Why Did Unemployment Rise to 4.3% and What It Means for Fed

TL;DR

The unemployment rise to 4.3% reflects steady labor-market softening that the Federal Reserve engineered to help reduce inflation, especially wage inflation. Payroll data show deeper weakness: total non-farm payrolls added only 22,000 jobs, while June was revised negative. Markets consequently priced an 87% chance of a 25 basis point September cut, making the payroll trends and inflation constraints worth examining further.

Transcript

Hey everyone and thanks for jumping back into the macroverse. Today we're going to talk about the recent jobs report and how the unemployment rate has risen to 4.3%. Furthermore, we had some revisions to prior months that actually sent I believe it was the June non-farm payrolls negative. So, we're going to talk about some of that stuff, what it mi... Read More

Key Insights

• The unemployment rate has risen to 4.3%, an outcome described as always the most likely given steady softening in the labor market that has been moving up to new levels over recent months.
• Labor market weakness was engineered by the Federal Reserve, which wanted to loosen the labor market to reduce inflation, since wage inflation is one of the biggest drivers of higher prices.
• Total non-farm payrolls increased by only 22,000, and June's non-farm payroll figure was revised negative, bringing quarterly job growth dangerously close to turning negative.
• Quarter-over-quarter total non-farm payroll growth was about 0.055%, compared to roughly 1 to 1.5% per quarter back in 2021, signaling a sharp slowdown in job creation.
• Markets price roughly an 87% chance the Fed cuts only 25 basis points in September, while odds of a 50 basis point cut rose from near zero to about 13% as traders reassessed the weak jobs report.
• Persistent inflation is the reason a larger cut stays unlikely, with a hot PPI print, core PCE at 2.02% year-over-year, and the price index at 2.88% year-over-year keeping the Fed cautious.
• Construction employment year-over-year growth dropped below 1% to about 0.7%, down from roughly 4% in 2022, which the speaker sees as telling of a broader economic slowdown.
• The labor market could become the narrative behind a potential 2026 bear market for Bitcoin and stocks, much as inflation was the narrative for the 2022 bear market.

Questions & Answers

Q: Why did unemployment rise to 4.3%?

Unemployment rose to 4.3% after months of steady labor-market softening. The speaker says the Federal Reserve intentionally loosened the labor market to reduce inflation, since wage inflation can increase demand and push prices higher.

Q: Is the unemployment rise becoming uncontrolled?

The speaker says the unemployment rate has steadily increased, often reaching a level, remaining there, and then moving higher. However, it has not yet entered the parabolic or uncontrolled phase associated with scarier historical increases.

Q: How many jobs did total non-farm payrolls add?

Total non-farm payrolls increased by only 22,000. The speaker considers that slowdown more concerning than the unemployment rate reaching 4.3%.

Q: What happened to the June non-farm payroll figure?

The June non-farm payroll figure was revised into negative territory. The speaker did not recall the exact earlier figure, saying only that it might have been around 14,000.

Q: How weak was quarterly non-farm payroll growth?

Total non-farm payrolls grew by about 0.055% in the latest quarter. By comparison, quarterly growth was roughly 1% to 1.5% in 2021, so the latest reading was described as dangerously close to turning negative.

Q: What were the expected chances of a September Fed rate cut?

Markets indicated about an 87% chance that the Fed would cut rates by 25 basis points. The probability of a 50 basis point cut had risen from essentially zero to about 13%, after reaching roughly 16% earlier.

Q: Why was a 50 basis point Fed rate cut still unlikely?

Inflation remained the main obstacle to a larger cut. The speaker cited a recent hot PPI reading and explained that the Fed must address labor-market weakness while also preventing inflation from returning.

Q: Did the payroll data indicate that a recession had already begun?

The speaker said the year-over-year change in total non-farm payrolls remained positive at about 0.9%, so it had not reached that point. Historically, every negative year-over-year reading in the tracked data was associated with a recession, although a negative quarterly reading did not always cause an immediate recession.

Summary & Key Takeaways

• The recent jobs report pushed the unemployment rate to 4.3%, a rise the speaker views as controlled rather than parabolic. Total non-farm payrolls rose only 22,000, and June's figure was revised negative, pulling quarterly job growth close to zero at about 0.055% versus 1 to 1.5% in 2021.

• A September rate cut looks highly likely, with about an 87% chance of a 25 basis point cut. The probability of a 50 basis point cut climbed from near zero to roughly 13% as traders reassessed, but sticky inflation, a hot PPI, and core PCE at 2.02% keep a larger cut unlikely.

• Weakness extends to construction, where year-over-year employment growth fell below 1% to about 0.7%, down from 4% in 2022. The speaker argues the labor market could drive a 2026 bear market for Bitcoin and the S&P 500, since Bitcoin tends to top in post-election years like 2013, 2017, and 2021.