This post was originally published on TKer.co
Stocks fell after Federal Reserve Chair Jerome Powell told Congress: “the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hike.”
In other words, stronger-than-expected economic reports mean the Fed-sponsored market beatings will continue.
That brings us to the labor market where news headlines can sometimes be confusing. Is the market strong? Is it deteriorating? Is good news about jobs actually good? Or is it bad?
The answers to all of those questions are: Yes.
To understand this, let’s first check in on the data.
According to Bureau of Labor Statistics (BLS) data released Friday, U.S. employers added a respectable 311,000 jobs in February. That’s down from January’s 504,000 gain, and it confirms a downward trend from earlier in the economic recovery.
Nevertheless, the jobs number is also consistent with the narrative that demand for labor is robust as the number of people employed continues to break records.
During the period, the unemployment rate rose to 3.6% in February, up slightly from the 54-year low of 3.4% reported the month prior.
The main reason the unemployment rate climbed was that 419,000 people entered the labor force, bringing the labor force participation rate up to 62.5%.
Rising labor force participation means more people are applying to open jobs, which helps loosen labor market tightness and relieve inflationary pressures. Indeed, average hourly earnings increased by just 0.2% month-over-month in February, the smallest increase in a year. While monthly figures can be noisy, the rolling three-month average confirms wages are cooling.
Entrants into the labor force are entering a market with lots of jobs.
According to the January Job Openings & Labor Turnover Survey released Wednesday, there were 10.82 million job openings in January, down from 11.23 million in December. While this measure has been cooling noticeably, it remains well above pre-pandemic levels.
During the period, there were 5.69 million unemployed people — meaning there were 1.9 job openings per unemployed person. This is one of the most obvious signs of excess demand for labor.
Layoff activity picked up during the period. In January, there were 1.72 million layoffs, which brought the layoff rate up to 1.1%. Directionally, the acceleration in layoff metrics is discouraging. However, the levels continue to be relatively low.
Despite ongoing news coverage of layoffs — which the Federal Reserve recently characterized as “scattered reports” — hiring is the much bigger story. There were 6.37 million hires in January.
Initial claims for unemployment benefits — the most up-to-date of the major labor market stat — came in at 211,000 during the week March 4, up from 190,000 the week prior. While the number is up from its six-decade low of 166,000 in March 2022, it remains near levels seen during periods of economic expansion.
Simultaneously 🔥, 🧊, and 😵💫
There are lots of seemingly conflicting headlines in the news about the labor market, and they might all be true.
Here are three ways to characterize the labor market that I think are all fair.
Perspective certainly plays a role in how someone characterizes the labor market: employers having to pay up as they compete for limited talent will tell you the labor market it hot; professional forecasters will tell clients economic storm clouds are gathering as the market cools; and policymakers responsible for getting inflation down will emphasize how the ongoing mismatch in labor supply and demand is problematic.
For investors, it’s kinda complicated. Recessions always come with sharp downturns in earnings, which is bad because earnings are the most important long-term driver of stocks. So labor market strength is a good thing, as it limits the risk of an economic hard landing.
But as I’ve been writing for about a year (here and here), the Fed will act in ways unfriendly to the financial markets as long as inflation is significantly above 2%. That’s because tighter financial conditions will slow the economy, which will lead to deteriorating labor market demand, which in turn should cause wages to cool, which they believe will cause inflation to come down. And based on Fed Chair Powell’s comments last week, it seems the central bank’s battle with inflation is far from over.
Unless inflation comes down for some other reason, expect the labor market to continue to cool from hot levels as it remains problematic in the Fed’s eyes.
The next datapoint on this front comes on Tuesday with the next scheduled release of the February Consumer Price Index.
That’s interesting 💡
Globally, we’re still a long way from gender parity in the workplace. From S&P Dow Jones Indices: “The U.K. is the only region where women cross the 40% threshold for board membership and across total workforce, with Europe and the U.S. closely following. Within the S&P 500®, women represent 39% of total workforce roles and close to 33% of board appointments.”
Reviewing the macro crosscurrents 🔀
There were a few notable data points from last week to consider:
👆 There was a lot of labor market data, which we covered above.
⛓️ Supply chain pressures ease. The New York Fed’s Global Supply Chain Pressure Index
— a composite of various supply chain indicators — fell in February and is hovering at levels seen before the pandemic. It’s way down from its December 2021 supply chain crisis high. From the NY Fed: “Global supply chain pressures decreased considerably in February and are now below the historical average. There were significant downward contributions by the majority of the factors, with the largest negative contribution from European Area delivery times. The GSCPI’s recent movements suggest that global supply chain conditions have returned to normal after experiencing temporary setbacks around the turn of the year.”
Supplier delivery times, trucking capacity, seaborne freight rates, and container terminal bottlenecks have all improved significantly. This is all great news for inflation, which has begun to cool. For more on the improving supply chain, read: We can stop calling it a supply chain crisis ⛓
🔌 Electricity prices are coming down. From the EIA (via Jones Trading’s Dave Lutz): “Natural gas’s current place as the largest source of U.S. electricity generation means that its fuel costs are a significant driver of wholesale electricity prices. For 2023, we forecast that the cost of natural gas delivered to U.S. electric generators will average around $3.50/MMBtu, which would be about half the average in 2022. Although wholesale power prices can be extremely volatile in the short-term, we expect that average wholesale prices this year will be lower than in 2022 as a result of lower natural gas costs.”
For more on energy prices, read: The other side of the surging oil price story 🛢
💳 Consumers are taking on more debt, but levels are manageable. According to Federal Reserve data, total revolving consumer credit outstanding increased to $1.21 trillion in January. Revolving credit consists mostly of credit card loans.
But as Apollo Global economist Torsten Slok notes, “the increase in household incomes has been faster. The net result is that credit card debt is declining as a share of income, see chart below. Combined with strong job growth, solid wage growth, and high excess savings, the bottom line is that the US consumer is in good shape, and there are no signs this is about to change anytime soon.”
For more, read: Consumer finances are in remarkably good shape 💰
🍾 The entrepreneurial spirit is alive. From the Census Bureau: “Total Business Applications in February 2023 were 429,800, up 1.9% (seasonally adjusted) from January 2023.” Applications continue to trend significantly above pre-pandemic levels.
📈 GDP growth estimates are rosy. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.6% rate in Q1. This is up considerably from its initial estimate of 0.7% growth as of January 27.
For more on the improving economic outlook, read: Economic forecasts are getting revised up, and people aren’t thrilled about it 🙃
Putting it all together 🤔
We’re getting a lot of evidence that we may get the bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession.
The Federal Reserve recently adopted a less hawkish tone, acknowledging on February 1 that “for the first time that the disinflationary process has started.“
Nevertheless, inflation still has to come down more before the Fed is comfortable with price levels. So we should expect the central bank to continue to tighten monetary policy, which means we should be prepared for tighter financial conditions (e.g. higher interest rates, tighter lending standards, and lower stock valuations). All of this means the market beatings may continue and the risk the economy sinks into a recession will relatively be elevated.
It’s important to remember that while recession risks are elevated, consumers are coming from a very strong financial position. Unemployed people are getting jobs. Those with jobs are getting raises. And many still have excess savings to tap into. Indeed, strong spending data confirms this financial resilience. So it’s too early to sound the alarm from a consumption perspective.
At this point, any downturn is unlikely to turn into economic calamity given that the financial health of consumers and businesses remains very strong.
As always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have had a terrible year, the long-run outlook for stocks remains positive.
This post was originally published on TKer.co
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