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Don’t be Fooled – The Macro-Economic Picture is Deteriorating

Once again, the Non-Farm Payrolls (NFP) number, at +275K, was well above the consensus +200K estimate. But, that’s where the good news ended. The sister survey, the Household Survey (HS), reported a fall in the number of jobs of -184K. The HS is used to calculate the Unemployment Rate. Since the labor force did not change significantly, but employment fell, that rate rose from 3.7% in January, where it had been since November, to 3.9%.

Revisions to prior releases of NFP were -167K, just as we suspected last month. If we do a net calculation, i.e., from where total employment was as of the day before the data release to what total employment is now, the calculation looks something like this:

NFP: +275K; less downward revisions: -167K = net payroll growth: +108K.

But wait: The Birth/Death Model add-on (this is the long-term trend line add-on for small businesses because they are not surveyed) was +111K. So, the actual net counted difference between January and February payrolls was -3K. Some strong labor market!

Back to the HS, just in the December to February period, while the NFP report has looked stellar, the HS has shown job losses of -898K. Worse, it showed a large drop in full-time jobs of -187K in February alone, and full time jobs have shrunk by -1.78 million (not a typo) since December. Some of this drop was made up in part-time jobs (BLS counts full-time and part-time as equal, an assumption that is nebulous at best). Nevertheless, all of this data indicates a weakening job market, not a strong one as the media has touted from the headline NFP +275K number.

Adding insult to injury, the ranks of the self-employed rose +252K. This occurs when a skilled employee loses a job, can’t immediately find another, and opens their own business. Rapidly rising self-employment always accompanies a weakening economy or one in Recession.

As noted, the Unemployment Rate (U3) rose from 3.7% to 3.9%. The low in this cycle for U3 occurred in January ’23 at 3.4%. Wall Street Economist David Rosenberg notes that, over the past 70 years, a 0.5 percentage point rise in the U3 rate has always been accompanied by a Recession!

In addition, what nobody in the media is talking about is the alternative measure of unemployment, known as the U6 rate. This measure is much more sensitive to changes in labor market conditions, as it takes into account marginal workers and those employed part-time for economic reasons (i.e., no full-time employment available). In December that rate was 7.0%. It rose to 7.2% in January and 7.3% in February.

We’ve also recently seen spikes in both Initial and Continuing Unemployment Claims. The latter spiked to 1.906 million the week of February 24th from 1.898 million the prior week, one of the highest levels since the pandemic. This indicates that, once unemployed, finding a new job has become much harder.

Challenger, Gray and Christmas, the job placement company, said layoffs rose +8.8% in February from a year earlier to 84,638, the highest level for any February since the Great Recession (2009). In addition, Challenger said hiring plans fell -62.4% from February ’23 levels, the lowest for any February in eight years.

Other Labor Market Measures

Other measures of the labor market show it to be in better balance. The “Quits Rate” has come down to pre-pandemic levels implying job opportunities at higher pay rates have all but evaporated. The first chart below shows the falling “Quit Rate.” The second one shows that as that “Quit Rate” has come down, so has the growth in hourly earnings.

This implies that the economy is not in a 1970’s style “wage-price spiral,” and is good news on the inflation front as the Fed is clearly winning that war (although they don’t yet want to admit that). The right-hand side of the chart above shows that year/year change in Average New Hourly Wages. Note that it has now turned negative.

Other Signs of Macro-Economic Sclerosis

  • The trade deficit rose in January to -$67.4 billion from -$64.2 billion in December. Exports were down -0.4% from a year ago while imports rose +1.1%. In contrast, exports, in January ’23, sported a +12% year/year growth rate. This appears to be the result of the Recessions already taking hold in China and Japan, and just sprouting in parts of Europe (Germany, France, and the U.K.). During Recessions, these countries import less (which drives our exports down). It is rarely the case that the U.S. escapes a worldwide slowdown.
  • In prior blogs, we discussed our concerns over rising delinquencies. Last week, we learned that consumer credit rose a whopping +$19.5 billion in January, twice as much as normal. Consumers have clearly exhausted their savings and, as a last gasp, are in the process of maxing out their credit card lines. We’ve also noted that delinquency rates are rising and that banks, on net, have stopped advancing new credit lines.
  • Thus, it is our view, that the main driver of the economy, the consumer, is tapped out, likely near their credit limits. January showed the first decline in Retail Sales, and we expect similar results as the year progresses. While the Atlanta Fed still forecasts Q1 GDP at 2.5%, the St. Louis Fed recently lowered their call to 1.19%. Others, such as Rosenberg Research think Q1 GDP will barely be positive (+0.1%). Our view is at the lower end of this range.
  • In addition, the FDIC’s latest report backs up our view of credit issues in the nation’s banks. The report said that “problem banks” rose 18% in Q4 and that delinquencies in credit cards, auto loans, and Commercial Real Estate are at levels we last saw a decade ago (i.e., the tail end of the Great Recession). We think the financial sector will play a large role as economic conditions deteriorate.

The Fed

This particular Federal Open Market Committee (FOMC) appears to be tied to lagging indicators. So, perhaps the rise in the unemployment rate (a lagging indicator) to 3.9% from 3.7% is a wake-up call. We strongly suspect that March’s number will have a “4” handle.

Prior to the release of the employment report, two FOMC members (one voting and one non-voting), Bostic (Atlanta Fed) and Kashkari (Minneapolis Fed) indicated that at March’s Fed meeting, which will produce an updated “dot-plot,” their dots will fall from three (rate cuts) to two for 2024. According to Fed-watcher David Rosenberg, if just two more of the 19 dot-plotters move to two cuts from three, the median will be just two. Imagine what the reaction will be in the bond market (currently pricing in 3.7 cuts before year end) if the median dot-plot falls to two!

We know that rate increases are off the table, especially with the rise in the unemployment rate (the Fed has a dual mandate – low inflation and low unemployment). However, the timing and magnitude of the upcoming rate cuts depends heavily on the incoming inflation reports, and to a lesser extent on the unemployment rate, at least at rates under 4.5%. While we are optimistic about inflation, January’s inflation numbers were on the high side. A repeat of such numbers in February will certainly delay the first rate cut, likely well into Q3 or Q4 of the year.

Final Thoughts

While the headline payroll number was hotter than expected, that’s where it ended. The sister Household Survey continued to show a weakening labor market along with the JOLTS report, the U6 unemployment reading, and private sector monitors like Challenger. The rise in the U3 and U6 unemployment rates is surely the beginning of a rash of poor employment reports over the next several months.

Credit card debt expanded at a record rate in January, likely the crescendo for the series this cycle. That, we think, is the last gasp of over-the-top consumption numbers. Already, January showed a negative reading in retail sales and the announced closing of 150 Macy’s (M) stores is the final exclamation!

We continue to have deep concerns about the quality of assets on bank balance sheets. The Fed recently closed its BTFP (Bank Term Funding Program), which provided needed liquidity during the March ’23 Regional Banking crisis by providing 100% face value liquidity for underwater bond investments on bank balance sheets. Our view is that, with the oncoming issues in Commercial Real Estate, another such liquidity facility will be necessary.

All of this makes it necessary for the Fed to move off of their restrictive monetary stance sooner rather than later. The longer they wait, the worse the economic downturn will be. Unfortunately, this FOMC group appears fixated on the lagging indicators instead of the leading ones. And so we wait!

Robert Barone, Ph.D.

(Joshua Barone and Eugene Hoover contributed to this blog.)

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