Axios Macro

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Wow. Our jaws dropped at the new jobs numbers this morning, and we weren't the only ones.

  • In today's early edition of Macro, we unpack the data — and look at how the good news for workers also means the Fed may tighten the screws on the economy even further. 🏦 🪛

Today's newsletter, edited by Javier E. David, is 601 words, a 2-minute read.

1 big thing: The labor market is on fire

Illustration of a pattern of "we're hiring" signs, in different colors.
Illustration: Brendan Lynch/Axios

It's a hot summer with a labor market to match. The question is no longer "is this a recession," but rather: "Is the job market too hot for the Fed's comfort?"

  • The jobs slowdown economists have been expecting isn't materializing. Rather, the economy added 528,000 jobs in July — the strongest print since February, and double what economists expected.
  • The unemployment rate ticked down to 3.5%, its pre-pandemic level, the lowest in nearly a half century.

Why it matters: There are a ton of headlines about buzzy companies laying off workers. But the numbers show that most businesses have an insatiable demand for workers. That's just not something you see during a recession.

  • That's excellent news for job-seekers, and gives the Biden administration some badly-needed good news to trumpet.
  • "Economies in recession do not produce 528,000 jobs on a given month and have 3.5% unemployment rates," said Joe Brusuelas, chief economist of RSM US, in a note. "Claims that the economy fell into recession or is in recession fall flat and should be politely set aside."

Yes, but: The Fed's interest rate hikes are intended to slow down the economy in hopes of bringing down inflation. The new numbers suggest that, at least with regard to the labor market, it isn't working so far.

  • The numbers are"uncomfortably hot," as Harvard economist Jason Furman put it.

Between the lines: Beyond the headline numbers, Fed officials are likely to see reasons to worry about inflation pressures remaining high for the foreseeable future.

  • Another worrying sign is on the labor supply front, which is moving in the wrong direction. The number of adults not in the labor force rose by 239,000, and the participation rate ticked down. At 62.1%, it remains 1.3 percent points below its pre-pandemic level.
  • In the past year, wages have jumped 5.2%. Wage gains accelerated in July, however, to an even faster 5.8% annual rate.

There's a lot of data due out between now and the Fed's mid-September meeting. Yet what we've seen so far — robust job creation, a shrinking labor force, and rising wages — would imply that another 0.75 percentage point rate hike will be very much on the table.

  • Market chatter over the last couple of weeks that the Fed will soon relent on rate hikes now looks quite premature.

The bottom line: It's great news that jobs are plentiful, and nearly every American who wants to work is able to. But that implies there may be more pain to come in the form of higher rates.

2. The tightening already happened

Credit: Federal Reserve and FactSet; Chart: Axios Visuals
Credit: Federal Reserve and FactSet; Chart: Axios Visuals

One fascinating thing about monetary policy is that it can work even without central bankers actually doing anything, so long as financial markets understand how they are likely to react eventually.

  • That's what took place this morning, as markets swung in ways that anticipated the likely Fed reaction to the new numbers, essentially doing Chair Jerome Powell's work for him.

By the numbers: The two-year Treasury yield spiked around 0.2 percentage points this morning to 3.2%, a huge move. Longer-term rates surged as well, with the 10-year yield up 0.15 percentage point to 2.83%.

  • Those higher rates will filter through to rates on mortgages, auto loans, and other forms of credit — meaning the good jobs numbers will create an immediate effect in the economy.

The strong jobs news follows some hawkish Fed talk this week, pushing back on the idea that the central bank is near the end of its rate-raising campaign, or that rate cuts are in the offing next year.

The bottom line: The markets are forward-looking, and they see even tighter money on the way.