over the next two months — and Warsh tells you, point-blank, that he doesn’t completely trust the first draft.
Today’s data proves his point…
The already strong May edition of 172,000 was reduced by another 43,000 copies to 129,000. April fell by 31,000 to 148,000.
That’s two more months of the “echo of history” Warsh describes, rewriting itself in real time.
So what’s the best way to read this morning’s data?
Warsh does not tell us what replaces the printing of the title. Data quality task forces remain staffed – he said so yesterday at Sentra, promising more details “next week”.
So, until the Fed builds something better, investors will be left to build their own workaround.
Here’s what we have: Instead of reacting to a headline number for any one month, see three-month average payroll gains, calculated using the most recently revised numbers rather than each month’s raw estimate.
To be clear, this is not a Warsh framework. But it was presented in the spirit of the problem to which it referred.
So, what does this morning’s number look like after polishing?
Averaging the three most recent publications reviewed — 148,000 jobs in April, 129,000 jobs in May, and the initial reading of 57,000 jobs in June — the pace for the last three months comes to about 111,000 jobs per month.
To keep pace with population growth and keep the unemployment rate constant, the US economy has historically needed to add approximately 150,000 jobs per month.
So this average is fairly weak.
In addition, it represents a real cooling trend – and a confirmed trend, as the three months have just been adjusted in the same direction: downward.
So, although our three-month frame does not allow us to treat today’s quieter headline data, in and of itself, as important enough to move Fed policy, three consecutive downward revisions point toward a real signal.
He is Which Is it enough for Lorsch to tone down his extremism?
Important details to keep in mind
Every new Fed Chairman receives the same treatment from the media.
The cameras find one face, and the mood of that face becomes shorthand for the mood of the entire organization.
It happened with Bernanke. It happened with Powell. It’s happening now with Warsh.
But Warsh doesn’t run the Fed the way the coverage sometimes suggests. He’s the chairman of the board, but on the FOMC, his vote counts as much as everyone else’s.
Right now, that committee is deeply divided, even if the vote itself doesn’t show it. At its first meeting on June 17, the Fed held interest rates unanimously. But look beyond the vote on the dot chart below, and the picture changes…
Nine of his eighteen colleagues expected interest rates to be raised before the end of the year, six of them wanted to raise interest rates separately, while eight preferred to keep them steady and only one wanted to cut them.
Warsh himself declined to make predictions at all.
A unanimous vote with that kind of division underneath is not consensus. It’s a committee that quietly agreed to disagree for another meeting.
So, everything we’ve been through so far—the “Echo of History” comment, the annoyance at the noise of headlines, the instinct to look beyond one month’s publication—tells you how Wars You’re likely to read this jobs report. It doesn’t tell you how the rest of the committee read it, divided as it was.
What this means for how you trade between now and the fall
We got confirmation of our June 16 thesis this morning, but it is not a clear and unidirectional thesis.
The initial reaction to the printing of jobs was textbook…
Futures rose within minutes, yields fell, and traders recalculated their expectations for a rate hike. But this sudden ruling did not hold up…
As I write, around lunchtime, the early gains have disappeared – although the Dow is still up, the S&P is negative, and the Nasdaq is down about 1%.
This is a market split on how to read the soft but review-filled print: Will slowing labor demand ease the pressure the Fed has kept hawkish, or is it an early sign that the economy itself is cracking?
Without a workshop press conference to iron out this disagreement and turn it into a tidy consensus, this is what price discovery looks like instead – fast, chaotic, and uncertain.
But the bigger picture hasn’t changed…
Warsh will not move on one number, it needs a sustainable trend. And even if he got one, he would still need to bring in a committee that didn’t completely agree with him.
Until those two things happen, expect exactly what we’ve been proposing is today’s new normal: greater reactions to smaller pieces of data — and, apparently, more uncertain reactions to those reactions.
It’s the logical consequence of a Fed that is more divided and less connected than it has been in years.
We will continue to track this as the story develops.
I wish you a good evening,
Jeff Remsburg
