Payroll Expectations Were Way Too High

The jobs report came out today. The 199k job growth was WAY below what the “expectations” were. But those expectations were a joke. There is no way to grow our economy 800k jobs at 4.3% unemployment.

Here’s a dot plot from the last recovery (2010-2019) when the employment rate was under 7%. The y-axis is payroll growth and the x-axis is the unemployment rate.

As one would expect, as unemployment goes down, payroll growth slows. This is simple math: the less unemployed, the less payrolls can grow.

At 4.3% unemployment – which is where we were last month, the linear trend would say our job growth would have been … 195k jobs. Right what we had.

We are running out of workers. We are now only 0.3% away from the lowest unemployment of the last cycle.

CPI Has Huge Market Implications

While everyone is focused on food prices, the real issue for the economy and the markets is that the political climate for inflation has changed. Which means the markets now expect a Fed raise much sooner.

This is a graph of market expectations about the Fed Funds rate.

You can see how the entire curve has shifted up DRAMATICALLY. The first rate hike was expected at the end of 2022 and is now due for just 6-7 months from now. In fact the market is now expecting *3* rate hikes by the end of next year versus just one before.

The Fed could keep calling inflation transitory for only so long. Now it’s becoming more widespread and, with supply issues that will not be fixed quickly, has to consider slowing the economy to reduce demand.

If these forecasts (and the market is right more than the Fed forecast), then the party is just about over for risky assets and GDP growth will be MUCH slower than the 4% Fed Forecast next year.