Just about everyone is probably familiar with the movie Field of Dreams. As you know, it is a better-than-average ghost story about a farmer, Ray Kinsella, in Iowa, who builds a baseball field on his farm. Dead baseball greats play pickup games in his backyard. Oddly, this doesn’t appear to scare him as much as it would terrify me. At first, only Ray can see the spirits. However, by the end of the show, everyone, including Timothy Busfield’s character can see them.
Now, this morning, the Bureau of Labor Statistics (BLS) released The Employment Situation – November 2024. It suggested the U.S. economy created 220K net, new payroll jobs and the unemployment rate ticked up to 4.2%. On the television and various media websites, pundits cheered the job growth. They opined it was neither too weak nor too strong to keep the Federal Reserve from significantly altering its current monetary policy stance.
Fair enough.
However, I am feeling a lot like Ray Kinsella. Can no one see what I am seeing here? Am I going crazy? Why is everyone applauding this report?
As I have written in this newsletter/blog in the past, the Employment Situation report is comprised of two surveys.
- The first is the Household Data, which is as the name implies. The BLS calls actual workers, or households, and asks them about their employment status.
- The second is the Establishment Data, which is also relatively self-explanatory. It collects information from HR departments and the like.
Intuitively, these two sets of data should move in the same general direction. They don’t have to be right on top of each other in absolute numbers, and never have been. However, they should at least be directionally the same. Historically, this has indeed been the case.
I pulled down the numbers for both surveys going back to December 1999 from Bloomberg Financial. Not surprisingly, the correlation between the two is an impressing 0.9872 since “inception.” Obviously, that is almost perfect correlation.
- For the past 10 years, the correlation is even higher at 0.9932.
- Over the last 5 years, it is a robust 0.9779.
- It remains extremely strong at 0.9444 over the last 36 years.
- However, for the past 2 years, the correlation between the two surveys falls to 0.7249.
- Over the last 12-months, it is, drum roll please, 0.0080. You don’t have to be a statistician to know that is effectively zero correlation.
What’s more, the Household Data suggests the U.S. economy has shed 725K jobs since November 2023, whereas the Establishment Data currently reports a 2,274K increase. A little “back of the envelope” math tells us that is a 2,999K job discrepancy. To put that number into perspective, it is roughly the same as the entire number of payrolls in either Missouri or Colorado.
Now, a possible objection to this analysis could be that 12 months isn’t a large enough sample size in order to get a good correlation. Okay. So, I did a trailing 12-month difference in job growth for both data sets, and then ran the correlations on these. Perhaps not surprisingly, the story was mostly the same, though not as dramatic.
- The since inception, correlation (from December 1999) was 0.8714.
- The 10-year, 5-year and 3-year correlations were 0.9787, 0.9853 and 0.9565 respectively. So, pretty much in keeping with the correlations between the actual number of jobs in both surveys.
- However, the 2-year correlation fell to 0.7816, and for the last 12-months it was only 0.7134.
As such, based on my calculations, you could say the correlation between the Household and Establishment Data has either completely fallen apart, at worst, or lessened pretty substantially, at best.
Either way, something has to give. Either the Household survey has to start showing significant signs of improvement OR the BLS has to negatively revise the Establishment data. Which one is it? This is where the slight increase in the unemployment rate caught my attention.
Unemployment Rate
Oftentimes, a bump in the unemployment rate is due to more Americans looking for work. The economy could create 300K jobs in any given month, but if 400K more people are searching for one, more people are unemployed. Conversely, the economy could shed 100K jobs, and have the unemployment rate actually fall if, say, 300K fewer folks were looking for a position.
So, when the headline number was 220K for November and the unemployment rate climbed to 4.2%, I fully expected the Labor Force Participation Rate to have increased last month from 62.6% in October. After all, if job growth is that robust, one would expect more people would be looking for work. However, the Participation Rate actually fell to 62.5%, which is pretty pathetic really.
As such, I immediately knew something was off with the Household Data in November. It would be impossible to have that sort of job growth, fewer people looking for work and have the unemployment rate go up. It is just math. It truly is an impossibility.
The Math
Do you want the numbers? Well, the survey of actual workers suggested there were 355K fewer jobs in the U.S. economy in November 2024, and the number of officially unemployed increased from 161K to 7,145K. As a point of comparison, at the end of 2022, the number of unemployed was 5,698K.
Admittedly, this is nerdy stuff. So, let me put it this way. This morning, the Establishment Data reported that the number of official payroll jobs hit an all-time high in November of 2024 at 159,288K. Conversely, the Household Data suggested the number of jobs in the U.S. economy hit an all-time in November of 2023…and has been losing them since.
Unfortunately, due to a number of other economic reports, I am more inclined to believe the Household numbers than the Establishment ones. Simply put, the labor markets is NOT as hot as the television and other media would lead you to believe. This would have to be a major reason why a substantial majority of Americans believe the country is moving in the “wrong direction.”
I mean people tend to feel better about things when there is “a chicken in every pot.”
In the end, again, I feel as though I am seeing something what no one else is seeing. It is screaming off the page at me, and I know corrections in the data will be forthcoming. Even IF the data sets “meet in the middle,” the labor markets will appear much softer in the headlines than they currently do. That is the bad news.
The good news is this will allow the Federal Reserve to be more aggressive in cutting the target overnight lending rate than most currently believe.
That will/would be a good thing for both the economy and the markets. Shoot, I might even say that would be dreamy. However, unlike the ghosts in Field of Dreams, this is very real and very likely to happen.
Have a great weekend.
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 and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
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