Common Cents & Weird Data

There you have it. Another week of weird economic data and head-scratching headlines is in the books. For the past couple of years, people have talked about the New Normal.” If what we are living through is just that, might we play a mulligan or a let? Frankly, it is getting rather tiresome.

For instance, this morning, the Bureau of Labor Statistics (BLS) released “The Employment Situation – July 2022.” In the report, it estimated the economy created 528K net, new payroll jobs last month. That’s pretty strong. However, it also reported 63K folks actively left the workforce. This plus population growth means there are now 100.05 million working-age Americans not in the labor force.

So, is it a good or bad report? Job creation is always a good thing. So, in that regard, it was a good one, even great. Maybe too great.

You see, the median estimate of 71 in the Bloomberg survey was for 250K net new jobs. The high was 325K and the low was 50K. Given that relatively tight dispersion, the standard deviation was “only” 54.75K. As a result, this morning’s headline number of 528K was a whopping 5 standard deviations to the right of the median.

Basically, it shouldn’t be. But why?

For starters, while they remain low by historical standards, ‘weekly initial jobless claims’ have been increasing since hitting a low of 166K on March 18th. The most recent reading was 260K. Further, the ‘employment,’ component in both ISM Reports on Business (Manufacturing and Services) was below 50 for the past month. Traditionally, this has suggested a decrease in hiring.

In short, there was nothing in the supporting data that suggested such strong job creation in July. Nothing. So much so, it is actually kind of like, say, Santa Claus. I mean, yeah, the data is all wrapped up and under the tree. Dude, I see it, but, c’mon. A fat elf and flying reindeer? Really?

Really. You see, analysts are whiffing on their labor force statistics for a very good reason. Workers are behaving bizarrely. It might not be Santa Claus, but the behavior is almost as unbelievable.

Consider the following quotes from the ISM reports. The first one is from the manufacturing sector:

“Although an overwhelming majority of survey panelists again indicate their companies are hiring, they are still struggling to meet labor management plans…Employment levels, driven primarily by turnover, remain the top issue affecting production growth.”

The following is from the services survey:

“Comments from respondents include: ‘Employee turnover, backfills taking longer to locate and onboard’ and ‘Difficulties hiring new candidates as we lose more people who retire or leave the company for new opportunities.’”

Basically, as the old expression goes: “good help is hard to find.” So, where did all the workers go? Did they just evaporate into thin air? Or did something else happen to them?

An economist in the economic research department at the Federal Reserve Bank of Kansas City, Didem Tuzemen, wondered the same thing.  In her bulletin on May 6, 2022, “How Many Workers Are Truly Missing from the Labor Force?” she wrote the following:

“Two years into the pandemic, the labor force participation rate remains one percentage point below its pre-pandemic level despite signs of strong labor demand. A natural question for policymakers is how much of the decline in the size of the labor force has been driven by “missing” workers, who may yet return, rather than demographic factors such as slower population growth and an aging population. Accounting for these forces is crucial in assessing how many workers are truly missing from the labor force relative to the pre-2020 trend…

Overall, my calculations suggest that, compared with early 2020, around 2 million workers are missing from the labor force after accounting for both slower population growth and the aging of the U.S. population over the past two years. Currently, individuals age 65 and older make up the majority of the missing labor force as their labor force participation rate has remained persistently below pre-pandemic levels throughout the recovery. Increases in the size of the aggregate labor force in the near term will depend on the pace of recovery in the labor force participation rates of these older groups and further increases in the prime-age labor force participation rate, which had been on an increasing trend in the 2015–19 period (Tüzemen and Tran 2019).

These were the first and last paragraphs of the report, and it tells a simple story. Older workers who left the labor markets during the pandemic have been slow to return. Unfortunately, younger workers haven’t returned to work in the numbers necessary to absorb the job losses. They have simply returned to ‘trend line’ pre-pandemic levels.

Clearly, this has created a gap in the workforce that wishful thinking can’t fill. You might also call that gap “friction,” if you so desire. If the past serves as prologue, this friction should unleash investment in technology which will fill the void.

Intuitively, this will include a massive surge in automation and DIY technology. In the short-term, this will allow businesses (and even governments) to add or maintain the necessary capacity. In the long-term, it means a large number of workers will become redundant with the next significant economic decline.

Trust me, this doesn’t require a crystal ball. It just requires a desire to turn a profit and a willingness to read history. However, unlike in history, the future will bring us driverless delivery services. Machines will make our hamburgers with little to no human input. Cashiers will become a thing of the past. The possibilities are endless, and companies are already hard at work.

When all is said and done, the New Normal in the future will be so much science fiction today. The truth is, it almost always is. We are just going through the painful transition from old to new. Obviously, it too, shall pass. With that said, I typically get a mulligan per hole (when no one is looking), and still wouldn’t mind taking one in 2022.

Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows not only on this day but on every day, and thank you, as always, for indulging me this week. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.

John Norris
Chief Economist & Fortune Teller



Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.