multi-asset
Rate cuts: are they justified by employment data?
The resilience of the labour market, evidenced by low unemployment and solid job growth, is seen as a key driver of the US economy’s strength. But in 2023, the trend of robust job creation shown in the previous two years began to deteriorate as the pace of newly created roles slowed down.
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Employment levels directly impact consumer confidence and spending, thereby affecting businesses across sectors. This is the macro blind spot in the current soft-landing scenario: a weakening jobs market could prompt the Federal Reserve (Fed) to cut rates sooner. Whether this is happening is the kind of question that our nowcasters can shed light on.
Deteriorating employment data
The strength of the jobs market can be indicated by non-farm payrolls data and the employment components of the US ISM Manufacturing and Services indices, both of which are shown in the left chart of figure 1. Recently, all three have declined. However, ISM Services employment has not weakened to the same extent, making the narrative more complex.
The employment constituent of our nowcaster offers a wider perspective, helping to resolve such conflicting signals by combining a variety of job-market-related data into an aggregate measure. The right chart of figure 1 represents the employment component of our nowcasting indicators for US growth, inflation, and monetary policy. The depicted trend remains consistent with what was observed in the individual series, as all three curves have been declining since 2022.
In setting monetary policy, the Fed is likely to view this job-market deterioration as a potential trigger for a future cut in interest rates. Employment is likely to impact our nowcaster for growth more than monetary policy, and with the economy showing signs of expansion, further weakness is probably needed for the Fed to cut rates.
FIG 1. The US job-market and out macro nowcasters
Source: Bloomberg, LOIM. For illustrative purposes only.
A panoramic view
Employment is an important data point, but is not the full picture. It’s worth considering a comprehensive breakdown of our growth and monetary policy nowcasters to gain a broader perspective.
We break down these indicators by sector at three intervals in the current quarter. This shows that our growth signal declined by 30% in November, consistent with the unexpected fall in the US ISM and deteriorating US employment data. This fall was evident in its employment and investment components.
Is this deterioration in growth sufficient cause for a rate cut? The answer from our nowcaster is a straight ‘no’: growth has fallen outside its neutral range of 45% to 55% but has not declined enough to justify policy easing. For a rate cut to become likely, the prices, housing, and employment components of our indicator must all fall.
Consider too that our monetary policy indicator is at a close-to-neutral level, implying that rate cuts are more likely to happen in the second half of 2024 instead of the first – unless, however, something unexpected shows up in the data.
FIG 2. Decomposition of our US growth and monetary policy surprise nowcasters
Source: Bloomberg, LOIM. For illustrative purposes only.
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Simply put, the recent weakness in the job market justifies a Fed pivot. Rate cuts would likely require a deterioration in growth. |
Nowcasting corner
The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises, and global monetary policy surprises designed to track the recent progression of macroeconomic factors driving the markets.
Our nowcasters indicators currently show:
- Growth increased over the week in China and the US, after better-than-expected non-farm payrolls and lower unemployment rate data
- Inflation appears to be going into the right direction, after the latest US report was in line with expectations. However, our global indicator showed an increase
- Monetary policy declined marginally this week, as the Fed announced its pivot
World growth nowcaster: long-term (left) and recent evolution (right)
World inflation nowcaster: long-term (left) and recent evolution (right)
World monetary policy nowcaster: long-term (left) and recent evolution (right)
Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).
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