Weekly Signal & Noise Filter
Mid Cycle Adjustment
December is a cut and January is a pause. The signal comes from Friday’s labor market report.
The labor market, to which the Fed explicitly strategically pivoted to at Jackson Hole, is in a sweet spot – for now.
At the time of the Jackson Hole Symposium, the Sahm indicator was running at .533, above the .5 recessionary threshold that signals an incoming recession.
By the September FOMC meeting, the indicator was getting worse at .567.
The indicator is now at .433, and the three-month moving average of the U3 rate is at 4.133 for the second month in a row, suggesting a stabilization of the labor market.
The economy is by all intents and purposes stronger and more stable than what the Fed anticipated at the September FOMC.
GDP is running stronger – the latest Atlanta Fed GDPNow nowcast is running at 3.3% for Q4, and calendar 2024 will come in around 3% vs the 2% projection in the September SEP.
U3 rate is below the Fed’s 2024 year-end 4.4% projection and will average around 4% for the year.
Core PCE is at 2.8% YoY, above the Fed’s 2024 YE 2.6% YoY projection.
Inflation hawks are becoming more vocal about slowing the path of rate cuts. Friday morning’s commentary by Cleveland Fed President, Beth Hammack, in which she states that “it makes sense to slow the pace of rate reductions”, while referencing mid-90s mid-cycle rate cuts, captures the zeitgeist of the emerging policy outlook. There is still enough consensus for a cut in December, but January is evolving to pause.
The U.S. economy is now a stable outpatient and no longer in triage after an intended cooling of the labor market.
The current goldilocks state of the economy is of a lesser concern than the forward evolutionary path. Monthly high frequency data used for projections are notoriously noisy due to seasonality, revisions, and one-off occurrences that happen throughout the course of a cycle. The data can also be contradictory.
Take for instance the U3 chart above, which shows a previously increasing, but now stabilized, U3 rate. This flies in the face of NFP prints that have ranged from 36k to 310K per month and have averaged 180K for calendar 2024. The contradiction lies in the break-even NFP level for a given level of employment and is compounded by short-run and long run break-even estimates.
According to the eggheads at the San Francisco Fed, the long-run breakeven estimate to maintain a U3 rate of 3.8% is around 70k-90k NFP jobs per month. The short run number, however, is much higher due to immigration which increased the size of the labor force. The current short run estimates range from 151k to 230k, depending on the immigration assumptions used.