Ep 237: U3 vs U6 - What's Going On?
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[00:00:00] Welcome back to the what's more podcast. I'm your host, Quinton Harris. You're dialed in for episode two, three, seven. [00:00:05] In this episode, we're going to take a look behind the scenes of the Federal Reserve, what they're looking at as far as rate [00:00:10] cuts and decision making process, because it's job weeks and everything comes down to labor [00:00:15] over inflation.
[00:00:16] All of that and more in the next episode of What's Your One More. [00:00:20] Yeah, so labor over inflation, that seems to [00:00:25] be the theme of the Federal Reserve's new mantra. At least for the last four meetings, that's what we've heard. [00:00:30] And we can all agree that jobs, they lead to household income. And household income [00:00:35] determines how much your spend rate is on. housing, but also things such as luxury [00:00:40] items.
[00:00:40] And what makes this economy go around is consumption. We always talked about it's not necessarily [00:00:45] production because I mean, you can produce as much as you want, but we've got to be able to consume it. So [00:00:50] job weeks is really important because we need more people working in the economy to stimulate the [00:00:55] economy.
[00:00:55] More importantly, we need full time jobs. I think we would all agree full time and higher paying jobs [00:01:00] are better than part time jobs or maybe entry level positions. And that's something that we really wanted to [00:01:05] focus on the job weeks here because that's really important as we go into details of what we got [00:01:10] over the last two weeks.
[00:01:10] So last week we got two job reports one comes from adp which represents the [00:01:15] private sector and you might be familiar with them They're a payroll company One of the largest and the next one [00:01:20] comes from the bls Which is more of the government sector that talks about non foreign private payroll.
[00:01:24] And [00:01:25] so inside of that what we get is Usually more government job readings on the [00:01:30] BLS side because they're included in that versus on the ADP side and inside that BLS report [00:01:35] We also get the unemployment rate Which is carrying the most weight for the Federal Reserve in my opinion because [00:01:40] that is the number they keep talking about When they go to the podium as far as what they're watching and [00:01:45] if you recall at the last meeting We focused a lot of our podcast on that commentary from Powell [00:01:50] about the unemployment rate And we're gonna talk a little bit about that in here, but on the ADP side of things right the [00:01:55] private sector So we talked about we want full time jobs, right?
[00:01:57] Full time jobs are important, higher paying jobs are [00:02:00] important. And I think you could absolutely draw a conclusion that private jobs are going to pay more than government jobs. You [00:02:05] could argue that government jobs are based primarily, if you were to take a percentage, on lower paying, entry level [00:02:10] jobs.
[00:02:10] That's typically how the government jobs work. Whereas ADP on that private sector is going to give you [00:02:15] higher paying jobs than that. So that's why there's so much focus on that when we talk about job creation. And so in this [00:02:20] private sector for ADP, there was an expected reading from the markets to be at 140, 000 new [00:02:25] jobs created, which is important, right?
[00:02:27] Instead, it came in at 77, 000, well below [00:02:30] expectations. And we've talked about this ideology of What's not good for the [00:02:35] economy typically is really good for mortgage rates. By no means, if you're in the mortgage business, are you [00:02:40] rooting on for terrible news, but you understand with bad news comes opportunity on the mortgage [00:02:45] side, especially in terms of interest rates coming in lower.
[00:02:47] So that's kind of one of the caveats of that. So [00:02:50] when it comes in less, it could create an opportunity, which is what we're seeing right now. But then right on [00:02:55] the heels of that report comes the BLS report. Now we've talked about the struggle with the BLS report and [00:03:00] boy has there been struggles with it from the standpoint that we just there was almost like erroneous reporting [00:03:05] and it's what we would call overstating the report and then they would come back and revise it they being [00:03:10] the BLS they would give you a report number and then the next month they would come back behind that and they would go ah we made a [00:03:15] couple mistakes and revise it and if you recall I've used the analogy multiple times it's kind of like [00:03:20] taking a test and getting an A on it going home and telling your parents you got an A on the test [00:03:25] and then the next month Your grade gets revised down to a C or even worse, a D, [00:03:30] an extreme case, right?
[00:03:31] Cause we've seen errors like that in the BLS reports where they're so extreme, you could use that analogy [00:03:35] from A to D, for a test grade. And then you're trying to backpedal and go, but wait a minute, I had [00:03:40] an A and I celebrated the A and now I got this D a month later. And [00:03:45] it's not a, it's not a fair report is what I'm getting at.
[00:03:48] And that's how extreme the [00:03:50] BLS report has been throughout the course really of the last, you could argue, 24 [00:03:55] months. And you know, some might say, Oh, it's an administrative thing as far as like the [00:04:00] administrations.I would say that it's just inaccurate reporting. And we'll go through that and see if that's [00:04:05] the case on this one, because this is the first report we get under the current new administration.
[00:04:09] So it [00:04:10] was forecasted to be at 160, 000 jobs created. It came in at 151, 000, again, slightly [00:04:15] below market expectation, but you could argue that was flat. nothing from the standpoint of like, Oh, they really missed [00:04:20] it. Like the ADP report. Like we always say, let's just do a quick dive in these numbers. And thanks to our friends over NBS [00:04:25] highway, you're going to see this graph that we're going to put in the YouTube channel.
[00:04:27] And if you're not watching us on YouTube, go over there and [00:04:30] check it out at what's your one more with the number one, subscribe to that for us. hit the light button on there, leave us some [00:04:35] comments, but man, our producers a good job of getting these charts in there for you guys. So you can really.
[00:04:38] see exactly what we're talking [00:04:40] about on here. But when you look at the BLS report and the readings that come in there, when they talk about the [00:04:45] jobs created, right, 151, 000 jobs are what the creation was. And that's under a seasonal [00:04:50] adjustment, right? There's always a seasonal adjustment to that. But then there's this portion, this component of those [00:04:55] jobs that are created under the assumption of the birth death rate model.
[00:04:58] And we've talked at length about that on here. [00:05:00] And, it's funny when people see that they're like, Oh, birth and then death of people, and that's not what it is. The birth death [00:05:05] rate model is a business birth rate, small business birth death rate model, meaning that [00:05:10] for every new small business created, there's an assumption that small business is going to create [00:05:15] X amount of jobs.
[00:05:16] And as those tax numbers close out and those businesses close out, Quote unquote [00:05:20] die off that X amount of jobs would be taken off the table. So there's this birth [00:05:25] death rate model And so the component of that's kind of inaccurate if you may is that [00:05:30] you know at this podcast It's a private business.
[00:05:32] So you have myself and then you have my producer [00:05:35] Charlie under this birth death rate model We have a tax ID number for this the government is [00:05:40] going to assume that we're gonna create Let's say five to ten jobs under this. Well, we have two So there's a [00:05:45] negative eight right there in that assumption that's off.
[00:05:47] So you can kind of see how this model, while being used for a [00:05:50] long time, isn't necessarily accurate. And the reason I say that is in this chart, if you look at it, the birth death rate [00:05:55] model, again, did not make up all of the 151, 000 seasonally adjusted jobs, but it was a large, [00:06:00] it's a portion of that, right?
[00:06:01] Well, ADP runs a similar small business [00:06:05] kind of job creation, if you may, and they said that was negative 12, 000, not [00:06:10] positive 136. So I like to think that there's going to be, you know, some, readjustments of [00:06:15] this coming out into next month and that you might see that offset because there's a big difference between [00:06:20] 136 and negative 12 when you look at those two on there.
[00:06:22] And I think that's important. And so I think it [00:06:25] would, I think it would have been much weaker if you didn't have it there. Meaning, I think this report would have come in a lot less than 151, [00:06:30] 000. And I think it would have led to a weaker result than what we got with this birth rate, birth [00:06:35] death rate model in there.
[00:06:36] The other thing to take a look on here is we talked about private paying jobs [00:06:40] versus government paying jobs. And we talk about earnings, household spending. Now, if you recall a couple episodes [00:06:45] ago, we talked about the retail sales earnings and the retail sales themselves. We're down and it was [00:06:50] almost like is the consumer tapped out or is the consumer just to the point where they can't spend anymore because [00:06:55] interest rates on credit cards are so high and is there more debt financing going on and is that why [00:07:00] the consumer is pulling back and traditionally speaking, you see a pullback after the holidays, but that was one of the lowest ones [00:07:05] we've seen and I think we argued almost 20 years on there.
[00:07:07] So one of the things we take a look at is in this report, we get average weekly [00:07:10] earnings. Now this is important because this speaks to affordability. Like, what can the consumer [00:07:15] afford house wise living? Et cetera, just to live, right? And I think one of the [00:07:20] things that we looked on there was that we look at take home pay, right?
[00:07:22] And when we look at take home pay, we look at like [00:07:25] average hourly earnings and hours work. And that's important because if the earnings are going up and the hours being worked are [00:07:30] going up, then you could argue that more money is coming into the economy and there's going to be a [00:07:35] better position for the consumer.
[00:07:36] Unfortunately, in this case, It was one of the lowest levels in [00:07:40] 15 years that we've seen. Again, speaking to the economy itself. And the reason I want to point that out is because [00:07:45] if the Federal Reserve fills, the economy is growing weak. And if the Federal Reserve fills the job market's [00:07:50] getting weak, one of their main functionalities is to protect that.
[00:07:53] And so how would they do that? Well, then you [00:07:55] stimulate the economy. And how do you stimulate the economy? You lower the fed funds, right? We've talked about that over and [00:08:00] over again, and we'll also go back to our annual forecast that we did at the beginning of the year. I said, by the [00:08:05] end of Q2, we would see something with a five handle on it.
[00:08:07] Maybe even like a 5875, maybe a [00:08:10] 599, but it would be there. And the reason it would be there was under the assumption of the weakening labor market. We're [00:08:15] continuing to see signs of that show up. And one of the things that shows up in this report are the two [00:08:20] surveys you get. One's a household survey and one's a business survey.
[00:08:23] And inside of that, the business [00:08:25] survey is where the headline number comes from, and the household's where the unemployment number comes from. And that unemployment [00:08:30] rate number is important because that's what we're going to harp on a little bit here that I think is the, it's the [00:08:35] warning sign, right?
[00:08:35] I think it's the catalyst that's going to kind of propel the federal reserve to say, [00:08:40] okay, we were thinking about a cut in, January, maybe even in March is [00:08:45] definitely coming in May. And I think that you may even get it in March. We've got a couple of inflationary readings [00:08:50] coming out this week that may lead to that, but here's where I'm going with this.
[00:08:53] In that household survey, if [00:08:55] you take a look, again, I'm going to have another graph inside of here out of this report, thanks to our friends over at MBS Highway, just do a [00:09:00] great job of putting this stuff out there so there's no reason to recreate it, let's just give it to you since, you know, Dan and Barry have done such a good [00:09:05] job over there.
[00:09:05] and by the way, if you're not subscribed to their services or you're not a part of their program, you should, [00:09:10] if you're in the mortgage business or real estate business, go over to MBS Highway. Get involved in that. It's super [00:09:15] cheap and affordable. And the amount of content and information you get from Barry and Dan every day, it's pretty priceless.
[00:09:19] [00:09:20] always enjoy, get a chance to hear them out and have their information on our show as well. But one of the things I [00:09:25] look at in this household survey is that there was 588, 000 job losses, right? So household survey, [00:09:30] phone rings, did you lose your job? Yes. Okay. So that's how they got to this, right? Hey, Nope.
[00:09:33] I lost my job. I'm [00:09:35] unemployed. whether it was part time full time, it's lost and I don't have one anymore. That's a household survey, right? Hey, did [00:09:40] you get a new job? Yes. Got a new job. So you can kind of see how that survey dissipates there and they draw the conclusion. [00:09:45] So the amount of a household survey.
[00:09:46] So they were jobless was 588, but of that [00:09:50] 588, 385, 000 people say, Hey, we just have left the labor force. We're gainfully [00:09:55] unemployed at this point. Now I don't know how that works, but they've left the labor force. That's a pretty big number. [00:10:00] to say that has left the labor force from this household survey.
[00:10:02] Maybe the question wasn't asked correctly. Maybe it [00:10:05] was mismarked on the form. But to think that 385, 000 people just up and left the labor force, DOGE [00:10:10] didn't do that, right? So 385, 000 is a large number. So the question becomes, is that [00:10:15] part time number? Is that full time? What does that look like? But because there were so many more job [00:10:20] losses and there's such a large decrease in the labor force, the unemployment rate only rose from [00:10:25] 4 to 4.
[00:10:25] 1. So you could have argued things. Really look worse than what they [00:10:30] are, meaning that if it would have been worse if there wasn't such a mass exodus from the labor force, if it wasn't that [00:10:35] 385, 000 people leaving the labor force, your participation rate would have been higher, which means the [00:10:40] unemployment rate would have been higher, which means you could very well draw a conclusion.
[00:10:43] Had that been a normal amount [00:10:45] of exodus, just consistent over the last 90 to 120 days, just feeling that same line, [00:10:50] that trend line, this number would have been 4. 4 unemployment, not 4. 1. And I think [00:10:55] that's going to show up. In the Federal Reserve thought process, because there's two types of readings [00:11:00] here.
[00:11:00] And if you look at the headline of the show, U3 versus U6, what's going on? Well, the [00:11:05] reality is the U3 is a newer unemployment level that we look at. We [00:11:10] haven't always looked at that. The traditional one is U6. And U6 encumbers everything I just said. [00:11:15] Plus people that are not, they're not working, they're not on, gaining unemployment [00:11:20] benefits and also people that have left the labor force.
[00:11:22] Right. And, what's interesting about that number, [00:11:25] the U six, which encumbers everything it's at the highest level we've been at since October of [00:11:30] 2021, it went from seven and a half to 8%, 8 percent total [00:11:35] unemployment. Now, like I said, the government likes to use you three, and that's been the case for quite some time, probably [00:11:40] over the course of the last 20 plus years.
[00:11:42] But we used to use this U6 as the trend [00:11:45] number, and that would be at 8%. And again, that does include some of the things that [00:11:50] I talked about should be changed in the U3. That's already included in this number. That is a big difference, [00:11:55] because the other thing inside of this that's clearly weak to me is that [00:12:00] even when we look at the breakdown of the types of jobs that were gained versus lost, we lost [00:12:05] 1.
[00:12:05] 2 million full time jobs. Last month, 1. 2 million full time [00:12:10] jobs. That's a big deal. And we saw, the rise, the major rise in job [00:12:15] creation were part time jobs. Well, we've talked about that. I mean, like, so you could argue that, [00:12:20] hey, if I'm working full time, I might have a part time, but that doesn't mean like, that doesn't [00:12:25] mean.
[00:12:25] It's getting better out there. I mean, it's actually getting worse because I have to support my life [00:12:30] with a full time and a part time job, not just a full time job. And so when you see things like [00:12:35] that, that speaks to weakening of the labor force. I have a lot of people that I talk to that go, Hey, [00:12:40] listen, I don't know what the news is talking about, but like there are people hurting out there and you know, if you're [00:12:45] dealing with consumers on a daily basis, you see it in some of just the, the, the habits and [00:12:50] you also see it in just talking with people, just being dishumanizing.
[00:12:52] and being humane and talking to people that the struggles that they're [00:12:55] going through are real. And it does feel a lot like that 2007, eight, nine, [00:13:00] 10 credit crunch as far as non housing, as far as credit cards and the credit market, [00:13:05] you know, because additionally all the gains that came from those 610 and [00:13:10] even some of the,the other non part time jobs were between the ages of 16 and 19 years old.[00:13:15]
[00:13:15] Like, we can argue easily, those are not high paying jobs, those are entry level positions, [00:13:20] and the people that were 20 years old or more, those jobs fell [00:13:25] 667, 000. So we had an 80, 000 gain from 16 to 19 [00:13:30] years old, but then we had a loss of 600, of that 1. 2 million loss, 667, [00:13:35] 000 were people that were 20 years and older.
[00:13:37] Like, that speaks to a weakening [00:13:40] economy. If I can see that, if I can dive into the numbers and find that for a podcast, [00:13:45] you can darn well bet the Federal Reserve does. So they know these things. Like, I'm not bringing anything that's [00:13:50] groundbreaking or earth shattering to the table here. I'm just reading the reports and getting rid of the headlines and diving into the [00:13:55] details here.
[00:13:56] So, when you look at this number, And you, including the administration, the Fed, [00:14:00] the report basically apprised so much more pressure to the Federal Reserve because the [00:14:05] administration is saying, Hey, listen, we'll take care of the 10 year. We're going to work on that. But the Federal Reserve, you've got to [00:14:10] focus on the economy and the employment market.
[00:14:12] And that's why I think, hey, going back to that December Fed [00:14:15] meeting when Jerome Powell came to the podium and he said, Hey, listen, Two cuts that's what here's our dot plot map two cuts [00:14:20] and if you recall we even have an episode titled that's a head fake That's a head fake because the [00:14:25] past administration was closing out the new one hadn't come in yet And I said I can guarantee you there will be [00:14:30] four now Obviously my guarantee is different than a guarantee from the federal reserve But why I thought there would be [00:14:35] four is because that was a head fake.
[00:14:36] Employment was trending down. There was clear signs. There was cracks in the [00:14:40] economy. And now we have not just cracks. There are gaping holes in the [00:14:45] actual labor market that are starting to show up. And I've talked about unemployment being a runaway train. I think that's [00:14:50] important. And if you just look at the consumer's mindset, Fannie Mae just released on Friday, the consumer [00:14:55] sentiment.
[00:14:55] And there's some interesting takeaways from that. One being is that the consumer is adamantly [00:15:00] frustrated with pessimism about mortgage rates falling, right? They're just frustrated with [00:15:05] it. If it's going to happen, when? Why hasn't it happened yet? And 69 percent of the consumers [00:15:10] expect mortgage rates to go up or stay the same in the next 12 months.
[00:15:12] That's how frustrated they are. Which is up from 65 [00:15:15] percent the month before. So 69%, roughly 70 percent of Americans believe interest rates are going to go back up. [00:15:20] I don't believe that's the case. And I'm going to talk a little bit about that in our next episode. But The shares of the [00:15:25] consumers who say it's a good time to buy a home, inched up to 24%.
[00:15:29] So consumers, [00:15:30] even though they think rates are going up, they still think it's a good time to buy a home. That speaks to settling [00:15:35] in. We've talked about what that means. The settling in, the psychology of the buyers settling in going, listen, [00:15:40] it's a good time to buy. Why? Because housing rates are. going up in appreciation.
[00:15:44] They're not coming down. [00:15:45] Mortgage rates, even though the consumer thinks they're going to go up, they still think it's a good time to buy a home, which I think is [00:15:50] really good because that speaks to all of, let's just call it as these bozos on YouTube that are still [00:15:55] preaching doom and gloom in the housing market.
[00:15:57] It's not going to crash. There's not enough inventory and still [00:16:00] too much demand. And even in suspected consumer psychology thinks rates are going to go up. They're [00:16:05] prepared to buy. They think it's a good time. And also, it was worth noting the decline in the consumer's optimism [00:16:10] towards their personal financial situation, including household income and concerns they could lose their [00:16:15] job.
[00:16:16] The consumer's also concerned they could lose their job, which also kind of [00:16:20] speaks to the job report we just got that, hey, they're concerned they're going to lose their job. It's because people [00:16:25] are losing their jobs around them, and more so at a rapid rate that we've seen before, which speaks to the [00:16:30] weakening economy.
[00:16:30] So, I agree about the job portion, is a real thing. I [00:16:35] believe that there is some serious issues in this, and I think that it is what the Federal Reserve is going to be looking at, [00:16:40] and if I'm a buyer and I'm a homeowner. Help is on the way because right [00:16:45] now you've got an administration focused on driving the 10 year treasury down and that's going to be our next [00:16:50] episode.
[00:16:50] But you've got a federal reserve that has to maintain labor over inflation and right [00:16:55] now that is starting to give warning signs that are bigger than just a crack. And so I think the cuts [00:17:00] are on the way. I think it's going to get to 50 50 for March and I absolutely think May is going to be your [00:17:05] first cut, if not your second cut of the year.
[00:17:06] And again, Four, four cuts are what's coming. We've got inflation week [00:17:10] next week. it won't be the fed's favorite form of inflation. It'll be CPI. and that'll come out next week, which is the consumer [00:17:15] price index, which affects you and I every day spending on the market. So we'll be watching out for that.
[00:17:18] And if that number [00:17:20] continues to go down, yeah, that could be a good sign for the fed that comes in at expectation. Still [00:17:25] a good sign if it's over. Well, that's something that could put a wrench in that cut for the month of [00:17:30] march So we'll be looking out for that. So again, thanks for tuning in If you like what you're hearing share this episode five star review it more [00:17:35] importantly go to our youtube channel subscribe Leave us some comments.
[00:17:37] Always appreciate the feedback. Always [00:17:40] appreciate the commentary guys. Thanks for tuning in We'll see the next episode at what you're one more.
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