Weekly Signal & Noise Filter

Evolving to Target

The non-farm payroll report, coming in at 272K new jobs for the month of May, is the noise. 

The signal is in the unemployment (U3) rate.

This is not simply a question of choosing the indicator that confirms one’s biases or narrative preferences.  Investors should focus their attention on the U3 rate because it is a primary input for policy formation and policy measurement.

• U3 is used in the Taylor rule.

• U3 is used in the Summary of Economic Projections (SEP) used by the FOMC.

• U3 is used to measure the policy efficacy of the Fed’s dual mandate.

• U3 is what figures into the national debate over labor market conditions and, more importantly, electoral politics.

The monthly NFP figures do not figure into any of these policy considerations. 

The information from the U3 rate informs us that the labor market is unambiguously cooling, currently at 4% after bottoming at 3.4% in January 2023.

While the NFP should not be discarded outright, it should be contextualized against the steady state needs of the economy.  In other words, despite the above consensus NFP print of 272K jobs, the unemployment rate still increased from 3.9% in April to 4% in May.

Confidence in the economy’s evolution to a goldilocks steady state of disinflationary growth is furthered by this week’s inflation signals from the core CPI and core PPI reports.

No need to rehash the numbers we all know.  The following is what they infer, assuming Pinebrook’s May core PCE projection of .05% MoM.