As Wimbledon gets underway, the words of John McEnroe resonate in my mind: “You cannot be serious!” However, amidst the fervor of tennis matches, the real game-changer lies within the realm of economic data. The line umpires of these numbers have made their calls, and upon closer inspection, figures that were initially considered outside the lines don’t appear as alarming.
The Federal Reserve will have a myriad of conflicting data to consider, with primary focus placed on the Bureau of Labor Statistics’ June employment report released just this Friday. While the increase of 209,000 nonfarm payrolls fell slightly short of economists’ consensus estimate of 230,000, it must be acknowledged that this deviation is rather trivial. In fact, it marks the first time in 14 consecutive months that this key monthly jobs number failed to surpass expectations. Alternatively, the revisions of the previous two months’ payroll tallies were far more substantial, resulting in a downward adjustment of a significant 110,000 jobs.
The verdict lies in the hands of the Federal Reserve, and only time will reveal their decision on interest rates. As we await their announcement, the economic stage remains tense and uncertain.
Reimagined Article
Payroll Numbers Show Moderate Growth in June
The latest payrolls report for the month of June shows moderate growth, albeit not as much as expected. The so-called birth-death adjustment, a statistical plug-in used to account for the assumed number of business start-ups and shutdowns, played a minimal role in the overall payroll increase. According to Joshua Shapiro, chief U.S. economist at MFR, this adjustment only contributed 3% of the total increase, which is negligible compared to previous months.
In comparison, the May report revealed that the birth-death adjustment accounted for more than a quarter of the revised unadjusted payroll gain, while it represented 44% in April. This indicates that the current increase in payrolls is primarily due to real job growth rather than statistical adjustments.
The official seasonally adjusted private payrolls gain for June was 149,000, falling far short of ADP’s estimate of 497,000 released the day before. ADP, a private payroll processor, has often faced criticism for not aligning with the Bureau of Labor Statistics (BLS) numbers. However, considering that ADP processes paychecks for millions of actual workers, they should have a reasonable handle on employment data. The issue seems to lie with ADP’s seasonal adjustment method, which may require some fine-tuning.
In addition to the moderate payroll growth, the workweek also saw a slight increase from May, with an average of 34.4 hours in June. Average hourly earnings also rose by 0.4% in the latest month, along with an increase in total hours worked. As a result, incomes were up by 0.8% in June and showed a solid 6.3% increase from the same period last year, according to Evercore ISI.
Overall, the June payrolls report indicates steady but modest growth in employment numbers, with potential adjustments needed to better align private payroll estimates.
Labor Market Update
The latest news on the labor market reveals a slight decrease in the headline unemployment rate to 3.6%, indicating that more Americans are finding jobs. However, there is another important aspect that often goes unnoticed – an increase in the underemployment rate, a broader measure of the labor market. The underemployment rate has risen by 0.2 percentage points to reach 6.9%. This increase is primarily due to more people working part-time because they couldn’t secure full-time positions.
Despite this, the overall labor market remains strong, providing no justification for the Federal Reserve to refrain from implementing further interest rate increases. In June, overall employment was 2.5% higher than the pre-pandemic level in February 2020, with private payrolls surpassing their previous high-water mark by 3.1%, as reported by TLR Analytics. However, state and local government employment continues to lag, remaining 1.1% below its pre-pandemic level.
Looking ahead, another significant milestone for the market will be the release of the June consumer price index on Wednesday. Current projections indicate a 0.3% increase for both the overall CPI and the core measure, which excludes food and energy prices. On a year-over-year basis, the core CPI is expected to rise by 5%, while the overall index would see a more modest increase of 3.1%. The decline in retail gasoline prices contributes significantly to this relatively small gain, and the Biden White House is likely to highlight this as it represents a sharp deceleration from the four-decade high of 9.1% inflation.
The Myth of CPI Comparisons
Jim Bianco, founder of Bianco Research, has been tirelessly pointing out a crucial statistical anomaly regarding the year-over-year change in the Consumer Price Index (CPI) since the start of this year. It turns out that the current CPI is being measured against the high energy prices of last June, making it appear more volatile than it actually is. In terms of corporate earnings, this would be equivalent to facing tough comparisons.
During a recent client presentation, Bianco clarified that the current state of core CPI may be the best we can hope for. Even if inflation regresses to the benign trend observed from 2009 to 2019, with average monthly increases of 0.16%, the year-over-year rise in core CPI will still reach 3.8% by the end of 2023. However, if we continue experiencing the more recent average of 0.4% monthly increases, core CPI growth will exceed 5% by the year’s end.
Both economists and the futures market experts anticipate that the Federal Reserve will raise its key policy rate to between 5.25% and 5.5% at the conclusion of their next meeting on July 26. While the Fed’s median projection for the year-end fed-funds target includes another quarter-point increase, resulting in a midpoint of 5.6%, the futures market seems to believe that there will be no more rate hikes after this month.
In summary, it is clear that the CPI comparisons are misleading due to an anomalous statistical calculation method. Jim Bianco highlights that even if inflation follows a much less aggressive pattern, we should still expect significant growth in core CPI by the end of 2023. As the debate over future rate hikes continues, it remains to be seen whether the Fed’s median projections align with the expectations of the futures market.
Inflation and Interest Rates: An Analysis
According to recent calculations by Bianco, it seems unlikely that inflation will make significant progress towards the Federal Reserve’s 2% target this year unless there is a sudden drop in oil prices. Consequently, interest-rate markets may need to make further adjustments upwards.
During the past week, the yield on the key Treasury two-year note briefly surpassed 5%, reaching its previous high from last March. Simultaneously, the benchmark 10-year note broke above the 4% mark. These levels indicate a matter of great significance for investors.
Stay Informed
