Navigating Economic Uncertainty: The Impact of Recent Jobs Data on the Fed’s Strategy

Let's get to the big story breakdown.

The White House is moving to tighten control over the BLS after President Trump fired the commissioner following a weak jobs report, trusting US economic data is suddenly under the microscope this after sharp downward revisions to May and June payrolls.

Now the move did rattle Wall Street last week with banks fielding calls from clients who now worry whether they can rely on data to guide investments with the White House. more possible shakeups, some fear this could signal a turn in what's long been seen as nonpartisan economic reporting.

Well joining me live here at the New York Stock Exchange is James Knightley, senior international economist at ING.

Good morning, James.

Thank you so much for joining me.

Well, here we are, and in the aftermath of that jobs report, so of course those downward revisions to payrolls, not in the latest month, but the previous two.

Months did weigh on the market, but as an economist, how concerned are you about the credibility of data moving forward?

Well yeah, it's a hugely important story, you know, it's not just the BLS data that we're seeing these sorts of revisions though.

The problem, I think it's not, it's not partisan politics.

It's much more that there's been a change of behavior since the pandemic.

Before the pandemic used to get people responding to the data requests to compile this data.

Now people just seem to be much more reluctant to reply, and those that do reply reply later.

So we are subject to much more of this lower quality data that needs to be improved as more people send their late responses in to get a truer reflection of what's going on.

And the other issue is that of course one area to cut government spending that's relatively easy to cut is cut your statistics. and therefore you've got fewer people to chase people to actually respond to the data requests.

So yeah, politics is involved but not to the extent or to for the reasons that are being stated here.

But certainly if we have got question marks over the data, it makes economic forecasts even more challenging than it already was, and of course it makes the Fed's job that much harder too.

And you mentioned a key term there, and that is the Fed.

So we are awaiting the September Fed meeting, but before that we do get Jackson Hole, Wyoming because it is that time of year, and we'll be getting more data before the September meeting.

But if we look at Fed funds, we are looking at a rate cut of at least 25 basis points.

But what do you think the Fed is going to do and does one rate cut mean more to come?

Yeah, I think last week's jobs report really does change the narrative.

On Wednesday afternoon, Jerome Powell is telling us that the labor market is solid, the economy is solid.

That's been thrown out the window by this report.

I mean, the mediocre number for July in any case, then compounded by quarter of a million downward revision.

It tells you that the momentum has really been lost post Liberation Day tariff announcements, and as a result, there is a real justification for loosening policy to avert the risk of a recession.

So certainly we are now looking for a September rate cut, but if they go in September, they're then going to pause in October.

I would think it unlikely.

So we're now looking at 325 basis point rate cuts this year, we suspect.

And James, while I have you here, I do want to get your take on the GDP data that we also got out last week, and you mentioned the accuracy of data and the lack of people responding to these important data points.

So what do you think needs to happen?

Will more people rely on private sector data or what do you think will actually happen here?

No, I think that's right.

I think what we're looking at is rather than focusing on 23 or 4 big well known data, your GDP reports, your inflation data, your jobs numbers.

You're going to be looking at a broader range of surveys and trying to match them up.

Are they all telling the similar narrative we do have divergences and it's sort of consensus forecasting, if you like, using lots of different suppliers, I think is going to be the way that we do have to have to to move going forward.

And we saw that 3% headline GDP figure.

For growth here in the US, but what was actually happening underneath the surface here?

Yeah, I think we have to take the first quarter and the second quarter together.

Remember, the first quarter was a negative 0.5, then we got a 3 because that trade volatility, the surge in imports, really depressed that first quarter GDP number.

It really helped to as it unwound in the second quarter, it really inflated that GDP number.

So I think I take the two together.

Just take an average, which is around 1 just under 1.5%, which is a clear slowdown from what we've seen over the last few years.

But also more importantly, what are the domestic demand drivers?

The consumer is king in the United States.

It's 70% of all economic activity that grew just 1.4%.

That is not a robust economic story, and again, it argues for the Fed perhaps to come in a little bit earlier, offer a bit more support to the economy to keep the motor going.

And you mentioned the American consumers.

So for viewers out there who are watching and getting mixed messages when it comes to corporate guidance as well as earnings report, and they're wondering ahead of back to school season what's actually coming down the pike.

What would you say to them when it comes to prices?

Yeah, I mean in terms of Inflation, we know that tariffs are going to be lifting prices, but we think it is going to be a one-off step change.

We're in a very different environment to 2021, 2022 when inflation rocketed up to 9%, and that's because if you remember back then we also had a tripling of the oil price.

Today oil prices are just flatlining.

Back then we also had house prices rising 50%.

Today house prices are actually falling, rents are slowing.

And then thirdly, of course, the labor market was red hot, you know, people were just flipping jobs every month.

It felt like wages were going higher.

This time they're not, but we don't have that same sort of robustness of the jobs market.

So yeah, I think we have to embrace the higher goods prices, but more broadly inflation I think is actually going to be pretty well behaved over the next 12 to 18 months, and that will indeed allow the Fed to cut rates to try and provide a bit of relief for the economy.

And James, before I let you go, less than 60 seconds, but we do have a Treasury auction later today, so we're paying attention to the bond market.

What are you seeing when it comes to both the long and the short end?

Yeah, I certainly think the short end is going to be pulled lower because of course the Fed rate cuts story.

But for the long end it's a little bit more ambiguous because of course you have got this normal narrative that when the Fed cuts rates, the whole yield curve normally moves lower.

But of course we've got real concerns about fiscal sustainability.

Remember the US got downgraded again earlier this year.

The US is going to be ramping up its borrowing over the next decade as well.

You've got to find buyers for that, and it may well be that with foreign investors.

Being, you know, feeling a bloody nose from Donald Trump in terms of the whole tariff narrative and those sorts of things, are people going to be as inclined to be as as vibrant in their demand for US Treasury and we're a little bit nervous that we could get a steepening short end pulled lower by the Fed rates, long end pulled higher because investors just want a higher return for the risks that they're running.

OK, James, well, always great to have you here at the New York Stock Exchange.

Thank you so much for simplifying some very complicated topics.

Thank you.