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Headline Data Look “Strong,” But Contradictions Abound

The January Non-Farm Payroll (NFP) number was always destined to be a market mover, especially after Fed Chair Powell said that, while the Fed will be lowering rates in 2024, March was not their base case. The +353K NFP number (consensus was +185K) with December’s number revised up to 333K from 216K, and the +0.6% surge in average hourly earnings, all but sealed that deal. The market odds of a rate cut in March are now at a mere 20%.

The equity market rejoiced at the NFP headline number with the S&P 500 rising nearly 1.1% on the day and the Nasdaq more than 1.7%. But, bond prices took a hit as yields rose. The 10-Yr. Treasury Note, which had fallen to 3.83% on Thursday tacked on 20 basis points to close just above 4.02%. Note the last upline on the right-hand side of the chart is that of Friday, February 2nd.


Those market moves, of course, are instinctive reactions. (Buy now, ask questions later!) Like the data from the last few months, however, there are a bunch of inconsistencies and contradictions in the just released jobs data.

Like last month, the sister Household Survey (HS), the one the media ignores, showed up with a -31K headline jobs number, and a fall of -63K in full-time jobs. (In December the HS showed a loss of -683K total jobs of which -1.5 million were full-time.) That survey is taken at the same time as the NFP survey and is just as rigorous. Unfortunately, it doesn’t fall into the “soft-landing” or “Goldilocks” narrative. So, it’s ignored. The two surveys paint widely divergent pictures of the economy. Which one should be believed?

Let’s look at other evidence. The workweek, itself, contracted to 34.1 hours from 34.3 in December and 34.4 in November. This is the lowest number since March 2020 (the pandemic) and, before that, November 2008 (Great Recession). Rosenberg Research calculated that, despite the job gains, total hours worked actually contracted.

It is clear that employers, after the extremely tight labor market for the past couple of years, are holding on to their employees. Rather than laying off, they are reducing hours and are relying more and more on part-timers (fewer hours and no benefits!). In addition, hiring has slowed. This is evident in the Regional Federal Reserve Bank surveys, with the employment sub-indexes all slipping. As seen from the chart, posted job openings are on a fairly steep downtrend. Sentiment surveys are showing that consumers think that jobs are harder to get, and, as a result, voluntary quits have fallen fast.

The U3 unemployment rate remained at 3.7%. This was due to a fall in the labor force participation rate (people dropping out of the labor force – another negative sign). The unemployment rate is calculated using the Household Survey, so a fall in jobs of -31K (the numerator) must be matched by a proportionate fall in the labor force (the denominator) for the unemployment rate to remain the same.

The more comprehensive U6 unemployment measure rose by +0.1 percentage points for the second consecutive month to 7.2%. And the number of people working “part-time for economic reasons” (they can’t find full-time jobs) rose by +211K in January, to 4.42 million, a two-year high. A year ago, this number was 3.95 million.

According to Rosenberg Research, over the past five months, the NFP report showed a growth of +1.28 million in the number of jobs, while the sister HS showed a net decline of -350K. The implications for the economy are significant (i.e., growth vs. contraction). So, which one should be believed?

Growth or Contraction?

An overview of the economy tilts us toward the HS.

  • Business Surveys are anything but upbeat. The Chicago PMI report, covering Illinois, Indiana, and Michigan, scored a 46.0 in January (50 is the demarcation line between expansion and contraction) with most of its sub-indexes also below the 50 mark.
  • Bank Q4 earnings were well below their year earlier levels:
  • Key Corp:       -90%
    • Comerica:        -90%
    • Zions:              -50%
    • PNC:               -40%
    • Truist:              loss

The tenor of the reports indicated large additions to loan loss reserves due to debt-laden and overbuilt office and multi-family real estate and an erosion in consumer credit quality.

  • NY Community Bancorp shocked the markets last week, posting an unexpected and large loss for Q4. The losses originated in their commercial real estate (CRE) portfolio. We expect that, given the reliance of Regional Banks on CRE lending, this is just the tip of the iceberg.
  • Rosenberg Research says that corporate earnings in the S&P 500 are no higher in Q4 than they were in Q2 ’21. That’s nearly three years of stagnation. The rise in equity prices, then, is due solely to an expansion of the P/E ratio, i.e., the earnings multiplier. Normally, in a high interest rate environment, this ratio falls.
  • Despite NFP data, Initial Jobless Claims are rising: +224K the week ending January 27, up from +215K the prior week. The latest on Continuing Unemployment Claims is that they also rose (+50K) to 1.898 million the week of January 20.
  • The ISM Manufacturing Index showed up at 49.1 in January, now negative (under 50) for 15 months in a row. Note in the table the generally contractionary levels in the sub-indexes in both December and January.
  • The Regional Federal Reserve Bank monthly manufacturing and service surveys all point to contraction. The chart is a composite of the Philadelphia, Kansas City, New York, Dallas and Richmond Fed Manufacturing Surveys. Some of these surveys showed large negatives in their January reports (right-hand side of chart).

The Fed

In addition to all the data releases, last week was also a Fed meeting week. In the after-meeting press conference, Chairman Powell acknowledged that, in the absence of heightened inflation data, the Fed’s next move would be a cut in rates. But, “When?” is the unanswered question.

  • If the economy has a “soft-landing,” the Fed would want to move rates to “neutral,” which they define as a 2.5% Fed Funds Rate. Currently that rate is north of 5.25%, so that would be nearly a 300 basis point fall.
  • If the economy falls into a Recession, they will want to move rates significantly below neutral, say to 1%; that’s more than a 425 basis point reduction.
  • In a “strong” economy, the Fed is likely to keep policy on the “restrictive” side. Given that the Fed is sensitive to the headline data, the “strong” NFP report likely put the final nail in the coffin for a March rate cut. The market odds, as of this writing (Friday, February 2) of a March rate cut have fallen to 20%, and are down to 73% (from 90%) for May.

Inflation – the Good News

Inflation data continue to improve, and Powell acknowledged that at the press conference. He said that the Fed didn’t need to see more improvement in the inflation data, they just needed to see the data continue at its present readings for a few more reporting periods. That would give the Federal Open Market Committee (FOMC) more confidence that inflation has been tamed.

We note that the Core PCE price index fell to +2.9% in December on a year/year basis. Of more relevance is the lower six (+1.9%) and three (+1.5%) month trends (see chart). A continuation of the latter two trends is what the Fed needs to see to begin the rate cutting cycle.

As we have noted in past blogs, rents, which have a 33.9% weight in the CPI, have been falling since mid-2023 (see chart). Since the CPI uses lagged rents, there will be considerable downward pressure on the index for several more months. The next CPI release is scheduled for Tuesday, February 13. We look for a continuation of the tear/year downtrend. And rents will continue to fall due to the fact that multi-family units under construction have been at a record high level and are just now coming onto the market in a rising vacancy rate environment.


High mortgage rates lower affordability. High home prices too. Both are present in today’s housing market. Mortgage rates are a function of monetary policy which we discussed earlier. High home prices are a function of demand and supply. The ultra-low mortgage rates that existed for the decade prior to the Fed’s first rate increase in 2022 locked homeowners into their homes with sub-4% mortgage rates. Given today’s much higher rates, a homeowner’s mortgage payment could nearly double for the same borrowed amount if they sell and then buy another home. Because most homeowners are locked into those low rates, existing home sales have tanked. Because supply in the existing home market is constrained, the new home market has benefited, especially since the home builders have been willing to give concessions, like buying down the mortgage rate. As seen from the chart, existing home sales are at record lows, and new home sales, while not near highs, have rebounded from their 2022 lows. Still, the housing market is mired in a Recession, and only lower mortgage rates can remedy that situation.

Final Thoughts

  • As Mark Twain once said, “if it seems too good to be true, it probably is.”  This seems a fitting description of the headline jobs report. Indeed, as we have discussed, there are many contradictions in the data.
  • Nonetheless, the Fed is hooked on lagging and headline data. The most important numbers for them are the CPI (12 month look back), the NFP (not the HS), and the U3 unemployment rate. None of them, at this time, would give them reason to cut rates.
  • The NFP number likely put the final nail in the coffin for a March rate cut. While there is still a lot of incoming data between now and the Fed’s mid-March meeting, the data, especially the inflation news, will have to be quite stellar for the Fed to move rates down in March.
  • While the media and Wall Street pundits are celebrating a “soft-landing”/Goldilocks economy, the underlying data paint a different picture for us. We see imminent banking issues around commercial real estate, a housing market that is not healthy, and employment data that have many contradictions.
  • Because Q4 corporate earnings are no higher today than they were nearly three years ago, and the Fed is “tight for longer,” we see a lot of air under the current equity indexes. Buy Bonds.

Robert Barone, Ph.D.

(Joshua Barone and Eugene Hoover contributed to this blog)


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