Payroll Preview: Negative Mo

Negative momentum, excess supply, cooling wage growth, negative convexity, "Let's Get on with It"

August Payroll Preview

Economist forecasts imply there was little change in the balance of supply and demand for labor in August, we have been, and continue to be, more concerned than the majority of FOMC participants or street economists. That said, the problem in the small business sector is resolvable, if the FOMC reduces the policy rate 100b and ends their unbalanced policy that is penalizing floating rate borrowers. The brief improvement in demand for labor in the wake of last year’s rate recalibration and boost to small business confidence in response to the election holds the key. Easing is likely to reopen the small bank credit channel, increasing demand for loans and securities and lowering credit costs for small businesses broadly and real estate developers, investors and households in particular.

Last year’s recovery in the labor market faded when the Fed stopped the easing process and the Trump Administration cut government spending and enacted tariffs. This process is not yet complete and continues to pressure small businesses, this is at the core of our view the Fed should be cushioning the detox from the addiction to government spending and cheap goods imports to an increase in private sector capital investment. A weak report on Friday and large negative first estimate of the annual benchmark revision for the year ended in March ‘25 could trigger a similar cycle as a year ago, in other words a 50bp cut followed by two additional 25bp cuts in the 4Q25.

We suspect, in part due to Governor Waller’s speech late last week, the low response rate in the first month for the establishment survey raises the hurdle for the FOMC to not cut rates on September 17. On the flip side, a weak report combined with negative revisions will strengthen Waller and Bowman’s case for a series of cuts. In short, a strong report will be viewed with skepticism, a weak report will solidify the growing concerns evident in the Beige Book released this afternoon.

(BN) FED BEIGE BOOK: MOST DISTRICTS SEE LITTLE OR NO GROWTH

“Eleven Districts described little or no net change in overall employment levels, while one District described a modest decline. Seven Districts noted that firms were hesitant to hire workers because of weaker demand or uncertainty. Moreover, contacts in two Districts reported an increase in layoffs, while contacts in multiple Districts reported reducing headcounts through attrition—encouraged, at times, by return-to-office policies and facilitated, at times, by greater automation, including new AI tools. In turn, most Districts mentioned an increase in the number of people looking for jobs.”