The Real Story Behind the Disappointing Jobs Report

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Payrolls crash to 57,000… why markets cheered anyway… the trend Warsh actually needs to see…

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Have a good evening,

Jeff Remsburg

As I write on Thursday morning, the Labor Department just reported 57,000 jobs added in June – badly missing the 115,000 consensus and a sharp step down from May’s downwardly revised 129,000.

The unemployment rate did tick down to 4.2%. But that’s not really good news…

The drop came almost entirely from a falling labor-force participation rate, which slid to 61.5%, its lowest level since March 2021. So, we can translate this number as “fewer people looking for work” rather than “more people finding it.”

Now, plenty of talking heads are already taking a familiar posture – the soft jobs report takes pressure off the Fed, rate hikes get kicked further down the road, onward and upward for the market.

But there’s a wrinkle…

The man running the Fed has already told you, in his own words, that he’s not grading today’s number the way Wall Street is.

So, how is he grading it?

Yesterday, Federal Reserve Chairman Kevin Warsh gave us a preview of how he’s thinking

Speaking Wednesday at the ECB’s forum on central banking in Sintra, Portugal, Warsh once again declined to signal anything about this month’s meeting. But he didn’t stay quiet on inflation.

Here’s Warsh:

We’re all in the price stability business… but if there was a common thing I heard over the last couple of days, it was open-mindedness on these questions of AI, open-mindedness on productivity, but we’ve all looked around, and we’ve seen that prices are too high.

Translation: whatever AI is doing to boost productivity isn’t fixing the inflation problem yet.

That’s the lens Warsh brought into this morning’s number – not “did payrolls beat consensus?” but “does anything here change my inflation math?”

It’s unlikely the answer is “yes.”

One more detail from yesterday is worth noting, given this morning’s data…

In that same Sintra appearance, Warsh described the labor market as “steady.” Twenty-four hours later, payrolls missed by more than half, and a chunk of the workforce simply stopped looking for jobs altogether.

That’s either an inconvenient coincidence or an early sign of the exact disconnect we’re about to walk through…

You see, yesterday, Warsh also gave us a glimpse of where he wants the Fed’s whole approach to data to go – and when:

My hope, my aspiration, is that nine-12 months from now we’re going to be using new technologies to understand what’s happening in the real economy in a contemporaneous real time way.

That’s not a Fed chair who trusts the data he’s handed by default. It’s a Fed chair actively building his own alternative to it.

We flagged this shift three weeks ago

Regular Digest readers will remember our June 16 issue, where we laid out the case that Warsh is dismantling forward guidance itself – the dot plot, the press-conference roadmapping, the whole architecture Bernanke built and Powell expanded.

At his Senate confirmation hearing, Warsh to this plainly:

Unlike many of my colleagues, past and present, I don’t believe in forward guidance.

I don’t believe that I should be previewing for you what a future decision might be.

Our takeaway was that if the Fed stops telling you where it’s going, the incoming data becomes the new dot plot. Every economic report gets bigger. Every release becomes a larger event that can rattle markets.

Today’s jobs report was the first real-world test of that thesis. So, we should still be careful not to rush to interpret it.

Warsh already told us what’s wrong with this morning’s number – just not what should replace it

In our June 25 Digest, we showed you that Warsh doesn’t lean primarily on headline PCE – he’s called the Fed’s conventional inflation gauge little more than a “rough swag.”

Instead, he watches the Dallas Fed’s trimmed mean PCE, a measure that lops off the pricing outliers on either side to focus on what’s happening in the middle.

Warsh hasn’t given us a parallel substitute he prefers to the jobs report. But at his very first FOMC press conference as chair, on June 17, he made clear he has the same discomfort with it.

A reporter pressed him on how much weight he puts on the initial payroll print. Here’s Warsh:

What we’re less interested in is echoes of history.

Some of the data that we receive – that we’re waiting on the first Friday after the month of payroll index or something else – that might be an echo of history that’s quite useful on its third revision.

We need to take those error bounds down because we have to make hard decisions in real time.

Translating that out of Fed-speak, Warsh is saying the number that hits your screen the moment it’s released isn’t the real number. It’s a rough first draft that gets rewritten twice more over the following two months – and Warsh is telling you, directly, that he doesn’t fully trust the first draft.

Today’s data proved his point…

May’s already-strong 172,000 print got cut by another 43,000, down to 129,000. And April came down another 31,000, to 148,000.

That’s two more months of the “echo of history” Warsh is describing, rewriting itself in real time.

So, what’s a better way to read this morning’s data?

Warsh hasn’t told us what replaces the headline print. His task forces on data quality are still being staffed – he said as much yesterday at Sintra, promising more detail “next week.”

So, until the Fed builds something better, investors are left to build their own workaround.

Here’s ours: rather than reacting to any single month’s headline number, watch the three-month average payroll gain, calculated using the most recently revised figures rather than each month’s initial estimate.

To be clear, this isn’t Warsh’s framework. But it’s offered in the spirit of the problem he’s flagged.

So, what does this morning’s number look like after smoothing?

Averaging the three most recently revised prints – April’s 148,000, May’s 129,000, and June’s initial 57,000 – puts the trailing three-month pace at roughly 111,000 jobs a month.

To keep pace with population growth and keep the unemployment rate steady, the U.S. economy historically needs to add roughly 150,000 jobs per month.

So, this average is somewhat weak.

Plus, it represents a real cooling trend – and a confirmed one, since all three months just got revised in the same direction: down.

So, even though our three-month framework doesn’t let us treat today’s softer headline print, on its own, as significant enough to move Fed policy, three consecutive downward revisions point toward a real signal.

Is that enough for Warsh to ease up on his hawkishness?

A critical detail to keep in mind

Every new Fed chair gets the same treatment from the media…

Cameras find one face, and that face’s mood becomes shorthand for the whole institution’s mood.

It happened with Bernanke. It happened with Powell. It’s happening now with Warsh.

But Warsh doesn’t run the Fed the way the coverage sometimes implies. He’s chairman, but on the FOMC, his vote counts the same as everyone else’s.

And right now, that committee is deeply split – even if the vote itself doesn’t show it. At Warsh’s first meeting on June 17, the Fed held rates unanimously. But look past the vote to the dot plot underneath it, and the picture changes…

Nine of his 18 colleagues penciled in higher rates before year-end, six of those wanting two separate hikes, while eight favored holding steady and just one wanted a cut.

Warsh himself declined to submit a projection at all.

A unanimous vote with that kind of split sitting underneath it isn’t a consensus. It’s a committee that agreed to disagree quietly for one more meeting.

So, everything we’ve walked through so far – the “echo of history” comment, the discomfort with headline noise, the instinct to look past a single month’s print – tells you how Warsh is likely reading this jobs report. It doesn’t tell you how the rest of the committee reads it, divided as it is.

What this means for how you trade between now and the fall

We got a confirmation of our June 16 thesis this morning – just not a clean, one-directional one.

The initial reaction to the jobs print was textbook…

Futures ripped higher within minutes, yields fell, and traders recalculated their rate hikes expectations. But that snap judgment didn’t hold…

As I write around lunchtime, the early gains have disappeared – though the Dow is still up, the S&P has gone negative, and the Nasdaq is off almost 1%.

This is a market split on how to read a soft-but-revision-heavy print: does cooling labor demand ease the pressure that’s been keeping the Fed hawkish, or is it an early sign the economy itself is cracking?

And without a Warsh press conference to smooth that disagreement into a tidy consensus, this is what price discovery looks like instead – fast, messy, and uncertain.

But the bigger picture hasn’t changed…

Warsh isn’t going to move on one number – he needs a sustained trend. And even if he gets one, he’ll still need to bring along a committee that doesn’t fully agree with him.

Until both of those things happen, expect exactly what we’ve been suggesting is today’s new normal: bigger reactions to smaller pieces of data – and, apparently, uncertain reactions to those reactions.

It’s the logical consequence of a Fed that’s more divided, and less communicative, than it’s been in years.

We’ll keep tracking this as the story develops.

Have a good evening,

Jeff Remsburg