Labor Market/Economy Weaker Than Headline Jobs Number Suggests
The big story of the first week of the new year was always going to be about the December jobs number. The Wall Street consensus was +203K for Non-Farm Payrolls, but the headline number, at +223K, handily beat that consensus. As a result, the “soft-landing” narrative is back on the table. The cherry on top was the unexpected low growth in wages (+0.27% to the second decimal). Consensus was +0.4%. Perhaps the much feared “wage-price” spiral isn’t happening! And with those two pieces of data, the equity markets spiked more than 2% on Friday, January 6 (the DJIA rose more than 700 points). One would think that, since the labor market appears to be so strong, this would elicit a further hawkish response from the Fed, and that interest rates would spike higher. But the opposite occurred with the 10-Yr. Treasury yield falling more than 16 basis points (to 3.56% from 3.72% on Thursday) and even short-term rates tumbled significantly (the 2-Yr. Treasury plunged nearly 20 basis points to 4.26%). Something appears to be out of whack!
Under the Hood
We have often cautioned our readers to look beneath the headlines, especially at relevant data that the media ignores. It’s wise to do that with this particular employment data! As mentioned above, the headline Payroll number was +223K (Seasonally Adjusted).
- The Birth/Death model add-on was +79K. (Note: This is the trend line “add-on” to account for small businesses which aren’t surveyed.) In addition, the November jobs number was revised down by -28K (and likely earlier months were also revised down, but those months won’t be reported until the annual revisions are revealed in early February). As a result, the net change in jobs that were actually counted by the BLS was +116K. That’s still positive, but nowhere near +223K.
- The number of jobs, while important, doesn’t tell the entire employment story because, while the Payroll Survey counts the number of jobs, it doesn’t distinguish between full-time and part-time jobs or hours worked. The total number of jobs may rise, but if they are all part-time, and if hours worked fall, then economic activity declines. And that is what happened in both November and December. Last month hours worked fell -0.3%. That small percentage doesn’t seem like a lot, but when spread over 159 million people employed, that’s a lot of hours. According to Wall Street Economist David Rosenberg, when hours worked are taken into account, the equivalent number of jobs fell -150K in December (and by -300K in November). Looking elsewhere for corroborating evidence, we find that the factory workweek fell -0.25% in December and has been flat or down in every month since February.
The Unemployment Rate
The Unemployment Rate (U3) fell from 3.7% to 3.5%. Wouldn’t that also be a sign of labor force strength? Again, let’s examine the detail. The U3 is calculated from the Household Survey which counts people who are employed. That is, if you are “employed” you are counted as one even if you hold more than one job. In the December report, there was no net increase in full-time jobs, but part-time jobs grew +679K! This tells us that the growth in the number of jobs in the Payroll report (i.e., the +223K) was all part-time. 5.1% of the workforce now have two jobs. That’s up from 4.7% in October and is a sign of distress in the labor market, not a sign of strength – similar to the recent rise we’ve seen in credit card debt.
Indeed, the “strong” labor market, “soft-landing” narrative is not backed-up by other data.
- If the labor market were as tight as suggested by the media or by the Payroll number alone, then the softening of the growth in wages discussed above would not be happening, i.e., we would expect wages to be accelerating, not decelerating! The chart above shows the eight -month change in job openings in the JOLTS (Job Openings and Labor Turnover Survey), a favorite of Fed Chair Powell. This kind of behavior only occurs in Recessions.
- Layoff announcements have been accelerating and are now a daily event. As we write (Friday, January 6), two of the top four CNBC headlines read:
Salesforce co-CEO Marc Benioff hints at more potential layoffs after latest job cuts
McDonald’s plans reorganization, job cuts as it accelerates restaurant openings
- Technology, America’s growth industry, has dominated the layoff headlines. The chart at the top of this blog compares the volume of tech company layoffs from April 2020 (the beginning of the Covid lockdowns) through November 2022. Note that last November saw many more tech layoffs than during the lockdowns. The table below shows specific layoff announcements from this sector.
- Layoffs.fyi has calculated that last year 1,018 tech companies laid off nearly 154,000 employees; this compares to 80,000 layoffs from March-December 2020, and 15,000 in all of 2021. Note in the chart above the acceleration in tech layoffs in 2022’s second half.
- Another sign of distress in the labor market comes from the head-hunters themselves. Temp Agency employment is a solid leading indicator for employment. Employment in this industry fell -35K in December and is down five months in a row (by -111K). Think about what this means. When the head-hunters are chopping their own heads, it means that job openings are drying up.
- The ISM Manufacturing Survey came in at 48.4 in December vs. 49.0 in November, both numbers below the demarcation line of 50 between growth and contraction (left-hand chart), and a composite from the Regional Federal Reserve Bank Manufacturing Surveys of new orders, production and employment has now dipped below zero (right-hand chart).
- To go along with the softer than expected growth in wages mentioned at the top of this blog and the softer tones in the PCE, PPI and CPI measures of inflation, the ISM survey of prices paid in the manufacturing sector (39.4 December vs. 43.0 November) (see chart below) is approaching the lows reached during the Covid lockdowns in April 2020. Clearly disinflationary.
- In past blogs we’ve extensively discussed the plight of the housing sector. Note that the Recession in real estate goes much deeper than just housing. According to Rosenberg Research, there are 212 million square feet of sub-lease space available, the highest ever recorded and nearly double the 109 million square feet available at the end of 2019.
- Over the last six months, rents in some once hot markets have fallen: by -3% in Las Vegas, by -2% in Phoenix, and by -1% in Tampa. Part of the reason is the 400K new apartment units that came on the market in 2022. Given that 2023 is on track to produce more than 500K new units, rents have a considerable distance to fall, and that will play a role in steering monetary policy in this year’s second half.
In addition to the jobs data, the first week of the new year also saw the release of the Fed’s December meeting minutes. For several months we have postulated that the Fed’s new “transparency” (indicating to the markets where interest rates are headed via the “dot-plots”) worked well in the tightening mode, as markets moved quickly to move interest rates toward the median of those dots. However, when it came time for less tightening (“step-down” in rate increases), for a “pause” in rate hikes, or for a “pivot” toward lower rates, we postulated that markets would move to ease monetary conditions (i.e., lower market interest rates) at a much faster pace than the Fed desired. As a result, in order to keep markets from prematurely easing financial conditions, the Fed must appear to be much more hawkish. Our hypothesis appears to have been confirmed with this quotation from the recently released minutes:
Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.
Clearly, the current hawkishness is meant to keep the financial markets from “unwarranted easing.” Our view, now reinforced by these minutes, is that the Fed will react to the incoming economic data in a timely fashion. We see a further “step-down” in rate increases to 25 basis points (.25 pct. points) at their February 1 meeting, and as the Recession continues to unfold and price indexes continue to disinflate, a “pause” at the March 22nd meeting. We also foresee the “pivot” toward lower rates occurring sometime in 2023, perhaps at one of their Q3 meetings.
Our last word is “BAAA” (say it out loud)! Bonds Are An Alternative.
(Joshua Barone contributed to this blog)