We’re now less than a month away from the next meeting of the U.S. Federal Reserve’s Open Market Committee — with another rate cut potentially on the table to stimulate the economy.
But most experts agree, it seems less and less likely we’ll get that rate cut as the meeting draws closer.
Because the Fed’s been “Flying Blind” without official government data.
Here’s what that means for you and your portfolio…
Video transcript:
Welcome to Moneyball Economics. I’m Andrew Zatlin.
The question du jour is whether the Fed is going to cut interest rates when they meet again December 9th.
Right now, if you ask the market, the market’s going to say there’s a 70% probability of a rate cut. That’s pretty strong, but it’s down from a hundred percent just a couple of weeks ago. What’s brought it down is the government shutdown and the lack of data.
So the Federal Reserve came out last month and they basically said, look, we’re going to cut interest rates now because we’ve got a lot of data and it’s only a couple of weeks out of date. Even though the shutdown’s underway, we feel pretty good about the data we’ve seen.
But fast forward another four weeks, they still don’t have any data, and so they’re flying blind. Now, if they’re flying blind, when they come to this meeting in a couple of weeks, they may kick the can.
They may say, Hey, we still don’t have data, and so that puts us in a position of uncertainty and we’d rather not be in that position and making such a critical decision.
However, I don’t think that’s the way they’re going to go.
In fact, they already tipped their hand and said they’re looking at alternative data.
Specifically, they’re looking at something like ADP employment data. They’re also looking at something called the Labor Market Stress Index, which is something that they themselves produce.
Now, when they look at these two data points, they’re going to see entirely contradictory stories. ADP’s reporting, softness, LMSI is reporting strength.
Now, I can reconcile these two. By the way. They’re not actually contradictory, and I can show how they’re the same data, but I don’t think the fed’s going to dive into deeply. So what is the Fed decision going to be to understand that?
Let’s look at these two data streams. Let’s start with ADP…
ADP. major payroll producer, right? They process all these payrolls, and so that gives them line of sight into salaries and wage growth. It gives them line of sight into employment growth.
And today, the ADP employment report came out and said, Hey, when we look at people who are employed, we see pretty good wage growth. We see four and a half percent, and folks that is steady as you go, type of wages. That’s what we’ve been seeing, and that means the economy continues to grow.
When we look at jobs, though, ADP says it’s better than it was in September when we said there were more layoffs and we had a negative payroll growth this month, seeing some acceleration, 42,000 jobs. Yay. It’s up from where it was, but it’s still weak. It’s in that zone where the Federal Reserve definitely would be compelled to cut interest rates.
Now we’ve got this other data point, the Labor Market Stress Index, and I like the approach and the methodology. I simply don’t agree with the conclusion.
The LMSI index is very interesting because it’s looking at breadth. Let’s say that California had a strike at the ports and then all of a sudden it lost a lot of jobs and you saw a surge in national jobless claims because of California.
So at the aggregate, we got a bigger number, but it’s really concentrated to California. Is that indicative of labor market strength or weakness? Well, I would argue, and so do others that No, it’s a California thing, not a national thing.
Even if the total numbers are reflecting a pullback, well, that’s what the LMSI does. It says, let’s count the 50 states and districts and say of the 50, how many of them are stepping on the gas?
How many of them are stepping on the brakes? And we’re going to just total that number up if you look at it. Well, what you’ll find is quite frankly, there is no labor market stress. Less than 10 states are showing accelerating, continually accelerating jobless claims only 10.
Now, yes, let’s face it, some of those 10 are the big drivers of our economy, but by and large, if you just wanted to say, how hard is the labor market? You’d say, well, 40 out of 50 places are saying it’s not bad at all. Now, here’s where it goes South.
Here’s where this approach doesn’t work. I believe right now that undocumented immigrant workers are not filing for claims. I mean, why would they show up on the radar and possibly get deported? That matters a little bit, but this month and next month, it matters a lot because they’re exactly the folks who normally would be filing a lot of jobless claims.
See, we are currently at the peak of when you would expect farm workers and construction workers to be laid off. That’s what happens. And typically, you’re talking hundreds of thousands of workers get laid off in this two month period, and guess what? The majority of them are undocumented immigrants. So as you follow that, we would expect a hundred to 200,000 undocumented immigrants filing for jobless claims.
Well, guess what?
If they’re scared of appearing on the government radar, you’re going to see fewer of them filing for claims. And that’s why I think we have this number so low. I think that the reported number of 10 states accelerating jobless claims, it’s probably closer to 20 to 25 states. That’s a critical point. That means half of the states are mostly showing accelerating jobless claims. That’s a red flag. Is the Fed going to go this deep?
Is the Fed going to see things the way I see them? I don’t think so. See, I can reconcile the weakness that ADP is seeing with the LMSI by saying basically LMSI is wrong, and here’s where it’s wrong, but I don’t think the Fed drills into this degree. And so the Fed might say, Hey, you know what? Either the data’s murky and we can’t make a decision. Or more likely they’ll look at the A DP data and say, this is fairly reliable, and it says weakness.
So I’m in the camp that says, yeah, another rate cut is likely a lot of reasons to do it. We’re not seeing information about inflation to say, don’t do it. So with that in mind, let’s see what emerges over the next week or two if we finally get back to some official data, because that is the data that will matter above all, but I don’t think we’re going to get it. We’re certainly not getting payrolls this week.
There you go.
We are flying blind, and the Fed is going to have to make a decision accordingly.
We’re in it to win it folks.
Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics