On the August Jobs Report, and the June Contraction

A big miss in payrolls, but at variance with the "household survey" and every other labor market indicator. The critical element is the revision of June payrolls to a contraction of 13,000, the first since the recovery from the pandemic. We have said that a payroll contraction is, historically, the best indicator of the end of an expansion and the onset of recession. This time it may not be. Mass self-deportation of almost 2 million recent immigrants has led to job losses not driven by the inability of the economy to employ. Rather than evidence of labor market slack, the hallmark of recession, we are seeing evidence of labor market tightness. At least a 25 bp cut at the September FOMC is assured now, no matter how hot CPI prints next week. Three cuts are now expected in markets by year-end, and a funds rate below 3% by early 2027. If this impounds recession expectations, it is wrong. Perhaps it impounds expectations that Trump-aligned officials will sway the Fed to lower rates whether or not they are objectively needed.