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­Employment Headline Hopeful – Ignore the Details at Your Peril

The big story of the week was the +263K jump in Nonfarm Payrolls, somewhat higher than the street estimate of 200K, now causing some pundits to say that a “soft landing” is now likely for the economy.  Unfortunately, the headline number is quite misleading.

 The Payroll Survey is a survey of larger businesses and counts jobs, while the Household Survey counts those who are employed. A person with two part-time jobs shows up as “employed” in the Household Survey (i.e., counts as one) but as two in the Payroll Survey.

  • The Household Survey results for November were -138K on top of -328K in October and the number of people employed was nearly identical to the number produced way back in March. We haven’t seen back-to-back declines in this survey since the lockdowns in 2020. In addition, since the Payroll Survey says the number of jobs is rising, but it isn’t showing up as more employment in the Household Survey, the rise in the job counts in the Payroll Survey must be mainly part-time. This is verified in the Household Survey by the expansion of +165K of those working more than one job.
  • The contraction of Hours Worked is another sign that part-time jobs have been the growth engine. In November, the workweek contracted -0.3% and, at 34.4 hours, is at the lowest level since the April 2020 lockdowns. According to Economist David Rosenberg, the workweek contraction is equivalent to a -380K job loss. Furthermore, overtime hours fell -3.1% in November, yet another negative sign.
  • Employment in the Retail sector fell -30K in November and is down -62K since September. One wouldn’t see this if retailers were expecting a solid holiday shopping season.
  • In the ADP report, employment only rose +127K. Of interest, small businesses (<50 employees) and large businesses (>500 employees) showed up as shedding jobs (-51K and -68K, respectively), and we’ve noted in past blogs the large and rapid layoffs in the tech sector. It was mid-sized companies (50-499 employees) that added (+283K).
  • The Unemployment Rate (U3) is calculated from the Household Survey. Because that survey has shown up negative for the past two months, one would expect the unemployment rate to have risen. But, it hasn’t, staying at 3.7% for both October and November. That’s because the labor force participation rate fell for the third month in a row (i.e., the labor force shrank; so while the numerator, employment, was lower, so was the denominator, the labor force). This isn’t healthy.
  • Of concern for the Fed is the jump of 0.6% in average hourly earnings, double the market expectation and up 5.1% Y/Y (vs. 4.9% in October). Had hours worked not been contracted, the average hourly earnings number would have been under the +0.3% street estimate. We don’t expect the labor force to continue to contract, so going forward, this is going to moderate. Nevertheless, this will likely give the hawks at the Fed additional ammo.
  • The reason we think that the hourly earnings will come back in line comes from the latest October JOLTS (Job Openings and Labor Turnover Survey), where layoffs rose +58K (up in two of the last three months), new hires fell -84K in October -238K in September, and -820K over the last eight months, and quits were down -34K  in October, -124K in September and down by -403K over the last seven months. So, going forward, we expect wage growth to fall to the 3% level.

The Fed

On Wednesday, Chairman Powell spoke at a conference and confirmed what the market already knew – that the Fed would be “stepping down” rate hikes as soon as their December meeting; that means a 50 basis point (bps) rate hike. This seems like a relief after four 75 bps hikes, but, in reality, 50 bps is still large by historical standards. Yet, based on this, something the market already strongly suspected, the Dow Jones rose more than 750 points. Feels like a “Bear Market” rally to us, as you don’t see that kind of volatility in a bull phase.


The Recession is just starting to manifest itself (i.e., the Household Survey). Historically, markets make a final bottom only after the Fed’s first rate cut. In Q3, pre-tax corporate earnings were down at a -4.2% annual rate, and we are just at the beginning of earnings indigestion in the corporate world as analysts are just beginning to take a knife to their 2023 earnings estimates. We’ve seen the trade deficit balloon as exports tanked -2.6% M/M in October, and even imports of consumer goods were off-1.2% M/M.

The good news is that inflation has peaked, and we expect a steady erosion in the Y/Y rate (CPI currently at 7.7%) over the next year or so. In every Purchasing Managers’ Survey, we find falling order levels, shorter delivery times, falling backlogs, falling prices paid, rising inventory levels, and lower employment intentions, all disinflationary signals. The latest such survey is the Chicago PMI for November. The index fell to 37.2 from 45.2 in October (50 is the demarcation between expansion and contraction). Production levels were 35.9 vs. 45.1 a month earlier, so really contractionary. Order levels were worse at 30.7. Delivery Delays (49.9) have been down eight months in a row and are in contraction for the first time since June 2016. Backlogs were 36.1; the last time they were at this level was during the lockdowns (June 2020), and prices paid fell -8.6 points. Even the employment metric was contractionary at 47.1, now three months in a row below 50. All in, this was quite a recessionary report with disinflation (deflation) written all over it.

The chart at the top of this blog shows a synthesis of service sector PMIs from five Federal Reserve districts, and this is overlaid with the ISM Services Index. Note the pronounced downtrend.

Rents have been a sticking point in the inflation picture. Much of this has to do with the way rents are calculated in the CPI. Nonetheless, real market rents are now in significant decline. The latest data comes from the Nationwide Apartment List Rental Rate Index. It fell -1% in November and has now been down three months in a row. This means that BLS’ CPI rent calculation will soon be falling, and this will take a lot of pressure off of the index as rents have a 33% index weight.

The above charts show that supply chain pressures have fallen significantly, as have manufacturing prices (at the PPI stage), indicating that disinflation has arrived.

The housing market is the most interest-sensitive, and every statistic we see in that world is screaming recession. The latest data shows a -4.6% M/M fall in Pending Home Sales (these are newly signed contracts) for October, down five months in a row and down -36.7% Y/Y.

And things look even worse in the rest of the world, with European Manufacturing PMIs all below 50 in October (Germany 46.2, France 48.3, Spain 45.7), and even Japan’s  Manufacturing PMI was below 50 for the first time since the lockdowns.

We also note that consumer credit has exploded. It isn’t because incomes have risen; because they haven’t. It is because consumers are “borrowing” to keep up their standard of living. Buying gasoline is a good example. It used to cost $60-$70 to fill the tank. Now it costs over $100. Like food, too, it just goes on the credit card. As the Recession unfolds and layoffs increase, we expect credit card defaults to mount.

Final Thoughts

The markets are fixated on interest rates and when the Fed will “step-down” rate increases, when they will “pause,” and ultimately when they will “pivot.” No one is talking about the negative trends now rapidly emerging in the money supply.

Note in the chart that the Fed grew the monetary base at a 60% rate in 2020 and 2021. It isn’t any wonder, at least to us, why we’ve had a spate of inflation. Since the monetary base is now contracting (Quantitative Tightening), it also isn’t any wonder why we see disinflation and deflationary trends emerging. This suggests to us that interest rates will be lower at the end of 2023 than they are today and that the hopes for a “soft landing” are just that, i.e., “hopes.”

Robert Barone, Ph.D.

(Joshua Barone contributed to this blog)


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