No Trade-Off?

“Are you willing, in Wall Street parlance, to ‘be Volcker’,” Bloomberg’s Michael McKee asked Raphael Bostic, during an interview in Jackson Hole last week, just prior to Jerome Powell’s brusque address.

Bostic’s answer was a soft “yes.” A “yes,” with caveats. Which misses the point. You can’t be “equivocal Volcker.” You either go Volcker or you don’t. “I think we won’t have to face a question like that for quite some time,” Bostic told McKee, citing labor market momentum to support the contention that the economy isn’t anywhere near the precipice. In the near-term, at least, there’s no trade off between jobs and inflation, Bostic suggested.

He may be right. But, as Jim Bullard told McKee just minutes prior, the “long and variable lags” appear to be shorter this cycle. “That was based on data from the 50s and 60s,” Bullard said, chuckling at Milton Friedman’s “fool in the shower.” Then he cracked a somewhat uncomfortable joke about the news cycle. “I think today’s markets, partly because of media like this,” Bullard said, gesticulating at the circus atmosphere in Jackson Hole. “They move very quickly to projected paths of policy.”

Bullard called the housing market “exhibit number one,” before driving it home: “I don’t think this ‘long and variable lags’ thing is as accurate as it’s been historically.” Tom Keene, donning a Dick Tracy-length trench coat, looked on.

Of course, the labor market and the housing market are apples to oranges. There’s a direct link between fast-acting markets and housing — namely, rates. The labor market, by contrast, is always a lagging indicator and Bullard’s (compelling) argument notwithstanding, the acute labor shortage that became the defining feature of the post-pandemic jobs market may mean it’s even slower to react this cycle. If that’s the case, Bostic could well be correct.

I doubt the question will be answered this week, but August’s jobs report, which economists expect will show another solid gain, should be contextualized via the debate sketched above. Consensus expects 300,000 from the headline (figure below). That’d mark the slowest pace of job creation since April of 2021.

Recall that July’s blockbuster report found the labor market recovering the last of the shortfall versus pre-pandemic levels of total employment. An in-line August print would bring cumulative job gains for 2022 to 3.6 million, assuming (unrealistically) net zero revisions.

It’s no coincidence that economists are projecting a glide path to smaller monthly job gains. They’re just assuming everything goes according to plan. Sure, there are models involved, but all you need is the boilerplate narrative (i.e., the Fed is tightening in an effort to cool a red-hot labor market) to come up with 300,000. That’s just a good number that’s less good than recent months.

Those searching for evidence (read: confirmation bias) that the jobs market is in fact already slowing, will look right past the headline figure in favor of the household survey. If it’s negative, expect another round of doomsaying.

Some market participants recently pointed to a disparity between the household and establishment data to suggest negative readings on the former may presage downward revisions to the headline NFP prints. July’s report showed a 179,000 gain on the household survey, pushing the three-month moving average back into positive territory (figure above).

For what it’s worth, there’s scant evidence to support the assertion that negative household readings are generally associated with an eventual “reckoning,” although I’ll confess to being sympathetic to the thesis.

The figure (below) shows the recent history of robust (here defined as 200,000+) pre-revision NFP prints contemporaneous with negative readings on the household survey.

When you compare the pre-revision NFP prints to the twice-revised, final figures, there’s no obvious trend. If anything, revisions tend to be positive.

Again, I should emphasize that in the current circumstances, I’m at least a bit sympathetic to the idea that a revisions reckoning is just around the corner. But, as we saw with second quarter earnings from corporate America, “revisions reckoning” narratives can be premature.

The problem for Powell is that despite claiming the Fed is out of the forward guidance game, he effectively pre-committed not only to something like a 3.8% terminal rate, but to holding terminal for an extended period of time. Bostic, a relative dove at least vis-à-vis terminal, suggested the Fed might stay at cycle highs for as long as two years. If the labor market rolls over hard in the near-term, they’ll look like fools. That’d be familiar territory for this Fed (and really, for all modern Feds, plural), but this is one case where extensive experience wouldn’t make the situation any more comfortable.

Ultimately, the Fed is still leaning on the assumption that tighter policy will result in the elimination of superfluous job openings, thereby reducing the yawning gap between open positions and scarce workers. Although Powell appears less willing to promote that narrative now than he was just a few months ago (he seems to have reached his personal limit in terms of being castigated for parroting any version of a soft landing story, even if other officials remain comfortable with it), the Committee still believes the extraordinarily elevated ratio of openings to Americans officially counted as unemployed leaves the door open to a benign outcome.

That ratio remained near two (figure above) as of the last business day of June, implying that every unemployed American could have two jobs if they wanted them. Which is handy, because with inflation running faster than wage growth for all but the lowest-paid Americans, you’d need two jobs (at least) to afford groceries. I’m just kidding. But not really.

Many commentators (and some economists) are dubious of the notion that engineering a soft landing is as simple as compelling employers to nix open positions. The disparity illustrated above is a function of poor match efficiency, and like so many other problems, the solution resides in the halls of Congress, not in the Eccles building. Perhaps it’s more apt to say the solution doesn’t reside in Congress, because Capitol Hill isn’t a place people go to get things done. Unless what you’re trying to do is score a shirtless photo op in the Senate chamber wearing a dead beaver with bison horns on your head. But I digress.

Tuesday brings July JOLTS, which means market participants will have an opportunity to reassess the veracity of the most popular soft landing thesis. An ideal scenario would be evidence of a rapid (but not harrowing) drop in openings and signs of normalization in the quit rate, with the latter serving as a proxy for wage pressure via the read-through for elevated “job switcher” pay. Also, ADP makes its return this week after a two-month hiatus.

Commenting further in Jackson Hole, Bostic told Bloomberg that the Fed wants to see job growth “start to slow,” as that would be “consistent with the idea that our policies are starting to take demand and pull it down and reduce the imbalance that’s underlying the inflation we’re seeing.” He politely declined to identify a threshold for NFP. “It’s not 277,000 and I’m good,” he remarked. How about negative 277,000?