Are rate cuts still in the offing?
By Joe Higgins, Quest 4 Quality
- The economy added 175,000 new jobs last month against expectations of 238,000
- The unemployment rate ticked up a tenth of a point
- Retail added 20,000 new jobs, suggesting that consumers are still spending
The rules have changed again; what was traditionally considered a bad economic report is now celebrated as positive news by Wall Street.
Last week the Labor Department’s Bureau of Labor Statistics reported that the U.S. gained 175,000 new jobs in April. Expectations were 238,000. At the same time, it was noted that the overall unemployment rate grew to 3.9% from the prior month’s 3.8%. The depth of the pandemic has clearly impacted the economy, and now we are beginning to see a new and more normal economic reality.
Let me put this in perspective: if the economy adds 100,000 jobs a month, that is enough to keep up with population growth. If it adds 150,000 jobs, that is considered an impressive performance. Over the past four months, the average number of jobs added each month was 287,000. So yes, we see a slowdown, but 175,000 might just be the right mix at the perfect time.
Bad is Good
Given the consensus estimates from Wall Street, the economy had a big miss at 175,000. Still, it may allow the Federal Reserve to pull up interest rate cuts into the second or early third quarter. Also, wages are down from a high of nearly 8% growth in mid-2020, to under 4% today. High wage growth increases demand and is a significant factor for inflation; as job creation falls, the possibility of a rate reduction increases.
Where did most of the new jobs come from? Retail was near the top of the list, with over 20,000 new positions. This indicates that consumers are still out in your stores spending money. Healthcare added 56,000 jobs, as a generation of aging boomers retire and require more medical attention. That sector will continue to add jobs for decades.
After last week’s Federal Open Market Committee (FOMC) meeting, Fed Chairman Jerome Powell characterized the economy as robust, stating, “The economy has remained strong with unemployment among its lowest rates ever.” This happened before the job numbers were released, but I am sure he feels better about the possibility of getting inflation under control now than he did the week before. For the Fed, the recent economic reports were golden: GDP fell to 1.6% and unemployment rose to 3.9%. In today’s world, bad news is good news.
The Two Percent Solution
According to the Consumer Price Index, inflation has held between 3% and 4% for the past 10 months. Powell said a year ago that the most challenging time would be the last push, from 3% to 2%. The April jobs report is the perfect scenario for lowering overall inflation to the Fed’s final target of 2%.
Job growth in April fell into the Goldilocks scenario — not too high and not too low, but just right. It doesn’t signal a recession, but after 11 interest rate increases by the Fed, it may mean that the economy has finally slowed due to the high rates of the past two years.
There has been some worry over the threat of stagflation, which is defined as a slowing economy with rising inflation. But with the GDP missing growth expectations in Q1 and a normalizing job market, the threat of stagflation has faded.
Bottom Line
The economy is slowing; it was inevitable, as the Fed has spent the last 24 months trying to bring it to its knees. Given enough time, high interest rates have a way of working.
A softening of business conditions will cause a reaction that will bring about the normalization of the U.S. economy. You might not believe adding only 175,000 jobs in April is a good thing, but I can assure you it is. If it leads the Fed to cut rates, the economy will pick up, consumer confidence will rebound and spending will remain positive.
America is in the beginning stages of exiting the old pandemic economy and starting down a new road. Only time will tell where it takes us.
Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at Q4QwithJoe.com.
