A Tale of Two Surveys
On Friday, markets were disappointed by the “meager” +210K (seasonally adjusted (SA)) headline Payroll Report (The “Establishment Survey”). The consensus expectation was for more than +570K with the lowest survey participant at +375K. Remember that the BLS adds a lump of more than +100K to the actual survey results each month (the “birth-death” model).
Markets were even more frustrated because on Wednesday, ADP had reported that private employers added +534K in November, (ADP’s report is based on their payroll business which processes paychecks for 20% of America’s private employers).
At the same time the Payroll Survey is taken (always the week of the month that includes the 12th), its sister survey also occurs – The Household Survey. That survey showed job growth of +1.14 million SA (your read that right – not a typo). That is a blockbuster number if there ever was one! And, because the much-watched U3 Unemployment Rate is calculated from the Household Survey, the U3 fell from 4.6% to 4.2%.
So, which survey is correct? How can there be such a divergence?
We have stated in this blog time and time again that one should not rely on SA data while the pandemic is still causing havoc in the U.S. and world economies. We believe that seasonal adjustment factors can cause the resulting data to be misleading when the data is influenced by events that are unique.
November is normally a period when hiring occurs in the Retail Trade sector. In all the Friday instant analysis that we read, Retail Trade was blamed for the disappointing employment data, showing up as -20.4K (SA). In actuality, retail hired +331.6K – that’s the Not Seasonally Adjusted (NSA) number, and, yes, once again, you read that correctly.
The reality is that on an NSA basis, both surveys actually produced very strong results. And those results were corroborative (see table), in that the NSA Payroll and Household numbers are very close.
As usual, markets shot first. Based upon the “disappointing” +210K headline number, markets quickly concluded that the Fed wouldn’t be raising interest rates as early in 2022 as previously thought, and Treasury yields, especially on the longer end of the curve, nosedived. The 10-Year yield fell 10 basis points (0.10 percentage points) on Friday alone and is now down 32 basis points over the last two weeks.
As an aside, it appears that you can use Powell’s public statements as a contrary indicator. For several months markets have been pressuring him to turn hawkish. Now that he has finally conceded (won’t use the term “transitory” anymore), it appears that markets have concluded that his initial position was most likely correct, and while the Fed’s Chair has now turned somewhat hawkish, markets have now turned dovish. (Will Powell “pivot” yet again?)
Scorecard: Opt-Ins vs. Opt-Outs
We have kept a weekly scorecard of the Continuing Unemployment Claims by state since May 15 when states began to “opt-out” of paying the extra $300/week of supplemental unemployment benefits funded by the federal government. While we have read elsewhere that there were no “notable” differences between the opt-in and opt-out states, our data clearly shows that, not only were there differences, but they appear to be significant. Between May 15 (the base data week) and September 25 (the federal programs officially ended the first week of September), in aggregate, the opt-out states had reduced their unemployment levels by -50.5%, more than double the -24.2% of the opt-in states. At the time the federal supplements ended, our view was that the opt-in state data would begin to play “catch-up.” And, indeed, that is what seems to be happening. As of November 20, the opt-in states are now at -50.9% (i.e., their unemployment is -50.9% lower than it was on May 15), accomplishing in two months what it had taken four months to accomplish when federal supplement were available.
Since the federal supplements ended, the opt-in states have shown a much faster pace of re-employment than the opt-out states. The conclusion appears inescapable: the federal unemployment supplements were a disincentive to re-employment!
Other Labor Data
Also in past blogs, we have commented on the Labor Force Participation Rate (LFPR), the percentage of the working age population either with a job or looking for one. Specifically, we noted that the LFPR in Canada was nearing its pre-pandemic level while it was still holding near its pandemic lows in the U.S. Again, we opined that we suspected the federal supplemental programs had played a role. And we were disappointed when October’s LFPR did not show any improvement.
November’s data, however, did show a positive move as the LFPR ticked up to 61.8% from 61.6% in both October and September. Even better was the progress in the most impacted demographic groups. For females aged 25-34, those most likely to have young children, the LFPR rose by 0.9 pct. points from 76.3% in October to 77.2% in November – perhaps some thawing in the child-care situation and certainly impacted by a return to in-person schooling. For 20-24 year-olds, those most likely to work in lower paying service jobs, the LFPR rose to 72.1% from 71.3%; and for those considered “unskilled,” to 55.7% from 55.0%. We believe we will see such a positive trend for the next several months.
Last week we commented that the 199K Initial Unemployment Claims (ICs) that the markets got hyped up about was a false start once again caused by the seasonal adjustment process. We noted that while the SA data fell, the NSA series actually showed an increase (see chart at the top, second bar from the right had side). This past week’s data release (for the Thanksgiving week – November 27) showed the decrease in the NSA data expected in a holiday week. And, no surprise, the SA ICs rose.
- Total employment is still 2.2 million jobs lower than pre-pandemic levels (February, 2020), but is healing. Other characteristics are still not as good including part-time but wanting full-time, the number of discouraged workers, the length of time of unemployment, and those that couldn’t look for work due to pandemic issues.
- The “shortage” scare has pulled holiday shopping demand forward. The National Retail Federation’s (NRF) survey revealed that 61% of shoppers started their holiday shopping early (hence the uptick in October Retail Sales). While November sales were up Y/Y, Black Friday sales were slightly negative Y/Y while Cyber Monday’s were flat. Again, according to the NRF, in 2021 there were 180 million shoppers in the Thursday-Monday holiday weekend in 2021, compared to 186.4 in 2020 and 189.6 in 2019. WSJ 12/1/21 B3″Fewer Shop During Long Weekend.” We suspect Retail Sales for December will disappoint.
- Commodity prices are falling. From their peak: Iron Ore: -57%; Lumber -54%; Soybeans: -26%; Steel -25%; Corn -23%; Natural Gas -22%; Oil -16%; Copper -10%; Aluminum: -16%; Lead -7%.
- The Consumer Confidence Indexes are falling (Conference Board: 109.5 November vs. 111.6 October revised down from 113.8) with intentions to buy cars and homes at 50-year lows according to the University of Michigan.
- While the media still blames the inflation on shortages and on wage gains, the data says otherwise. The majority of the wage gains have been in the lowest paying sectors which haven’t moved the needle much on unit labor costs. For the non-financial business sector, those unit labor costs have fallen -0.1% Y/Y (up +1.9% in Q2 and +.2% in Q3). But prices charged are up 5.1%, the fastest pace of price growth in 40 years and 5.2 percentage points above the growth in their costs (was 7.3 pct. points in Q2). Such fat profit margins won’t last when demand softens.
- Much of retail spending appears to have come from bloated savings, a function of the ‘helicopter” money from earlier in the year. The October savings rate declined to 7.3% from 8.2% in September and 10.6% in July. Had the savings rate stayed at the July level, consumer spending would have been negative. Thus, consumers are spending more than they earn, a condition that can’t last. We are still seeing the impact of the free money.
- The data says that the causes of the current “inflation” are, indeed, “transitory’ (despite Powell’s statement that the Fed will no longer use the term).
- As suggested in our last blog, market volatility (both equity and fixed income) has risen. We believe it will be with us for the foreseeable future.
- Conclusion: Slower growth in 2022. The bond market is sending such a signal. Equity markets too.
(Joshua Barone contributed to this blog.)