Is there a better way to celebrate the upcoming Labor Day Weekend than with a week’s worth of slightly softer job market data? Don’t get me wrong. The numbers weren’t awful. In a simpler time, we might even call them decent. However, after 525 basis points of rate hikes over the last 18 months, anything that will put the Fed in the dugout is welcome.
Job Openings and Labor Turnover (JOLTS)
On Tuesday of this week, the Bureau of Labor Statistics (BLS) announced there were 8.827 million job openings in the US economy in July. Prior to April 2021, this would have been an all-time high. So, in absolute terms, it is a whopper. However, in March of 2022, the BLS estimated employers had, get this, 12.027 million positions available. At the end of 2022, there were still 11.234 million.
Obviously, the relative decline in this series in 2023 has been steep.
So what do analysts think? They take this drop as evidence the labor markets are cooling off a little. Could this be enough to put the Fed in the box?
On Wednesday, one day following the BLS announcement, ADP told the financial markets that the economy created 177K net, new jobs in August 2023. That is about the size of Salem, Oregon or Santa Rosa, California. So, again, in absolute terms, this is a decent number.
For reference:
- In July, ADP announced 324K new jobs.
- In June, the total was 455K.
Further, the data for this series, in aggregate, is softer than it was in either 2022 or 2021. Essentially, while still quite decent in an absolute sense, this labor market series is also softer on a relative basis.
The Employment Situation
Then, there was this morning’s “Employment Situation – August” 2023 report.
The BLS reported the addition of 187K net, new payroll jobs last month. That is exactly the number in July, and a little better than what Wall Street had been expecting. However, the Unemployment Rate ticked up to 3.8% from a miserly 3.5%. Further, the so-called Underemployment Rate ticked up from 6.7% to 7.1%. This is the highest it has been since May 2022.
For grins, and as a point of elucidation, Bloomberg defines underemployment as: “This measure of unemployment includes the total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.”
Brother, I am flying my nerd flag now.
Now, you might wonder how the Unemployment Rate can increase 0.3% when the economy creates close to 200K jobs. Mr. Spock might even call it illogical. However, that is what it often is when you are dealing with the Federal government. Am I right?
You see, there are two surveys within the Employment Situation report.
- The first is the Household Data. For cocktail party conversation, this a survey of actual households. Somehow, the BLS gets in touch with these people and asks them a number of questions about their employment situation, demographics and the like.
- The second is the Establishment Data. This is little more than the BLS contacting HR departments about their hiring practices.
With that little primer out of the way, the Unemployment Rate comes from the Household Data. Conversely, the headline ‘jobs’ number is straight from the Establishment Data. While the two should converge at some point along the way, there can be monthly peculiarities.
This once one of those times.
You see, it seems a lot of people got off the couch in August. The Labor Force Participation Rate clicked to 62.8%, up from 62.6%. That little 0.2% increase represents 736K potential workers. According to this survey, the economy found jobs for 222K. This means 514K potential workers were left wanting. Voila. There is your uptick in unemployment; more people looking for work.
But…but…Norris, didn’t you just write there were over 8.8 million job openings in the economy? Why couldn’t these 514K get one of those? That doesn’t make a lot of sense. To have the number of job openings go down sharply as the number of unemployed go up? Intuitively, they should be moving almost in lockstep with one another. You know, a strong positive correlation and all that jazz. Am I right?
It is, indeed, curious stuff. However, quit asking such difficult questions.
As an aside, I just told myself to quit asking me difficult questions. What’s more, I apparently was expecting me to provide answers. This would imply I was having a conversation with my lonesome about the juxtaposition of the JOLTS and Employment Situation reports. Good grief.
In any event, and going back to my conversation, what does this all mean? Why spend over 1000 words droning on about slightly softer economic data?
It isn’t bad. Far from it. It just isn’t as good as it has been. So what?
The Federal Reserve
Well, the so what of it all is what the Federal Reserve is going to do after it digests all of this data. For instance, the trailing 12-month inflation numbers remain higher than the Fed’s target ranges. However, they are coming down, and the monthly observations are manageable.
Further, the Federal Reserve also has a mandate to maintain high levels of full employment.
- Do these figures give the central bankers any pause?
- Does the Fed still need to be ratcheting up the overnight rate while inflation is going down and unemployment is going up?
- Understanding full well inflation is still higher than anyone would like and the labor market is still tight by historical comparisons?
As I type here in the early afternoon of September 1, 2023, I think the Fed would like to be done with this particular tightening cycle.
5.50% overnight money and a Prime rate of 8.50% should be enough to slow things down, for now. The futures market apparently feels the same way, as there is currently only a 40% likelihood of another 25 basis point increase.
This time last week, on August 25, 2023, there had been about a 63% probability of one.
As a result, and in conclusion, sometimes bad news can be good news. This week, we had some lukewarm news, and what is more refreshing than a tepid glass of water on a hot day. Right? Even so, the sheer mediocrity of it was enough to get investors to believe the tightening cycle might be over. Ergo, we had a pretty nice week in the stock market.
And that isn’t a bad way to go into a 3-day weekend. In fact, it is a great way of doing it.
John Norris
Chief Economist
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
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