Good News is Bad News

Dan North | October, 2022

The September employment report was reasonably strong. Non-farm payrolls rose by a hearty 263k and the unemployment rate fell back from 3.7% to that 50-year low of 3.5%.

However, the headline job gain was:

·       shy of expectations of 275-300k.

·       less than August’s 315k

·       less than the 439k average for the rest of the year, and

·       it was also the slowest month since April 2001.

The job market is undoubtedly slowing. In fact, y/y job growth is now 3.9% which is still historically high, but it has fallen sharply from 4.7% in December 2021.

Job Growth YoY

Job gains were not quite as well distributed as usual with losses in retail, transportation and warehousing, financial activities, and government.
Jobs Created in September 2022

The labor force participation rate, which had been slowly recovering, slipped back from 62.4% to 62.3%. Wage growth on a y/y basis fell from 5.2% to 5.0%, which of course put wage earners even further behind at -3.3% y/y.

Unfortunately, we are in a regime of “good news is bad news.” It’s not that uncommon. The September employment report was good, which means the Fed is going to keep raising rates, and that’s bad. When the stock market digested the report, particularly the drop in the unemployment rate to the 50-year low of 3.5% the Dow crashed over 600 points or 2.1%. The S&P 500 got hit worse, losing 2.8%, but the NASDAQ shattered, losing 3.8%. The Fed time and again has cited the flawed and misleading unemployment rate as one of their favored metrics, and this report clearly gives the Fed the green light to raise another unflinching and determined 75bps at the next meeting in November.

I’m being asked how we can keep creating jobs if we are going into a recession. My answer is “because that’s how it works.” Let’s look back in history. In the chart below, each line shows the number of jobs gained or lost in different recessions. Each line is a different recession. Each line starts 12 months before the recession. You don’t need to figure out all the lines. Just look in the red box – it clearly shows that right up until the recession starts, jobs are still being created. You get the job losses as the recession starts. (And the unemployment rate, as a lagging indicator, again tells you nothing since it only signals recession after it has started).

Jobs Gained or Lost Before and After Recession
Let’s average the lines together to make it easier to see, and that’s the blue line below, showing positive job growth right up until the recession starts. So where are we now? Let’s assume the recession starts in January 2023, so 12 months before that is the beginning of the brown curve. The point of the chart is that the trajectory this time around is similar to that of the long-term average and that it’s entirely possible we will continue to have job gains right up until early next year. You can’t fight the relentless Fed.
Jobs Gained or Lost Before and After Recession

The August Job Openings and Labor Turnover Survey (JOLTS) came out this week, and it’s a deusy*. The report shows a decline in both openings and hirings and a narrowing gap between the two. In other words, employers are reducing the number of job openings, and are hiring more slowly. Unsurprisingly, much of the JOLTS data peaked in March when the Fed started hiking.

Since March:

  • openings are down -15%, which on an annualized basis is a huge -33%,
  • hirings are down -6% or -13% annualized
Job Openings Vs Hirings
  • And most importantly, the difference between openings and hirings has fallen -28%, or a colossal -54% annualized. 
Job Openings Minus Hirings

It’s as if employers are saying, “Hmmm…. everyone’s forecast is for a recession, so maybe we don’t need to be hiring as many people as we thought we did a few months ago. Let’s pull those job listings and let’s slow down the hirings.”

The same thing is reflected by the number of new job listings on the Indeed website which has fallen over the past three months from 83% (of February 22 listings) to a gut-wrenching 55%.

New Postings on Indeed
The hiring window is closing.
The yield curve has dug in… three months and counting.
Treasury Yield Curve
*For those interested in the origin of the term “duesy”, it originally referred to a Duesenberg automobile. Duesenbergs are among the finest, if not the finest, and most sought-after American classic cars of the pre-war era. The term “duesy” was meant to imply something truly special or extraordinary. These days it is often spelled “doozy.”

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