Labor Market Shows Signs of Cooling

Friday’s monthly jobs report for August indicates a further cooling in the labor market, which is seen as a positive development by both markets and the Federal Reserve in their efforts to combat inflation.

A Closer Look at the Numbers

However, Peter Corey, co-founder and chief market strategist at Pave Finance, remains cautious and identifies two worrisome aspects in the report. He believes that the Fed may not have finished its cycle of rate hikes just yet.

Stronger Jobs Numbers

Corey notes that the reported 187,000 new jobs in August surpassed expectations, which he considers a significant factor. However, he emphasizes that the average workweek increasing to 34.4 hours, coupled with a decline in employment for temporary workers, might actually be more crucial indicators.

He suggests that if this trend continues, it could lead to upward pressure on wages and ultimately force the Fed to tighten its policies. "If average earnings rise, that could scare the Fed into tightening," Corey explains.

Unemployment Rate and Economic Recession

The unemployment rate bumped up to 3.8% in August, another area of concern for Corey. According to the Fed’s “Sahm Rule,” which gauges the possibility of an economic recession, this increase could signal an impending contraction. The rule states that if the 3-month rolling average for the unemployment rate rises by half a percentage point from the previous year's low, the U.S. may be entering a recession or on the brink of one.

As of August, the 3-month rolling average stood at 3.6%. Corey warns that if the current unemployment rate persists for another two months, the Sahm Rule would be triggered.

A Forecast for the U.S. Economy

In December, Claudia Sahm, the renowned former Fed economist and creator of the Sahm Rule recession indicator, expressed her belief that the United States would be able to avoid a recession. One important aspect of her prediction was her suggestion that the Federal Reserve should refrain from increasing its benchmark rate above 5% – a recommendation that the Fed ultimately followed.

The Fed had already raised rates earlier in July, leading to a 22-year high in the range of 5.25% to 5.5%. The central bank has also not ruled out the possibility of additional rate hikes this year to combat inflation.

Interestingly, Corey, another expert in the field, believes that not enough attention was given to Chairman Jerome Powell's speech in late August at the Jackson Hole symposium. In his address, Powell discussed how inflation has become more sensitive to labor market conditions compared to previous decades. Corey argues that the Fed is excessively fixated on the strength of the labor market.

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Positive Outlook for U.S. Stocks

Last week, U.S. stocks closed mostly higher, with strong weekly gains. Year-to-date, the S&P 500 index has risen by a notable 17.6%, while the Dow Jones Industrial Average has climbed by 5.1%. The Nasdaq Composite Index has shown remarkable growth of 34.1% so far in 2023, making it the best performance before Labor Day since 2003.

To understand more about this historic achievement in the U.S. Treasury market, read our detailed analysis.