US Productivity and Employment Report
What is the 'unexpected' aspect of the employment report?
Analysis that the US employment report is causing confusion for investors, especially the large downward revisions to the previous month's employment numbers, which is raising concerns about a recession. However, the term "rolling recession" for the past few years, and believes that a strong recovery will emerge as uncertainties around trade, tariffs, and tax policy are resolved. It is believed that the likelihood of a fed rate cut is increasing, which will have a positive impact on the market. Overall, despite the current economic uncertainty, productivity gains will be driven by technological innovation, which will have positive long-term consequences.
What are the implications of this report and other economic indicators?
Interest Rates: The report suggests interest rate cuts are likely in the future, with 88% odds for a September rate cut.
Recession: The report confirms the ongoing 'rolling recession' and indicates that many economists might anticipate a longer recession scenario.
Employment Indicators: The labor differential (jobs easy to get minus jobs hard to get) has dropped significantly, typically indicating a recession.
PMI: Both manufacturing and services sectors are showing contraction, with orders falling as prices increased in services.
The employment report indicates a rolling recession with weaker-than-expected job numbers and downward revisions, leading to increased fears of a broader economic downturn. Despite the Federal Reserve's hawkish stance, the data suggests interest rate cuts are likely in the near future, which could stimulate a strong recovery driven by productivity gains and a favorable tax environment. This period of uncertainty, including geopolitical risks and trade tariffs, is seen as the market climbing a wall of worry, ultimately paving the way for a more durable bull market.
1. Key Uncertainties and Shifts in U.S. Economic Policy and Market Dynamics
The recent U.S. employment report was much weaker than expected due to significant downward revisions, increasing investor concerns about a possible recession.
The concept of a "rolling recession" has been used for a few years, with expectations of a strong recovery as uncertainties—such as trade, tariffs, tax policy, and regulation—begin to clear.
Despite recent hawkish signals from Chairman Powell, there is a high probability of a Fed rate cut in September (up to 88% chance, with a 25% chance of a 50 basis point cut).
fiscal policy is showing improvement, with the Federal deficit as a percent of GDP shrinking from 7.3% to 6.22% year-to-date, and projected to possibly reach 3% two years ahead of schedule if growth improves.
R&D spending has shifted dramatically: government-driven R&D dominated in the 1960s, but now the private sector accounts for over 75%, especially leading in areas like space and defense, which may accelerate productivity growth.
2. Key Economic Uncertainties and Policy Impacts on the US Outlook
The US aims to bring manufacturing back with more automation and permanent tax expensing, making 75% of capital spending eligible for these benefits, which is unprecedented.
The effective US corporate tax rate is expected to drop to 12–14%, matching Ireland’s rate that previously attracted significant manufacturing investments.
automation and AI integration are anticipated to deliver astonishing productivity gains as their costs rapidly decline.
Despite improved core inflation, GDP growth is weak, with real private domestic final sales running at about 1% and consumers raising savings rates, possibly exceeding 5%.
monetary policy remains restrictive as indicated by the inverted yield curve, typically associated with recessions and suggesting the Fed may be too tight.
Lower interest rates and greater tax certainty are likely to boost high-multiplier sectors like housing and capital spending within six months.
A 50 basis point rate cut is possible in September, and up to a 75 basis point cut for the year is expected due to weak employment and recession signals.
tariffs complicate the inflation outlook, but if trends continue, inflation could soon drop below 2%.
The progression from a negative to a positive yield curve has historically aligned with US recessions.
3. Economic Policy Uncertainty, Deflationary Undercurrents, and Productivity Trends
The yield curve flattening since the 2008-09 global financial crisis signals ongoing deflationary forces driven by technology.
Long-term deflationary trends benefit long rates over short rates, reflecting diverging economic pressures.
Real-time Trueflation data—leading CPI by 60 days—suggests tariffs have slightly raised inflation, but many U.S. corporations are absorbing these costs to avoid harming weak consumer demand.
Depreciating currencies in China and elsewhere are starting to mitigate some tariff impacts, adding another layer to corporate absorption strategies.
The U.S. dollar's fortunes may improve as corporate tax cuts increase domestic return on invested capital compared to the rest of the world.
inflation is expected to remain near 2% and move lower, which favors both fixed income and equity markets.
economic policy uncertainty hit unprecedented levels during tariff turmoil, even exceeding those seen during 2008-09 and COVID, but has recently improved.
Both GDP and productivity growth remain closely linked, with surges in productivity typically occurring at the start of recoveries; current trends suggest a secular increase, possibly sustaining 5% or more growth.
Emerging technologies—such as robotics, energy storage, AI, blockchain, and multiomic sequencing—are expected to drive significant productivity gains and reshape impacts on margins, compensation, R&D spending, and prices.
In China, productivity benefits may mostly enhance worker compensation, while in the U.S., they may contribute more to lower prices as the Fed fights inflation.
Recent trade events caused sharp swings in the trade deficit and real GDP, with the trade deficit spike lowering GDP by 0.5% in Q1, but a reversal in Q2 added nearly five percentage points to GDP growth.
Despite systemic shocks and market volatility—including large IPOs and tariff issues—the market is showing resilience by "climbing a wall of worry," which supports a more durable, broad-based bull market.
4. Key Economic Indicators Signal Ongoing Weakness and Uncertainty
Revisions to non-farm payrolls were extreme and typically seen only during a recession, supporting the view of a rolling recession.
Year-to-date, 84,000 Federal government jobs have been lost, with a projected total of 150,000 by end of September, amounting to 10% of Federal layoffs.
The birth-death ratio, estimating jobs created by startups minus closed businesses, was reported at 257,000—much higher than the usual 100—raising doubts about employment data accuracy.
The labor differential index has fallen from nearly 50 post-COVID to 10, historically marking recessionary periods and indicating consumer concern about job growth.
PMI readings for both manufacturing and services are below 50, indicating sector contractions since 2022 for manufacturing and recent weakness for services.
Real personal consumption expenditures (PCE) excluding healthcare have remained steady but could drop sharply if employment weakens further, as seen historically during recessions.
Auto sales are declining after pre-buying ahead of tariffs, with all manufacturers, including Tesla, experiencing challenges, despite a 27% sales increase for Tesla in Spain in July.
The spring housing market failed, and both new and existing home sales have declined, with affordability yet to improve but expected to do so.
5. Housing Market Pressures, Economic Indicators & Market Sentiment
The number of new one-family houses for sale is nearing all-time highs, similar to the period before the 2008-2009 crisis, indicating builders may struggle to sell homes.
Builders are offering concessions and cutting prices, leading to gradually falling new home prices for two to three years.
Existing home prices are up only 1.7% year-over-year, and shelter accounts for 40% of the CPI, but this contribution is expected to fall below 2%, supporting forecasts of lower inflation and interest rates.
The US dollar had its worst start to a year since 1993, but the supposed significance is exaggerated, as the uptrend remains intact.
There are significant uncertainties around tariffs, the Fed’s direction, and weak economic signals from China, but there is optimism for a productivity-driven economic boom if these clear up.
5.1. Housing Market Trends and Impact on Inflation
New one-family homes for sale are near all-time highs, similar to levels before the global financial crisis.
Builders face challenges selling inventory and will need to offer more concessions and continue cutting prices.
New home prices have been declining gradually for two to three years, not sharply.
Existing home prices, based on a three-month moving average, are up only 1.7% year-over-year.
Housing prices enter the consumer price index (CPI) with a significant lag, and shelter accounts for 40% of the CPI.
It is expected that the shelter component of CPI will drop below 2% later this year, supporting the outlook for lower inflation and interest rates.
5.2. Global Economic Signals: Dollar, China, and Commodities
The U.S. dollar had its worst first half since 1993, but the reported drama may be exaggerated when analyzed in a broader context.
Despite headlines, the dollar's uptrend remains unbroken and could strengthen if U.S. return on invested capital improves relative to 26 other countries.
Commodity-based inflation remains low, with today's levels similar to those seen in the early 80s and 90s, even with tariffs in place.
The metals-to-gold ratio signals underlying economic trouble, especially with very weak growth indicators coming from China.
Official Chinese GDP shows 5% real growth, but weak electricity growth indicates actual economic softness.
Copper prices previously surged on tariff threats but dropped by about 25% this week due to changes in tariff policy; current tariffs affect refined but not raw copper.
While copper price remains relatively strong, other metals have pulled the metals index lower, highlighting broader commodity sector weakness.
5.3. Market Indicators, Interest Rates, and 1970s Comparisons
The S&P price to gold ratio is closely monitored due to concerns about a potential return to a 1970s-style, tariff-driven inflationary environment.
Recent movements in the S&P price to gold ratio indicate an upward trend, expected to continue as recession and Fed uncertainty clears.
Analysis of the S&P price relative to oil suggests current market conditions differ significantly from those of the 1970s.
There has been a long-term downtrend in interest rates, starting from a peak early in the speaker's career, which is generally positive.
Near-zero percent Treasury yields during COVID raised fears of a deflationary bust, but the current trend may be returning to normal as the Fed lets markets operate.
It is believed that the Fed is now leaning too far in the opposite direction, but this stance is expected to change soon.
Interest rates are anticipated to decrease across the entire yield curve when the Fed’s approach shifts.
5.4. Assessing Bond Market Risk and Economic Uncertainties
The bond market risk metric, measured by high yields relative to 10-year Treasury yields, showed a significant jump of five basis points in one day, signaling increased concern.
Previously, this risk metric indicated market calmness, but similar patterns before 2007 led to missed warning signals.
Chinese and Mexican tariffs remain a source of uncertainty affecting future economic stability.
Federal Reserve actions, especially if motivated by preserving independence amid controlled inflation and housing relapse, could contribute to market risks.
Delaying necessary Fed policy adjustments, as seen post-COVID, could cause similar problems for the economy.
5.5. Bitcoin, Market Sentiment, and Outlook Amid Economic Uncertainty
Bitcoin to gold ratio is maintaining its uptrend, reflecting stronger performance for Bitcoin relative to gold.
A clear signal that the U.S. is not entering a long-term recession, coupled with Fed easing and productivity-driven economic growth, is expected to further support risk-on trades like Bitcoin.
There is significant market fear, but such periods are seen as necessary corrections to curb excessive speculation.
The current market is interpreted as "climbing a wall of worry," indicating resilience despite ongoing concerns.
The outlook remains positive for the next month, pending developments in economic policy and market conditions.