Moneybeat: Strong jobs report, weak workforce participation

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN: Well, good morning, Nick. Good to be with you.

EICHER: David, because of a deadline situation on Friday morning I had sort of pre-written a story assuming the January jobs report would come in as expected. Something just shy of 200-thousand new jobs. So I waited for 8:30 for the release of the report, and what do you know, more than 350-thousand jobs in January, coming completely out of the blue. Had of course to rewrite and quickly, but the job market continues to be hot. This is quite a story.

BAHNSEN: Well, it’s a huge story. And it was even bigger, because sometimes you get a pretty good monthly number, but then it's offset by past month revisions to the downside. And this big number was accompanied by upside revisions. The past two months were revised higher than previously expected. You combine that with the job openings data that is still over 9 million. Granted, the quits rate has reduced. There are less people that seem to feel emboldened to quit their job right now. But there just isn't a way to spin this for in any other way than the fact that the jobs picture is very good. And it looks like much of the economy is doing quite well. The forward looking GDP predictors, the St. Louis Fed has one, and the Atlanta Fed has one. And they're fallible, but they both seem to indicate we're on track towards a strong Q1 print. And we already know that the Q4 print was better than expected. The Q3 print was huge. The full year 2023 was very strong. So the economy is doing well. And I think that it's a surprise for a lot of peoplem because we haven't had a productivity increase in quite some time. And we're getting a fair amount of higher productivity leading to better GDP. And I think that's a very good thing.

EICHER: But isn’t there an asterisk here? I’m always scrolling down to that part of the report to see labor force participation rate, how many are coming off the sideline and seeking one of those many jobs available. And labor participation is unchanged which is not good. I was looking for it to tick up and it didn’t.

BAHNSEN: Yeah, it sure is. Because what that speaks to is the cultural milieu. And, you know, we're sitting here talking, and I have a big new book coming out this week here that deals with my view on the labor force and my view on our societal attitude towards work. And it's my goal that there'd be a higher labor force, which is defined as people who are working, or people who want to be working. And a declining labor force right now is not really based on people unable to find work. It's based on people choosing to exit the workforce. And that is problematic morally, culturally, spiritually, for a lot of reasons I talked about on this podcast a lot. I think it's something a lot of WORLD listeners resonate with. I think they agree with where I'm coming from on this subject. But you're right that on a month-over-month basis, and certainly even on the year, the labor participation force has not picked up much, yet GDP is doing well. So what that tells you is that with the people who are choosing to work, most of which who have jobs, if they want them, 96.5% of them, that we're getting a decent productivity. Technology, you know, our manufacturing productivity has been amongst the highest it's ever been. And candidly, that's with less people working in manufacturing, domestically. So this is the state of the economy. A lot of these things we've known for a while. The question to me, Nick, is how we choose to respond to it.

EICHER: Also last week, the two-day meeting of the open market committee of the Fed. The members decided to leave rates unchanged. But given the underlying strength of the economy, strong GDP, strong labor market, why not just start climbing the rate down toward a more neutral rate? Are you surprised they left interest rates intact?

BAHNSEN: Yeah, Nick, I think many people would ask the question with the opposite assumption. Some people believe—fortunately, you're not one of them—that strong GDP growth and strong jobs means they're supposed to be raising rates, because they worried that then the economy could get too good and we need high interest rates to bring that down, because economic growth is inflationary. And that premise is wrong. But if the premise were right, their conclusion would make more sense. Like oh, I guess we need keep rates high, because we don't want the economy to be good.

The issue is that you don't want rates to be artificially low. I've been opposed to that for 15 years. But you also don't want them to be artificially high. And how do you know what the right level is? Well, first of all, I don't really believe twelve PhDs sitting around a conference table can know what the exact number is. I think borrowers and lenders and buyers and sellers and bank A and bank B should be able to figure that out on their own. But be that as it may, the system we have is that the Fed sets that rate. And the Fed is above the natural rate right now. It is economically contractionary, and I think unnecessarily so.

I think inflation has been contained. And the key elements driving certain price levels right now is not remotely related to the Fed. And so I think that they can, should, and will be lowering rates. I'm skeptical that they'll start in March now. The futures have gone from about 80% chance they would cut in March to about a 20% chance. And yet we're at 100% chance that they'll have cut by May 1. So from March 20 to May 1, that's only five weeks in between or so. And I think you'll start seeing the Fed cut from there. But no, I don't think, first of all, you gotta remember the Feds' January decision has been baked in for a month, two months. This GDP print and especially the unemployment print all came after this last Fed meeting.

So if there are Fed governors that are worried that the jobs report is too good to be cutting rates, that would just be because they're Phillips Curvers. We talked about that recently on the podcast and the Phillips Curve is this errant, disproven, flawed economic belief that people having jobs is inflationary?

EICHER: Speaking of the Fed, David, why don’t we do a Fed-related Defining Terms. We just got finished talking about setting interest rates, but we ought to clarify, markets set interest rates. What the Fed does is it sets a Federal Funds target range. That’s what we refer to. The Fed Funds target. What is that, because we do know it’s a thing that none of us has access to?

BAHNSEN: That's right. And it's a very important subject, because people will say, Well, did the Fed increase my mortgage rate? Or did they decrease my savings rate on what the bank pays me and my savings account or my money market? And the answer all at once is yes and no. The Fed obviously does not control what a bank is charging you for your mortgage, or paying you for your savings account. And the Fed does not control what the Treasury bond rates will be when the government goes to issue new debt, what the market will end up buying that debt for. And the Fed can't control a lot of even what businesses borrow money at. And yet, the Fed funds rate is sort of the baseline rate that ends up affecting all of those things, but just a little bit less directly.

So what is the Fed funds rate? Technically, it is a rate set by the Fed as a target, generally with about a quarter point range, so they could set it - right now, it's five and a quarter percent to five and a half percent. So it's somewhere between 5.25 and 5.5%. And then from there, banks charge each other that rate for overnight lending. And you go, Well, why would a bank borrow money from another bank? Because some banks on a certain day have done a lot more lending, and they're underneath their reserve requirements. Other banks have done less lending and are above their reserve requirements. All banks have to keep their reserves on deposit with the Fed, that's the law, then you end up with extra money from deposits and capital you have as a bank, that's the money you lend out to make money. That's your profit. And when you have lent out a bunch with mortgages and business loans, that's economic activity, right? That's the whole point of banks out there trying to make money. But then you can be below your reserve requirements. So you're borrowing overnight.

So that very initial and shortest term rate, there's nothing to worry about if nobody's borrowing, if nobody's lending money out, then no banks need to borrow money from other banks to cover the reserve requirements. And so you get less activity when the Fed funds rate is higher, and you get more activity when it's lower. And that's what we mean by that Fed funds rate being sort of a baseline, because from there the cost of money the banks are using for the mortgages and the business loans and what they're going to pay out in deposits and all get set by the cost that they have for borrowing.

So that's what the Fed funds rate technically is, and the Fed does have the ability to control that; and then indirectly from there, a lot of other money market and mortgage type rates. I hope that is helpful.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group.

David’s personal website is Bahnsen.com. His Dividend Cafe each week you can find at dividendcafe.com.

Thank you, David!

BAHNSEN: Thanks so much, Nick.

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