Prospects

But below the surface these latest jobs figures may yet prove unhelpful to the president’s re-election campaign. That’s because they pose not one but two possible risks that could prove a headache in the months leading up to November: the risk of more inflation, but also the risk of a recession.

The nonfarm-payrolls numbers in January were double what economists had been expecting. So, too, was the rise in hourly earnings.

These figures are good for workers and for job hunters. But they raise the concerns that Federal Reserve chair Jay Powell’s economic medicine is not yet working the way it’s supposed to, and that the economy is not cooling off.

“Wages came in hot at 0.6%, which is the highest release since March 2022,” writes Jeff Schulze, head of economic and market strategy at ClearBridge Investments, in a note to clients. “This reading, coupled with the overall jobs number, effectively takes a March rate cut off the table and should raise fresh concerns about the potential for a reacceleration of inflation.”

Context: Wage spike in January probably not an inflation warning sign. Here’s why.

Also see: March rate cut? Even May now seems remote.

You can see this very clearly in the markets’ reaction to the data. The futures markets, which bets on future interest rates, just slashed bets yet again on early interest-rate cuts. It is also cutting its estimate for rate cuts in the second half of the year. If inflation just won’t lie down, Powell may have to keep rates higher for longer.

A month ago, the futures markets foresaw the Fed cutting interest rates by about 1.25 percentage points between now and its September meeting (the last one before the election).

Its best guess now? Between 0.75 to 1 point. Maybe. 

The market now gives a 10% chance that Powell will be able to cut no more than 0.5 point. Just a day ago, it put that probability at 0%.

Then there’s the interest rate that the Fed doesn’t control (directly, anyway), but which has an even bigger influence on the economy: that of the 10-year Treasury note
BX: TMUBMUSD10Y.
The jobs figures sent the yield on the 10-year — under 3.9% just moments before — leaping above 4%.

The 10-year rate isn’t just a critical benchmark for corporate borrowing and the financial markets; it’s also the key rate used by lenders when they set interest rates on fixed 30-year mortgages. 

So the latest jobs numbers may help keep mortgage rates higher for longer, and push back the day when they start coming down. As every homeowner and buyer in America knows, today’s relatively high mortgage rates have helped freeze much of the real-estate market. Homeowners don’t want to give up those great fixed-rate mortgages they locked in during the pandemic. So many are holding off selling. And scarcity has helped drive up home prices, provoking a crisis for those — especially younger — people trying to buy.

This is not good news.

(Donald Trump, incidentally, fully understands the importance of interest rates to his election campaign. He went on Fox Business on Friday to put pressure on Powell to keep rates higher, complaining that the Fed chief was being “political” and would be cutting rates to assist the re-election of Biden — despite Powell’s having been handpicked by Trump to lead the Fed in 2017.)

See: Initial market reaction: too hot

But if the nonfarm-payrolls data are unhelpful, so, too, are a completely different set of numbers also released Friday by the Labor Department: those from a second survey, in which the government polls households instead of employers.

These, remarkably, aren’t showing continuing labor-market strength. They are showing weakness.

Households reported employment numbers that fell last month. This jobs figure fell 31,000 in January even on a seasonally adjusted basis (meaning you take things like Christmas temporary jobs out of the picture). In fact, it’s down by 714,000 jobs since November, and, according to this survey, there are now fewer jobs in America than there were last summer.

More ominously, the household survey shows that full-time employment — a key indicator of a healthy jobs market — peaked in June. Since then it has fallen by 1.6 million (again on a seasonally adjusted basis).

Other metrics that often indicate a weak jobs market, such as the number of potential workers who have given up looking for a job, have also risen.

What’s going on? The two surveys are conducted in parallel each month. But they are totally different. One, the “establishment” survey, talks to employers. The other talks to “households” — workers and would-be workers.

ClearBridge’s Schulze warns that, while both data series are important, the second survey — households — is sometimes a better forward indicator, and, in the past, it has been quicker at catching big changes in the direction of the economy. And, he says, it has been pretty much consistently telling a more ominous story about the jobs market for a year.

“This divergence bears watching,” he writes, “as the household survey historically has been more accurate at inflection points, indicating job growth may be less impressive than it currently appears.”

In other words, if the economy heads into a recession this year after all you might expect to see it show up in the household survey before it shows up in the better-known establishment survey, which produces the nonfarm-payroll numbers.

See: Jobs report is strong, make no mistake. But it was probably inflated by January effect.

Whether the household survey is pointing toward a recession, or even stagnation, is another matter. Most economists think the U.S. will avoid a recession, and that the Fed will successfully engineer a disinflationary soft landing (even if the rate cuts will come later than many had hoped).

The betting still favors a rosy scenario.

But the household survey’s numbers certainly look strange alongside data from the establishment survey that claim we are living in an unprecedented jobs boom.

Read more about the nonfarm-payrolls report:

Soft landing for the economy? How about no landing? The U.S. is still growing fast.

‘Bang! What a way to start the new year’: Economists react to jobs report

U.S. economy showed signs of reaccelerating even before Friday’s jobs report