Steven Blitz is not convinced that the Federal Reserve will do a 25bps rate cut in September. Why? Because he says the weak July jobs report, alongside weaker retail spending data and abysmal sentiment, and weak growth numbers could lead the Fed to opt for a 50 bps rate cut just as it did in September of 2024. In other words, it’s not about IF the Fed cuts its key rate its next meeting, it’s about how worried policy makers will be about a possible recession if they don’t respond aggressively enough and how big the rate reduction will be.
As managing director of Global Macro and Strategy at GlobalData TS Lombard, Steve does not offer this forecast lightly. He seees the triangulation of jobs, spending and growth data as the kind of pattern that in the past has sent strong signals of an economy losing ground fast.
And he offers a major caveat. If the next jobs report, out in September, shows (1) a big upward revision to the July numbers, and (2) a healthy increase in the August payrolls this could alleviate Fed concerns.
Right now Steve sees an economy that is contracting or close to it. Given that the recent uptick in jobless claims has unwound, he acknowleges that this could suggest a hiring pickup ahead, but doubts that this will develop, as the tariff clouds continue to hang over businesses.
Jobs report finally matched job anecdotes - 00:01:25.180
Well, I think what's most important in this report is that we finally have a series of job numbers that seem to match up with what we've been hearing and reading anecdotally about firms in the economy, which is, namely, that firms are kind of stuck here. And so the, you know, job growth is not strong. It's basically let's just say it's flatlining. Okay, just because it's about negative or zero if you take out the health and education…
Tariffs have frozen up firms plans and actions 00:02:08.350
Steven Blitz: all we've been hearing about is that the tariffs have put firms in sort of a freeze mode; a freeze moment in terms of not knowing what to do next. And I think this data finally confirms that. And so that's where we are. It's hard to sit here and say it's a recession. but it can be. So, we can get to the point if you want about the you know, Waller and Bowman's dissent.
Weakness or… recession coming? 00:02:44.720
Yeah, cause, you know, if you look at the slowdown in spending in final sales of domestic purchases, purchasers. It's been decelerating since the 3rd quarter of last year. You can't just blame tariffs for that. So it's decelerated a lot. And employment now, finally looks like it's decelerating in response or in tandem with a lag. Employment lags real growth, right? So you know, employment. It's a lagging indicator, but it's coincident with the start of a recession. Right? So, it's lagging and inflation lags grow. So the slowdown that we're seeing in in the growth now is going to get reflected in the inflation numbers. Later it may be 6 months later, maybe a little bit longer than that.
Big payroll revisions due to low jobs survey responses not to BLS commisioner 00:04:50.
The data have a lot of faults, right? We know that. And it's not because of political motivation, although we know that the BLS Commission has just been fired. It's basically because the response rates <to BLS surveys> are so low. And then over time the response rates fill in. But that means you're going to get larger revisions right? So it would be better if we could see Congress instead of cut funding and personnel, not just in BLS, but generally with in the areas that collect economic statistics invest in it. If they invest in it, they're more likely to get better numbers and maybe go after numbers differently the way they do. And anyway, that's my commercial message on that point.
June jobs data show what recent sales data have been showing
To me, the employment data sync up with what the other data have been saying right, namely, final sales of real final sales, domestic purchases. Now, if I look at it that way, and I understand in the you know. I always say you know people I don't know about you. When I look at stars in the sky at night I just see stars. I see 2 dimensional space right just far away, and it's across. But if you're an astronomer. right? And that's or a physicist astrophysicist, you see it in 3-dimensional space. You see old stars, new stars.
Here and now analysis says do not cut right now- 00:08:24.230
And economic data. The way it's reported. It is reported flat. It's reported in 2 dimensional space. But in reality, it's 3-dimensional.And, so to say, Oh, inflation's up! Employment's down. Growth is doing this. Each one is a reflection, and an echo of the other. Growth leads right, real growth leads. employment follows, and inflation follows that right as a general rule. And so we've seen a slowdown in spending… domestic spending. It's been ongoing in a lot of different ways. And now the employment data are beginning to reflect that. So if I'm the Fed. and I'm looking at rates of four-and-a-quarter, four-and-half percent, if I'm looking at it from a strict Taylor rule perspective that's telling me, Do not cut. Right? And I get that, because if you just plug in the numbers, and I plug in a hundred-twenty basis points as my R star, which is the Laubach-Williams number I plug in 4.4% for my neighborhood unemployment rate, because that's the CBO's number. So I'm not making these up. I'm not gaming the formula to my advantage. And I put 2% in as the <inflation> target. Guess what? I <get a low fed funds rate>. … And I think this is the point that Waller made.
But Waller’s dissent looks ahead 00:14:54.
So I think the thing is, if you look at Waller and his dissent and you read through it what they're telling you, if let's just look past the politics of it. And I know that's hard to do, because we know that Waller is one of the people being considered to become the chair of the Fed. and replace, to replace <Powell>. Okay. So if Michelle Bowman and Chris Waller are both very competent people. Waller is a very accomplished economist. He was head of research at the St. Louis fed. They were both appointed to the board by Trump in his 1st term. and we know that, Waller, it's very clear, well known that Waller is in the running to replace Powell as Chair of the Fed. And you know we all know Trump, but we all know the way it works, and everyone wants to curry favor with him to show that you know he would be their guy in that position. But let's just put that aside.
Looking ahead there seems to be a greater risk of recession 00:16:47.300
And so, anyway what <Waller’s> saying is, look, if you look at the direction of growth, right? , I understand that if you look at employment and inflation, you should be where you are <on the current level of the fed funds rate.> But if you look at the deterioration of growth and the deterioration in the demand for labor, you have to assume here that if you don't lower rates or take a little bit of an insurance policy against it. you're going to end up with a recession. And since we want to prevent that…
Time to cut rates is NOW- 00:17:23.730
…you're better off cutting now, because if you wait for the unemployment rate to start to rise and rising really means above 4 and a half percent. or payrolls start to contract in a meaningful way, and they really are in the sense that they're below neutral already. Now, then. you really are basically going to be too late. Right? Which is Trump's moniker for Powell, right?, “too late Powell.” So, he's going to be too late. The recession will be here.
Lower employment may evolve as firms protect profit margins from tariff impact 00:19:07.420
If we look at how the US. trade deficit is created it is for the most part, the really vast majority of it is created by us firms sourcing low cost production, low cost goods, low cost labor around the world bringing it in (to the U.S.) in whole or in bits, right? So, like in whole, like a Nike sneaker, or in bits like an oil company that then assembles here in the US. and then sells the product in the U.S. and earns this wide margin which their equity price reflects.
Okay now, what Powell seems to…in the last couple of press conferences, he seems to have internalized is this: how much of this price ends up in the hands of the importers? The price to final price to consumers depends on the margin impact, depends on how much of a margin impact the firm wants to accept. But getting to this issue about slow growth, the slower the growth, the slower the demand, the more these firms are going to have to eat the margin…eat the tariff and what that might mean is that they pay for the margin by shrinking payrolls.
This is not a Covid supply shock…it’s a tax 00:21:21.650
I mean with Covid, what you had was a, you had a classic supply shock. And the mistake that people economists are making is saying that this is a supply shock. It's not a supply shock. It's a tax. It's a tax on businesses. What Powell, getting back to this whole Powell Waller kind of debate is that I think that what Waller is saying is that if demand is weak and the economy is slow, these tariffs and he won't say this. Obviously, for obvious reasons, these tariffs are actually going to slow the economy because firms, in order to imagine their margin. If they can't pass forward the price they're going to reduce their payroll and so reducing their payroll, could simply be to the point that you're making, I'd stop hiring.
Triangulation gives reinforcing slowdown signals 00:30:34.110
I don't think <the job report> a game changer only in the sense that it confirms the employment <signal>. Numbers are finally confirming, and therefore … the downward revisions to May and June critically. Part of this game is changing. So it's not just one month. It confirms exactly what we've been seeing in the slowdown of the consumer sector and the slowdown of the economy. If you look at the PCE, the personal income monthly data, you see a slowdown, a big, sharp, slowdown in growth of total wages in the month of June. Compared to May, and I know it's a month-to-month. There's a lot of <weakness. But all of a sudden, you know, my favorite word with economic data is triangulation right? You never like to hang your hat on one number. But if you start to see 3 numbers from different sources, and that are basically telling you the same story….And so the game changing aspect of today's employment number is the triangulation. It sinks in. It locks in the story we've been seeing. And now you see a lot of different things. It matches up with a lot of sentiment numbers you're seeing. And so now, all of a sudden you're looking at things and say, you know now.
Fed needs to cut rates 00:36:59.290
So I want to be real clear. But I think when you look last year, when you looked at where inflation was, and you looked at where the funds rate was…. remember, it was over 5%. I said at the time that the Fed was going to cut 100 basis points before the end of the year. Right? And they did it as 50bp, 25bp, 25bp. And now you're at another point in time, where, it's not 100 basis points over. But <the Fed funds rate is> clearly 25basis points - maybe 50 basis points - too high. Given the direction of growth.
Steven Blitz
Managing Director, Global Macro and Strategy
Steven joined the company in 2017. His professional experience as economist and portfolio manager began in the late 1970s.
It includes econometric modelling at Data Resources Inc., creating interest rate and FX derivatives strategies at Salomon Brothers, managing US and global fixed-income portfolios at OFFITBANK, being global head of fixed-income at Lazard Asset Management and, more recently, as Chief Economist at M Science he developed “big data” to underpin his analysis of the economy, central bank policies, and capital market pricing.
Aside from his extensive client-facing work, Steven is a well-known commentator on economic and financial issues, is frequently quoted in the financial press, appearing on TV and radio, and writing guest columns for financial publications.
