The job market’s flashing yellow lights

Sep 06, 2024

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QUICK FIX

Today, we’ll start to answer the question on every Federal Reserve official’s mind: How fast is unemployment going up?

Historically, “unemployment rises like a rocket and falls like a feather,” but this time around, joblessness has risen only slowly, feeding hopes that the economy can avoid a recession.

But last month gave the Fed room for pause. The July jobs report showed that the unemployment rate had jumped to 4.3 percent from 4.1 percent, a trend that would be quite worrying if it continues. Jobs data for August, to be released on Friday, will begin to tell us whether that report was a blip or not.

And there’s another reason central bank officials are wary. The labor market has been softening because there are fewer opportunities – which is bad news if you’re a recent college grad or someone looking to change jobs, but overall, less disruptive. Now though, policymakers are worried that any further weakening will come through a more painful route: layoffs.

The signals from this report will likely be the biggest determinant of whether the Fed goes with a larger or smaller rate cut this month.

“It’s a big report [Friday] because the Fed is about to make a big decision, and the American people are about to make a big decision about who to vote for, and so the monetary policy stakes are big and the political stakes are there too,” said Aaron Sojourner, a labor economist at the Upjohn Institute for Employment Research.

But, he said, not everything will be answered today.

“The big question is, did the Fed snatch defeat from the jaws of victory? Did the Fed keep rates too high too long?” he said. “Nobody knows that yet.”

Fed officials aren’t seeing reason for panic. “Reports of layoffs remained rare,” according to this week’s Beige Book, a document where central bank officials compile stuff they’re hearing throughout the country.

Weekly jobless claims also aren’t spiking. In fact, the Wall Street consensus expectation is that the unemployment rate will actually fall to 4.2 percent, according to Dow Jones – particularly because the July jump was driven by temporary layoffs, meaning companies expected to rehire the workers.

But the labor market is clearly weakening. Data from payroll firm ADP, which doesn’t necessarily forecast what Labor Department data will show but provides useful insight nonetheless, showed private payrolls rose by less than expected.

John Waldmann, who is CEO of small business payroll company Homebase, told MM that his company’s data showed “flashing yellow lights.”

“What we have seen is broad declines in employees working across pretty much all industries,” he said. Headcount shrunk by 3.5 percent relative to July, “which is normal seasonally, but the drop was sharper than the last few years.”

Their small business clients “react very quickly to changes in the market,” he added. “And what we are seeing is, fundamentally, they are just hiring less.”

IT’S FRIDAY — We’re officially less than two months out from the election. Email tips and suggestions to Sam at ssutton@politico.com. And you can always reach me at vguida@politico.com.

A message from the Georgetown Psaros Center for Financial Markets and Policy:

You are invited to the 2024 Financial Markets Quality Conference hosted by the Psaros Center for Financial Markets and Policy on September 17, convening leaders at the intersection of finance and policy. This year’s keynote speakers include Jamie Dimon, JPMorganChase; Nellie Liang, U.S. Department of the Treasury; Patrick McHenry, U.S. House Financial Services Committee; David Schwimmer, LSEG; Rostin Behnam, U.S. Commodity Futures Trading Commission; and more. Get event details and RSVP to secure your spot.

Driving the Day

The August jobs report will be out at 8:30 a.m. … New York Fed President John Williams will speak at a Council on Foreign Relations event at 8:45 a.m. … Fed Gov. Chris Waller will speak in a virtual discussion hosted by the University of Notre Dame at 11 a.m.

So, how’d he do? — Former President Donald Trump was in Midtown Manhattan to pitch Wall Street honchos on his plans to slash regulation, lower taxes and impose crushing tariffs on any business that moves its operations overseas.

His speech to the people who comprise the Economic Club of New York was both a scripted explanation of his agenda and a highly tangential riff on how a Kamala Harris administration would be tantamount to communism.

How’d he do? Well, as with most Trump speeches, it depends on who you ask.

In a text message, Key Square Group founder Scott Bessent said the speech was a “level set” for Trump’s policy agenda with new items — like the government waste commission that he’s workshopped with Elon Musk — “that would broaden his appeal.”

“He issued a warning on current [Biden administration] policies but then gave an optimistic solution like he used to in 2016,” said Bessent, a former chief investment officer at Soros Fund Management who’s now one of Trump’s biggest allies in financial services.

But it’s hardly certain if Trump’s approach to taxes and regulation — which many in corporate America favor — would overwhelm their qualms about his trade and immigration agenda. Wall Street analysts have warned that his plans to impose large tariffs on imports, something he doubled down on during Thursday’s remarks, would limit growth and raise prices. Curtailing immigration could weaken the labor market.

And as for his new plan to launch a sovereign wealth fund? “Very dumb,” wrote Cliff Asness, the founder of the hedge fund AQR Capital Management.

— Sam Sutton

—Trump also pledged Thursday to rescind any “unspent” funds under the Inflation Reduction Act should he be elected in November — potentially upending key parts of the Democrats’ climate law and its benefits to Republican-led communities.

—Read Trump’s plan on child care.

Just in: All your questions will finally be answered — Well, if you’re into bank regulation anyway. The Brookings Institution is hosting Fed Vice Chair for Supervision Michael Barr on Sept. 10, where he will preview next steps for regulators’ revised proposal on capital requirements, known as Basel III endgame. (Implicit here is the suggestion that the next step is a re-proposal, which signals agencies have finally agreed on what’s next procedurally for the rule.)

First in MM: GOP lawmakers push back on Nippon Steel crackdown — House Republicans raised concerns that the Biden administration's effort to block Nippon Steel's acquisition of U.S. Steel could be politically motivated, Eleanor Mueller reports.

Their resistance could reflect tension between some GOP lawmakers and Trump, who has said he too would block the deal if re-elected – but might also pave the way for Trump himself to make the call next year. Reps. Bill Huizenga of Michigan and Andy Barr of Kentucky are vying to replace retiring House Financial Services Chair Patrick McHenry (R-N.C.), while Huizenga and Rep. Dan Meuser of Pennsylvania hail from swing states.

"Vice President [Kamala] Harris’s remarks, combined with reports that the Biden Administration may be poised to intervene in the transaction, give the strong appearance of political interference," Huizenga, Meuser, Barr and Rep. John Rose of Tennessee wrote in a letter to Treasury Secretary Janet Yellen. "The possibility that these actions are being taken to benefit a particular candidate, given the upcoming presidential election, is deeply troubling."

The Treasury Department declined to comment.

The members, who sent a similar letter in June, also allege that the administration "may have been discussing CFIUS’s review of the transaction with third parties." They're asking for information on the White House's communications with CFIUS, as well as steps it is taking to keep the review independent.

House Financial Services "will seriously consider opening an investigation should the president decide to block this deal for political gain," said a House Republican aide granted anonymity to discuss private conversations.

—Also read the NYT on how swing state politics are playing into the Nippon deal.

A message from the Georgetown Psaros Center for Financial Markets and Policy:

From The Capitol

Event contract fight heads to the Hill — The House Agriculture Committee is holding a closed-door meeting next week to get lawmakers up to speed on the obscure world of event contracts — the financial products that allow traders to wager on everything from the U.S. election to Rotten Tomatoes scores, two people familiar with the gathering tell our Declan Harty.

The meeting comes as the CFTC weighs a proposed rule that would effectively ban event contracts that relate to elections and sporting events. The agency is also currently squaring off with Kalshi and PredictIt in court, while Polymarket — an offshore betting market particularly focused on elections — swells in popularity.

A committee spokesperson did not respond to a request for comment.

CRYPTO CORNER

‘A huge mistake’ — Our Jasper Goodman reports that Donald Trump’s sons want to turn their father’s growing bromance with the cryptocurrency industry into the new family business. So far, the project's troubled rollout has succeeded in creating only one thing: a potential political liability for the former president.

First in MM: Coinbase x the Chainsmokers — More from Jasper: Coinbase, the largest U.S. digital asset exchange, is set to announce today that it will hold its second annual "Stand with Crypto Day" in Washington on Sept. 18, featuring a get-out-the-vote event with the Chainsmokers at the Black Cat music venue. The event will come on the heels of a swing state bus tour being sponsored by the Coinbase-launched advocacy group Stand with Crypto. Kara Calvert, Coinbase's head of U.S. policy, told MM the goal is to help mobilize grassroots crypto supporters and demonstrate to policymakers their "commitment" to industry-friendly policies.

A message from the Georgetown Psaros Center for Financial Markets and Policy:

Don’t miss the annual Financial Markets Quality (FMQ) Conference on September 17, hosted by the Psaros Center for Financial Markets and Policy on Georgetown University’s campus. This year’s conference theme is Future of Financial Markets: Innovation and Uncertainty. Attendees will hear from key experts and leaders as they discuss timely issues and the future of finance and policy.

FMQ 2024 is an unparalleled opportunity to gain perspectives from leaders shaping global financial practice and policy. Hear from our keynote speakers and panelists on topics including market structure, innovation in ETFs, financial market regulation, and cryptocurrency.

You will network, collaborate, and gain actionable knowledge on everything from regulatory trends to technological advancements. Secure your place at FMQ 2024 to be at the forefront of what’s next for financial markets. Register now to reserve your spot.