Sometimes, as the expression goes, “bad news is good news,” in investing.
Sometimes it’s better to get a few months of ostensibly bad news about the economy, if that bad news will in turn cause the Federal Reserve to ease their grip and cut their benchmark interest rate.
And so the last few months of weak economic data have been seen as a blessing as much as anything else — forcing Powell to finally issue his first rate cut of 2025.
But what comes next might surprise you.
Hit today’s video below for the full story:
Video transcript:
Welcome to Moneyball Economics.
I’m Andrew Zatlin, and guess what? It’s payroll Friday.
Again, payrolls are back on the menu, and guess what? I’m forecasting A payroll surprise that’s going to be like Goldilocks. The market’s going to find it very tasty, very much to their liking. So let’s play out what the possible scenarios are on Friday…
I expect Friday to be very volatile, and I’d like to walk through why I see upside surprise right off the bat. Remember, we’ve had four months in a row, four consecutive months of really bad payrolls. In fact, it’s made people fear that we might be falling over into a recession and it forced the Fed to grudgingly cut interest rates by 25 basis points.
Well, now the market’s back and they want more rate cuts. But they don’t want a recession, and that’s their biggest fear right now. They’re forecasting a number of around 50,000 to 70,000 payrolls added in September.
That would be five months in a row of weak payrolls. In fact, it does suggest that the economy isn’t just weak. It could tip over into a recession, and that’s why something 50,000 to 70,000 will make the markets happy because it says, “Hey, fed, you got to do more cuts and sooner something below 50,000 though that’s going to send the market into a panic, anything below 50,000 suggests we are tipping over into a recession.” The Fed’s too late and not a lot can be done to recover.
Now, fast forward to the other scenario. My scenario, I’m forecasting a much better number, something of 129,000, and believe it or not, while that’s a lot higher than expectations. It’s still smack dab in this Goldilocks zone where the market gets the best of both worlds, a number of 129,000. In fact, anything a hundred thousand and above suggests that we’re not tipping over into a recession, so we avoided that.
However, it’s still weak enough that says “we need rate cuts.” It keeps rate cuts on the table.
There’s another scenario though, 150,000 or higher, I don’t think it’s likely, but again, if that number comes in, the market’s going to panic in a different way. It means rate cuts are off the table.
So just to recap, the markets, if they see anything below 50,000 are going to panic. Anything above 150,000, they’re going to panic. The sweet spot is around a hundred thousand.
Why do I think we’re going to get a better number? Why am I at 129,000? Let’s talk about that. Partly academics, but also data, hard data…
Now, the academics of the situation are these employers, well, they throttled back on their staffing either by laying off people or by not hiring, and that really took effect in the first half of the year. Then they went on vacation, they came back in August, and you know what they saw when they got their butts back in their seats? they saw a lot of positivity.
Economic conditions have actually been pretty strong. The consumer’s been spending a lot at the same time.
All this leaning [out] of their staff, all this management of payrolls has led to an improvement in their profitability. So now as they look at the end of the year, you know what they’re seeing? They’re actually seeing reports that the economy’s expanding, and next year they’re going to see much more revenue growth and much better profitability.
So instead of managing the situation and trying to restrain payrolls, they’ve got to now think about building for growth, staffing up. And so we’ve shifted from a little bit more firing and a little bit less hiring to a little bit more hiring and a little bit less firing.
And that’s key for this Friday and September’s payrolls … firing.
The mathematics of payrolls in September are very unique. Out of all the months out there, what is driving payrolls is how few people we fire. We expect to fire a lot of people in September. We’ve built up a lot of these seasonal workers, construction workers, Disneyland workers, and now it’s time to let a lot of them go. But how many get retained/how few get fired will define this September’s payrolls, and that’s what I want to share with you.
I track hiring at the individual company level, and I want to share with you some of that hiring that tells me, in fact, companies are sitting pretty and are expanding their payrolls, and that means we could get that upside surprise. Let’s look at the key sectors that are going to have the biggest impact this Friday…
And we start with construction. Construction and its sister sector, building material, retailers, home Depot, Lowe’s, they fire a lot of people in September, and you know what? I think they’re going to fire a little bit more.
Home building’s been soft, and in fact, when I look at the players here, when I look at Home Depot, when I look at Lowe’s, when I look at KBR and DR Horton, major home builders, soft, soft all around.
Home Depot is doing a little bit better, but in general, there’s not much strength here, and that’s not a surprise. Home building permits are down and so on and so forth, so not a surprise, but there’s weakness there.
Everywhere else though, I’m seeing strength.
For example, let’s talk manufacturing. We know manufacturing’s been struggling all year long with these tariffs, but guess what? I’m seeing strength at GM and Ford and auto Manufacturing is a major driver right now. Get that … major driver? Okay, anyway, but then I’m also seeing strength when we talk about manufacturing in the defense industry space, companies like Raytheon or Lockheed, they’re ramping up their hiring.
Well, that makes sense.
We’re cutting 10, 20 billion deals right now under Trump. These companies, well, they’ve got to hire because production’s got to ramp up, but that’s not the only place. Let’s talk retail. One of the interesting things here is when I look at retailers, the major clothing companies like TJ Maxx, like Ross, they’re ramping up their hiring.
Similarly, when I look at places like Leisure, hospitality, this is a big month for layoffs in leisure hospitality, especially restaurants. A couple hundred thousand people get laid off in September, but guess what? McDonald’s is sitting pretty, they’re actually kind of hiring a little bit more and on and on and on.
Temp workers, this is what I want to end with because temp workers are important for at least two reasons. One, a lot of people are back. Offices are open. We recover the business, we bring in temp workers.
This number is very big, and as you can see from what’s going on at both Robert Half Big employer and Kelly Services, we’re seeing hiring rebound, but that’s not the only reason. We look at temp workers. Again, they’re reflecting demand from businesses, and so if they’re doing well, it suggests that at the margins, so are most businesses to net it out.
I’m not guessing, I’m not giving you opinions. I’m telling you that when I look at my own data that tracks hiring at all these major employers, they’re actually ramping up when the expectation is they should be ramping down and even better, they’re close to the customer.
They know what’s going on and they’re responding to it. It’s very consistent with what we’re seeing in jobless claims data as well, where initial claims went up and over the past month, they’ve come down dramatically, both initial and continuing claims.
It signifies that employers are actually feeling a little bit more bullish. So I think that’s going to translate into a pretty solid number.
In fact, I wouldn’t be surprised if we do kiss 150,000 or above.
We’re in it to win it folks. Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics