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Research Recap | Supply offsets demand in the August jobs report

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Michael Feroli, Chief U.S. Economist, and Samantha Azzarello, Head of Content Curation and Strategy, discuss the August payrolls report.


SAM AZZARELLO: Welcome to Research Recap. My name is Sam Azzarello and I lead content strategy for global research here at J.P. Morgan. I’m joined today by Michael Feroli, our chief U.S. economist, to talk about the August jobs report. Mike, Thanks so much for returning to the podcast.

MIKE FEROLI: Thanks for having me.

SAM AZZARELLO: So Mike, jobs in August came in stronger than expected but we saw jobs revise down for June and July. Overall, talk us through the report high level — what we saw and what the implications are.

MIKE FEROLI: Sure. So I think high level, we saw another strong month of labor demand. As you mentioned, we did see some downward revisions to prior months. But still what we’re seeing is, employers continue to have apparently a pretty strong appetite for new employees. However, offsetting this was a nice increase in labor supply. So the participation rate moved up 2/10 to a cycle-high 62.8% driven by most demographic groups. And that in turn contributed to an increase in the unemployment rate from 3.5% to 3.8%, which is the highest in about a year and a half. And that perhaps fostered a more modest increase in wages. So overall picture, I don’t want to say Goldilocks, but it looks pretty good. You have still strong business activity but at the same time, perhaps some easing in wage inflation pressures.

SAM AZZARELLO: Perfect. So then as a segue, talking specifically about average hourly wages, you mentioned they went up. They were up 0.2% month over month, 4.3% on an annual basis. I guess, what level would be consistent with the Fed’s 2% inflation target?

MIKE FEROLI: Yeah. So last November, Chair Powell threw out a bogey of 3.5% as being something that would be consistent with 2% inflation, and maybe 1.5% productivity growth. We’re not quite there yet, but we’re moving in the right direction. So it is definitely a favorable development in terms of inflation concerns.

SAM AZZARELLO: So if you had to characterize the labor market I guess right now, you already alluded to this idea that we have seen some cooling. What do you expect going forward and what are the implications for the Fed?

MIKE FEROLI: So going forward I expect that we continue to see cooling like we have. Generally when we smooth through the ups and downs, we have been seeing cooling and I would expect that to continue, in part as some of the catch-up hiring that we’ve seen, which has been driving a lot of the employment gains as satisfied. In terms of what this means for the Fed, I think the easy call is that they have a meeting at the middle of this month — September. We think that meeting, they’re on hold. And then we had them on hold after that as well, though there is going to be some question as to whether perhaps November is in play if we see an acceleration from here.

SAM AZZARELLO: Mike, thanks for your time and insights. Looking forward to talking to you again next month. And thank you to our listeners for tuning in. For more research insights, visit jpmorgan.com/research.


| 03:38

Unpacked: Debt ceiling

Just like individuals who apply for loans, countries receive credit ratings. These are called sovereign credit ratings and they indicate the likelihood of governments paying back their debt.

| 03:38

Unpacked: Debt ceiling

Just like individuals who apply for loans, countries receive credit ratings. These are called sovereign credit ratings and they indicate the likelihood of governments paying back their debt.

Just like individuals who apply for loans, countries receive credit ratings. These are called sovereign credit ratings and they indicate the likelihood of governments paying back their debt.

For years, the United States received the highest possible credit score, a triple-A sovereign credit rating from all three rating agencies. This showed that U.S. debt was a low-risk investment.

But in 2011, Congress delayed raising the debt ceiling. This brought the government close to default. The country’s credit rating slipped to double-A plus for the first time in history.

So, what is the debt ceiling, and why is it so important?

This is the Debt Ceiling: Unpacked.

Every year, the U.S. Congress agrees on a budget for government spending on products and services such as the military, national parks and Social Security. It also sets taxes to pay for these expenses. Managing the flow of money — collecting taxes and distributing funds — then falls on the U.S. Treasury.

A deficit is when tax revenue is less than government spending. When this happens, the Treasury needs to make up the difference. It borrows money by selling Treasuries to investors like U.S. citizens, pension funds and foreign governments.

The debt ceiling is the limit on how much the treasury can borrow. Despite this limit, Congress can approve a budget with a deficit that’s more than the debt ceiling. To do this, it must also vote to raise the ceiling to cover expenses.

The first debt ceiling was established in 1917, when Congress passed the Second Liberty Bond Act. Before then, Congress had to approve every bond issuance. When the U.S. entered World War I and war bonds were needed to support military efforts, this system became slow and difficult.

With a debt ceiling, the Treasury could act independently while remaining accountable to Congress.

If the debt ceiling is reached, the Treasury has a few options. It can use existing cash, prematurely redeemed Treasury bonds, and halt contributions to government pension funds.

When options run out, the government declares a sovereign default. This means it can’t repay its debts because of a lack of resources or willingness to do so.

To date, Congress has always avoided default by raising the debt ceiling. If it doesn’t, essential services such as public health and security would be interrupted, and the United States’ global reputation would be damaged. This could lead to foreign investors dumping securities, the dollar’s value dropping and markets experiencing heightened volatility.

With so much risk to both the local and global economy, is there an alternative to the debt ceiling?

Yes. In fact, most western nations don’t have a fixed debt ceiling — the U.S. and Denmark are the only ones that do. Some other countries use a “debt brake.” In this system, national debt must stay under a certain percentage of gross domestic product. If the economy grows, the country can borrow more and vice versa.

Today, the U.S. faces an increasing budget deficit. From the COVID-19 pandemic and rising inflation, the debt ceiling will undoubtedly come under further scrutiny — especially if the U.S. wishes to maintain its reputation as a strong investment environment.