Are The Labor Markets Really That Strong?

As such, ‘Wall Street’ got this report wrong, very wrong.

This morning, the Bureau of Labor Statistics (BLS) released “The Employment Situation – January 2024.” In keeping with what seems to be a growing trend, it was better than analysts had expected, much better. The 353K net, new payroll number was 4 standard deviations to the right of the 180K median estimate. Further, the highest of the 77 guesses was only 300K.

As such, ‘Wall Street’ got this report wrong, very wrong. After last week’s Gross Domestic Product (GDP) whiff, it makes one wonder how much stock we should put in these surveys. I mean, if the so-called experts are just throwing darts at the board, why should we pay any attention to them?

The truth is, while there is some measure of process in generating guesstimates, that is exactly what they are, guesses. What was last month’s number? Were there any funky looking vagaries in it? What have ‘weekly initial jobless claims’ been since that time? How have the employment surveys in various purchasing managers indices, Fed reports and business optimism gauges fared? Was there a Federal holiday during the reporting time period? Bad weather? Labor strikes?

That sort of thing.

If I were still participating in the Bloomberg survey, which I stopped doing over a decade ago, my estimate probably would have been in the 225K range. While that would have been a winner on the ‘Price Is Right,’ it still would have been way off the mark. So much so, I wouldn’t have been able to claim any sort of real victory for being less wrong than most everyone else.

The media wouldn’t have searched me out for my clairvoyance, and I wouldn’t have dropped a single penny to the bottom line. If you want to know why I no longer participate in these surveys, please reread that last sentence. That isn’t to say I will never do so again. However, at this time in my life and career, I perceive it to be a better use of my time to tear these things apart rather than contribute to them.

Regardless, the questions remain: “is the labor market really as hot as the government says it is? If so, how can it be at this late juncture in the Fed tightening cycle?”

To be sure, the recent acceleration in economic activity seems a little too good to be true. While I have little practical way to refute the government’s data, it certainly runs counter to what one would expect given things like the slope of the yield curve, decline in the money supply, higher cost of capital and a host of others things.

What if this time is really different? What if the old rules don’t apply the way they once did? What if the established correlations have gone the way of the dodo? What if we aren’t asking the right questions and using the right calculations? What if all of these old dogs, myself included, need to learn new tricks?

What if there is some semblance of truth, be it large or small, in that last paragraph? As for the whether the labor markets are really as hot as advertised, the answer is closer to ‘not really’ than ‘resoundingly yes.’

For the second consecutive month, there has been a yawning chasm between the Household Data and the Establishment Data in the report. For instance, in January, the BLS reported the economy created 333K payroll jobs in the Establishment data. Conversely, the Household survey, actually asking people if they had a job, suggested 683K fewer Americans were employed. Clearly, that is a large gap between the two number. This month was a little better, as the BLS reported employers created 353K new jobs, whereas households responded an additional 31K were out of work.

Ideally, these data sets would move in tandem with one another. Hopefully, they would trend in the same direction. Supposedly, they will converge over time. But does it mean when they are wildly divergent? After all, the Establishment Data is telling us the economy has created 686K net, new payroll jobs over the last two months. Its counterpart, the Household Data, is suggesting 714K fewer Americans are holding down a job.

I have been doing this a long time, as my hair and waistline will both attest. While there have undoubtedly been any number of discrepancies like this over the last 3 decades, I can’t remember a time when the two reports were telling us such wildly opposite stories, at least to this degree. After all, that is a spread of 1.4 million jobs, or lack thereof.

Let’s just put it this way. The BLS will ultimately have to make some adjustments, and the low-hanging fruit is the labor markets won’t appear to be as white-hot when it is done. Don’t get me wrong, the end result will not be a worst case scenario. Far from it. Things just won’t be as rosy as currently advertised. Further, the BLS will likely make whatever changes it needs to make relatively stealthily.

There is no reason to pay attention to that man behind the curtain.

With my looking at gift horses in the mouth aside, the economy really does seem to be doing better than it should be. That is if my eyeballs in Birmingham are an indication of anything. There are more cranes up in Jones Valley than I have seen in some time. Traffic is the pits, with a lot of out-of-state tags to boot. Further, folks seem to be spending money with great aplomb.

For example, last Friday, I told my wife we could go to a local Thai restaurant for dinner. She loves and sometimes craves the place, and I just don’t quite understand her enthusiasm. I mean, it is fine. Regardless, I had made a promise, which was much easier to do than finding a parking spot in Crestline Village in Mountain Brook, Alabama, at around 7:00 PM CST on January 26th, 2024.

Every restaurant, and there are any number of them in this village, seemed to be groaning with people. We had to park way the heck away on the other side of the library, just to find out there was a 60-90 minute wait for a table for two. What’s more, given the number of forlorn looking would-be patrons in the waiting area, even that lengthy estimate seemed aggressive.

At a Thai joint?

This is just but one example, but every place is packed all the time. It doesn’t matter what business owners and the numbers are telling me. US consumers are responding to the higher cost of money and inflation by spending what they have. Obviously, that engenders economic growth, even if only for coconut milk, flat noodles and glutinous rice.

With this in mind, and not surprisingly, ‘us personal saving as a percent of disposable personal income’ has been falling over the last couple of years, in aggregate and in general. In the two years leading into the worst of the pandemic, 2018 and 2019, this number averaged 6.9%. In 2019, it was 7.4%. Thanks to all of the government largesse in 2020 and 2021, it averaged, get this, 13.2%. Obviously, that is a lot of so-called ‘dry powder’ for consumers.

However, since that time, Americans haven’t been, shall we say, parsimonious. To that end, since the start of 2022, the savings rate has fallen to an average of 3.9%. Clearly, that is a pretty sharp drop in a relatively short period of time. This even as interest rates on revolving debt have soared.

I suppose you could argue Americans are spending their money before inflation destroys it. Others might say it is a perfect example of the ‘paradox of thrift,’ and I will let you look that one up on your own. Regardless, this surprising profligacy is engendering greater economic growth than we should probably be having at this point in the economic cycle.

Essentially, the US consumer is behaving a little differently than they arguably should be this go around. As a result, some of the traditional economic measures, metrics and correlations are flashing somewhat false signals. Ergo, the confusion amongst some business owners and many/most economic forecasters.

As such, my advice to the folks still participating in the various surveys is to err on the side of strength in your forecasts. At best, you will be right. At worst, you won’t be a pessimist. In all probability, you will be more right than most.

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 any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.

John Norris

John Norris

Chief Economist

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 well as those of our 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.