The reaction and direction of the market was always going to be on the jobs numbers. At first glance, the BLS salary survey’s +315K looked “solid,” and stocks were up more than 1% early Friday. But, as the analysis progressed, the markets ended the day significantly in negative territory. Apparently the details under the title were less than “solid”.
Here are some of those details:
- The totals for the previous two months have been reduced by -107K.
- The BLS “adds” a number each month to the payroll survey for “small businesses” because the survey only considers large businesses. In August, that automatic “add” was around 90,000. So they really weren’t counting +315K, it was more like +225K. In Wednesday’s ADP survey, the number reported for small businesses was -47K. (ADP uses its payroll processing business for this data.) ADP has been reporting negatives in the small business space for several months. Using the small business count from ADP, the BLS count would still fall somewhere around +175K; thus, the +315K number is misleading.
- The household survey, the sister household telephone survey, was +442K. This was the first true positive after three months of stable or negative data. Again, looks solid at first glance, but it was all part-time jobs. In BLS surveys, part-time and full-time jobs are counted equally, that is, as a “job”. Full time jobs tear down by a fairly large -242K. Part-time job gains were +684K, which is not a very good economic signal. The way things are counted could be very misleading. If one loses a full-time job and takes two part-time jobs to make ends meet (probably generating less total income), that still counts as +1 in the number of jobs. There was a significant amount of that in this report, as multiple jobholders grew by +114,000.
- Part-time “for economic reasons” (no full-time available or the company has reduced its hours) increased by +225K in August after +303K in July.
- The work week contracted by -0.3%, which is never a good sign. It has been stable or falling for five of the last six months. Such a contraction is equivalent to -150K jobs.
- On the positive side, the labor force participation rate (LFPR) increased by +0.3 points to 62.4% from 62.1% in July, is at the highest level since March 2020, and is a sign that either pandemic fears are finally subsiding, or inflation needs employment for some couch potatoes. The LFPR for women aged 25-34 (generally young mothers) increased by +0.6 points to 78.6%, its highest level ever recorded. Perhaps the tight labor market is finally loosening – good news, especially for service sectors.
- Unemployment rates (U3 and U6) are based on the household survey. Thus, while employment increased there, the reintegration of candidates into forced labor increased both U3 (to 3.7% against 3.5%) and U6 (to 7.0% against 6.7%) .
- Wages rose 0.3%, a slower pace than in the recent past. Due to the contraction in the workweek discussed above (-0.3%), average weekly earnings stagnated.
Once the markets digested all of that, the decline in stock prices we’ve seen since mid-August continued with the major indices all down in the -1% zone on the day, from -3 % to -5% over the week, and -7.0% to -8.5% since this renewed downtrend really started in mid-August (see chart).
Inflation is the major topic of today’s business press. In past blogs, we have suggested that June (+9.1% Y/Y) would be the peak of the Y/Y inflation numbers. The July rate was 8.5% Y/Y, but what you didn’t see (except from us) is that the July M/M rate was negative at -0.19%. As a thought experiment, the chart below shows 1) what the Y/Y rate (what the Fed is pegged to) would be if the M/M rate were stable (i.e., 0 % change) over the next year, and 2) what the Y/Y rate would look like with a change of -0.1% M/M.
The chart shows that at the M/M inflation rate of 0%, Y/Y inflation does not reach the Fed’s 2% target until April 2023. We believe that the M/M changes in l CPI will be negative, so we’ve used -0.1% as the benchmark. The chart shows that the CPI Y/Y lookback hits the Fed’s 2% target next March and we actually have deflation in June. Here is the basis of our thinking:
- The supply chain has loosened up. The chart below is a composite of the Supplier Lateness Indices from the regional Federal Reserve Banks of NY, Richmond, KC, Philly and Dallas and the Texas Manufacturing Survey. Note that “bottlenecks” have returned to pre-Covid levels.
- The Baltic Dry Index is an index of the cost of transporting dry bulk items, such as iron ore. Note that it has fallen back to the level it was in June 2020, at the heart of the Covid confinements. That says a lot about supply chains.
- The following graph is an index of prices paid by companies and its strong correlation with the CPI. If the correlation holds, the CPI should fall soon.
Ironically, New York Fed research staff recently published a paper that concluded, “Absent any new energy or other shocks, it is… possible that the ongoing easing of bottlenecks of supply leads to a substantial drop in short-term inflation. .” St. Louis Fed research staff published an article with similar findings. We wonder why the Federal Open Market Committee (FOMC), the Fed’s rate-setting committee, doesn’t listen to its own staff! In any case, this FOMC, at least according to its public declarations, does not see such a relaxation of pressures on prices. In fact, from their public dialogue, one could conclude that they intend to raise rates quickly and keep them high until at least 2023.
We’ve written a lot about what looks like a big economic problem for the economy – housing. It is a significant contributor to GDP. Aside from house price issues, rapidly rising interest rates are the main culprit. Housing is now the least affordable in over 40 years (see the chart at the top of this blog). Due to interest rates, the affordability factor has taken the price away from many potential buyers. Mortgage purchase applications continue to decline on a W/W basis. Prices are market based and are only at the beginning of a corrective process which depending on what interest rates (i.e. the Fed) are doing, could correct by 10% to 20 %, the latter if the Fed continues to raise rates. We note that house prices in Canada, which have seen a price increase similar to that of the United States, have already begun their correction, so far down -5% year-on-year.
The Federal Housing Finance Agency (FHFA) has a housing price index. It increased by +0.1% in June (latest data) much weaker than the previous months. The median price of the index fell -0.4%. Based on other data, July and August were likely negative for both stats. Note that the Case-Shiller 20 City Composite chart shows a Y/Y price decline in May and June (latest data).
The next “big” report for the Fed will be the CPI, scheduled for September 13, just ahead of the September 20-21 Fed meeting. We don’t think this will have much impact on the Fed’s rate hike decision, as even a CPI M/M report of -0.1% or -0.2% will barely move the number. Y/Y (it will always be greater than 7% Y/Y ). This is the number the Fed is fixed on.
The supposedly strong payroll survey headline will continue to convince the Fed that the economy is in no real danger and that if there is a recession, it will be moderate. As noted in this blog post, the title of the payroll survey likely sends a false “everything is clear” message. The chart presented above shows that even if M/M inflation completely disappears, the look-back Y/Y numbers will not hit the Fed’s 2% target until next spring. Since monetary policy acts with a considerable lag, if the Fed waits until then before returning its policy to at least “neutral”, the economy will end up in a deep and probably long recession and, ultimately, end up in a deflationary environment. .
(Joshua Barone contributed to this blog)