The Breakdown - Jobs Revision Clears the Way for Fed Cuts

Episode Date: August 23, 2024

NLW catches up on the latest little hints of a Harris/Dem pivot on crypto, and also discusses the latest macro developments. TL;DR all systems go for the cutting cycle to begin in September. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, August 22nd, and today it appears that maybe we actually have a wink at a real Democrat crypto pivot. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit.ly slash breakdown pod. As you will well know at this point for several weeks, if not more, the crypto industry has been tuned in for any sign of a crypto pivot from the Kamala Harris campaign.

Along the way, there have been small rumors and a little discussion, but nothing that comes close to a commitment. This period culminated with crypto being entirely absent from the Democratic platform that was released earlier this week. And the prevailing take has been that talk is cheap, and people want to see tangible action to demonstrate if the party is actually shifting. Well, we did not get action per se, but on Wednesday we got a little more talk that could be a sign that something is happening. During a Bloomberg event, senior campaign advisor Brian Nelson was asked directly about Harris's views on

crypto policy. He responded, she's going to support policies that ensure that emerging technologies and that sort of industry can continue to grow. Now, to be clear, this is the same style of communication we've seen so far, of ag reference to being supportive of innovation and emerging tech, but nothing concretely about crypto. However, in this particular case, the messenger might be more important than the message. Nelson was a key Biden administration staffer who was hands-on during the crypto crackdown. He served as the Treasury Undersecretary for Terrorism and Financial Intelligence and had a key role in guiding the formation of policy on crypto sanctions. He was generally viewed as being open to industry engagement and pragmatic about dealing with illicit finance

in crypto, despite the high-profile nature of these policies. During a campaign event last week, Nelson said the Harris administration would be focused on, quote, cutting needless bureaucracy and unnecessary regulatory red tape. He added that they would encourage, quote, innovative technologies while protecting consumers and creating a stable business environment with consistent and transparent rules of the road. So how this is being received is, of course, a Roershack test for one, how much one wants a crypto pivot from the Democrats, and two, how much one believes it's possible. It remains scoffworthy in its lack of specifics for some, but for others is held up as being representative about the shift that we're hoping to see away from overtly hostile comments. Jonathan Padilla,

one of the organizers for Crypto for Harris, said that things are moving behind the scenes, commenting, concerted efforts by a number of actors are making tangible progress. I think we're seeing stage one of the reset. Folks should stay tuned. Fariar Shirzah, the chief policy officer at Coinbase seemed to reinforce that idea, tweeting, have been pleased to take part in a number of discussions with the Harris team, very much appreciate their constructive approach and their focus on advancing innovation, jobs, and consumer protection in the U.S. The Dialogue has been an important first step, and Brian Nelson's statement is an encouraging second step in the right direction. The other side was summed up admirably by Nate Garassi, the president

of the ETF store, who said, my take on this is very simple. Actions speak louder than words. Current administration of which Harris is a part is decidedly anti-crypto. There's always a balance between innovation and regulation. Focus has been solely on regulation. Need to demonstrate embracing innovation. Actions. The reporting around this has also been interesting, though, while the statement was basically empty and vague, it was considered important enough to end up as a Bloomberg piece under the headline, Harris supports policies to expand crypto industry, aid says. One possibility is that they're just looking for good headlines, the other is that there was more information provided on background. So we will see, but I suppose it's certainly better than

outright hostility. From here, though, let's shift over to the macro side of the house. The Bureau of Labor Statistics has just released a dismal revision to jobs numbers. For the period between April 2023 and March 24, job growth was actually 30% lower than first reported. This means that almost one and three additional jobs shown in the monthly payrolls numbers didn't actually exist. To give a sense of the overall size, this revision represents around 800,000 jobs removed from the data. This is half a percent of the overall labor force, the largest revision to jobs data since 2009. Typical annual revisions are closer to 0.1% of total payrolls. This revision still shows growth in the labor force of around 2 million people during that 12-month period.

In other words, the revised data is not saying that the labor force was weaker shrinking, just that it was much less strong than originally reported. One point worth keeping in mind is that this revision has no impact on the unemployment rate. That number is derived solely from the household survey, which is a separate part of the monthly payroll report. Looking a little further into the data, the heaviest revisions were seen in services in manufacturing. Professional and business services saw a particularly dramatic drop, with 358,000 payrolls removed.

Government jobs, a massive area of growth over recent years, were basically unchanged after the revisions. White House economist Jared Bernstein tried to put a positive spin on the data, commenting in a statement, this preliminary estimate doesn't change the fact that the jobs recovery has been and remains historically strong, delivering solid job and wage gains, strong consumer spending, and record small business creation. Goldman Sachs economists thought the revisions were exaggerated. They said the BLS may have been too aggressive in removing payrolls by as much as half a million jobs. Their explanation was that much of the revision was likely the removal of new jobs taken by undocumented migrant workers, who played an unusually large role in recent

labor market growth. There's a range of arguments about whether undocumented workers should be included in government statistics. But if the only goal is to gauge how strong job growth has been, many argue that those jobs matter just as much as any other. The clearest takeaway from this revision is that the path is now abundantly clear for Fed rate cuts to begin in September. At the July meeting, it was clear the Fed was only waiting for confirmation of labor market weakness, which this revision seems to provide. Jeffrey Roach, the chief economist at LPL Financial said, a deteriorating labor market will allow the Fed to highlight both sides of the dual mandate, and investors should expect the Fed to prepare markets for a cut at the September meeting. By itself, this data probably isn't enough to push the Fed into a jumbo-size

50 basis point cut. Payrolls data has been suspect for more than a year, with the establishment survey diverging from the household survey and painting two different pictures of the market. Fed Chair Jerome Powell even made this point directly during the June meeting, stating that there's a quote argument that they may be a bit overstated. In other words, no one on the FOMC will be surprised by a big revision, and it has likely been baked into their models as a possibility for some time. Robert Frick, corporate economists with the Navy Federal Credit Union, said, the revisions aren't a shock, given the estimates were for 1 million fewer jobs. This doesn't challenge the idea that we're still in an expansion, but it does signal

we should expect monthly job growth to be more muted and put extra pressure on the Fed to cut rates. Hello, friends, before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for crypto-natives by crypto-natives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it.

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Regarding what actually went wrong in calculating the data, Bloomberg economist Anna Wong completely rejected the explanation from Goldman Sachs, writing, We think these revisions indicate the labor market was running cooler than most believed for most of last year. Notably, the main sources of the downward revision were white-collar sectors, such as professional and business services, that don't tend to be a major draw for undocumented workers. That should alleviate concerns that the benchmark series undercounts undocumented workers.

Wong has recently been doing a lot of work critiquing BLS methodology. Her major theory is that one of the statistical adjustments the birth-death model is wildly off. The birth-death model attempts to estimate how many new firms are created or shut down each month, alongside a presumption of how many jobs are attached to those businesses. The thought is that a massive spike of self-employment threw the model off during the pandemic. Those new businesses show up in the statistics but have no additional payrolls attached. This spike could have changed forward assumptions about the pace of new business formation, poisoning the data. Another source of error could be basic assumptions about the economy. At its core, the model assumes a certain

pace of business formation and closure depending on whether the economy is expanding or contracting. This part is really just an educated guess about where we are in the economic cycle. Getting this wrong can lead the model to add new businesses when the reality is a wave of business shutdowns. This would be enough to push the payroll data wildly off course. Other data from the BLS showed that around half of businesses have shut down over the past year, which could indicate the birth-death model was just fundamentally off about the direction of the economy.

Economist and former Commissioner of Labor Statistics William Beach gave credence to this theory, tweeting, The big downward preliminary revisions to non-farm employment announced this morning by BLS probably stem from overestimating the number of firms in the economy. Slowing as well as recovering economies often pose challenges for BLS birth-death model, which BLS uses to fine-tune their monthly employment estimates. If that's the case, we now have an additional indicator that the economy may be more sluggish than many policymakers believe.

As you might imagine, there are a ton of commentators who are latching onto this opportunity to discredit government data on the whole. And the revision certainly adds fuel to that particular fire. However, an important point often made by market participants is that it doesn't matter if the statistics are real or made up, all that matters is if the markets move on the number. With that framework, it's interesting to note that the stock market barely budged on the news. Both the S&P 500 and the NASDAQ traded up by around half a percentage point and are closing in on all-time highs. Bitcoin also had one of its smallest daily moves in several weeks,

trading slightly down. Wall Street simply wasn't buying the narrative that this data showed a catastrophic recession had been covered over by the BLS. Overall, the read seems to be that this revision shows that the labor market was much weaker than previously believed over the past year and a half. Keep in mind that late 20, was viewed as having an abnormally tight labor market, so this downgrade is coming from a pretty high base. Nothing in the data is screaming recession, just a fairly notable slowdown. That said, the revisions end in March, so they say nothing about the position the economy is currently in. The probability of Fed rate cuts barely moved on the data release,

however, markets have long since priced in a rate cut in September, and are now trying to tease out the chances of a 50 basis point cut instead of the expected 25. With labor market deterioration now, analysts from QCP research said, quote, the question now is whether the U.S. Federal Reserve has been behind the curve having delayed rate cuts due to a previously stronger than expected job market and robust economy. Yesterday also saw the release of the minutes from July's Fed meeting. Over the past year, these minutes have provided no real insight as the Fed held tight to their hire for longer policy. Now that we're rapidly approaching the start of the cutting cycle,

it's a little more useful to know how committee members view the next policy steps. Unsurprisingly, the committee is ready to go with a rate cut in September. The minutes stated, the vast majority observed that if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting. The only curveball here is that the minutes imply a small number of hawks aren't yet convinced that a rate cut is appropriate. It also seems that a July rate cut was strongly considered, with the minutes commenting, several observed that the recent progress on inflation and increases in unemployment had provided a plausible case for reducing the target range 25 basis points at this meeting, or that they

could have supported such a decision. The minutes also spelled out that the labor market is now the main concern, stating, a majority of participants remarked that the risks to the employment goal had increased, and many participants noted that the risks to the inflation goal had decreased. Some participants noted the risk that a further gradual easing in labor market conditions could transition to a more serious deterioration. What's important here is how a line the committee is on these points. While a majority of participants believe the labor market is now the main focus, only some believe that there is a risk of runaway unemployment.

Read together, the information seems to be indicating that a 25 basis point cut will be an easy decision for the Fed in September. The size of the September cut will be the more important signal for markets. There was some indication in these minutes that Fed officials are ready to pull the trigger on larger cuts at the first sign of trouble. The minutes stated, for example, many participants noted that reducing policy restraint too late or too little could risk unduly weakening economic activity or employment. A couple of participants highlighted in particular the costs and challenges of addressing such a weakening once it is fully underway. Looking ahead, central bankers from around the world have descended on Jackson Hole, Wyoming for

their annual symposium. The event is typically a chance for global policymakers to review policy and coordinate future decision-making. It often signals turning points in central bank policy and provides insights into the way policymakers view the state of the global economy. For markets, the focus of the weekend will be Jerome Powell's speech on Friday morning. During the past few years, Powell has used this occasion as an opportunity to provide additional guidance. In 2022, halfway through the hiking cycle, Powell famously tore up his prepared remarks at the last minute. Instead, he delivered a terse speech that quelled a counterproductive stock market rally. Ahead of this week, the Fed is once again facing a major inflection point.

The theme of the weekend is, quote, reassessing the effectiveness and transmission of monetary policy. Economist Mohamed Al-Irean thinks that Powell needs to use this speech to reclaim credibility. In the Bloomberg opinion pages, he wrote, the Fed's paramount goal this year should be to re-establish the effectiveness of its forward policy guidance. It must also continue to rebuild its credibility and international standing, both of which have been eroded by the mistakes made over the last four years, from delayed policy implementation and poor forecasting,

to confusing communication and lapses in bank supervision. So what will happen at that meeting? Well, of course, we will be keeping close track of it. But for now, that is going to do it for today's breakdown. Appreciate you listening as always. And until next time, be safe and take care of each other. Peace.