The employment report came out stronger than expected, showing the economy created 223k jobs in December, higher than expectations of 200k. Job gains were widespread across industries with notable gains in Education and Health Services and Leisure and Hospitality
The unemployment rate dropped back to a 50-year low of 3.5%. The more important labor force participation rate rose +0.1% to 62.3%, but it’s been wandering like a drunken sailor between 62.1% and 62.4% for the last 12 months and remains well below the pre-pandemic rate of 63.4%.
Wages grew 0.4% m/m, less than expectations of 0.6%. The y/y rate came in at 4.6%, well below expectations of 5.0%. That’s bad news for wage earners because they are now worse off after inflation than last month. But it’s good news for the financial markets since in theory, it lessens the pressure on the Fed to keep raising rates aggressively. That’s somewhat wishful thinking because this single data point is highly unlikely to deter the Fed from raising rates by 25 bps in February.
While those headline numbers grab all the attention, the most important part of the report is the trend in job creation, which is distinctly down. December’s 223k gain was the smallest of the post-pandemic era. Another way to see the cooling trend is to look at the y/y growth rate in job creation. That rate has declined from 4.7% y/y in December 2021 to 3.0% in December 2022. It’s also worth noting that since the Covid shutdowns, most of the jobs have actually been “recovered” – only 10% are actually newly “created” jobs.
Although job gains were stronger than expected, that was last month. Let’s look forward and we’ll get a more complete picture. Job gains are a coincident indicator, that is, they tell you nothing about the future. So by definition as long as the economy is growing, employment will continue to grow. However, as soon as you reach a recession, job growth falls off a cliff and then we get job losses as shown in the first chart below. Each line in the chart is a separate recession, beginning 12 months before the recession hits, and the vertical axis is the number of jobs gained or lost. You don’t need to follow all the lines – the point of the chart is that jobs keep growing in the green box until the month the recession starts, month 0. Then you get the job losses in the red box. The second chart averages all the recessions as represented by the blue line. The brown line is the current glide-path to the coming recession, and you can see the two paths are rather similar. That means that even though the economy is still growing jobs now, it can start losing jobs very abruptly, which is likely to be the case soon. And the charts answer so many people’s questions as to how a recession can happen when the labor market is so strong. The answer is: “That’s the way it works, see?”
A separate report on the employment market called the Job Openings and Labor Turnover Survey (JOLTS), showed that the supply / demand imbalance in the labor market is still strong enough to drive wage growth, as seen in the Employment report. However, the JOLTS survey also showed that the imbalance is continuing to close rapidly. In the first chart below, the blue line is job openings, representing demand, while the brown columns are job hirings, representing supply. And the gap between the two represents the imbalance, which is big enough to drive wage growth. However, like the employment report, the important feature is that the demand, the supply, and the imbalance are all rapidly shrinking. Since the peak in March of 2022, on an annualized basis, openings are down -14%, hirings are down -12% and the critical gap is down -17%. It is as if employers are saying to themselves, “I hear a recession is coming, maybe I’ll start pulling some of those ‘want’ ads, and hire more slowly.” At the same time, potential hires seem to sense that the employment window is closing - job quits have been falling at a -13% annualized rate. Maybe the Great Resignation isn’t so great anymore as it would appear that people are now less confident about getting another job.
The same dynamics are reflected in new job postings on the Indeed website, which have fallen from 83% (of February 1st, 2020) to 56.6% in just five months. Finally, the Conference Board’s Consumer Confidence survey asks respondents if jobs are plentiful or hard to get. The difference is yet another measure of the labor market. In the chart, when the blue line rise, jobs are getting more plentiful. Note that when the blue line peaks, it’s always followed by a recession, and it peaked in March of last year.
Other economic news is a bit grim. The Institute of Supply Management’s (ISM) December surveys were published recently. The manufacturing survey shows that the sector is continuing to slide, as the total index hit 48.4, below the break-even level of 50 for the second consecutive month, thus indicating contraction. Demand is falling rapidly. The new orders component of the survey came in at 45.2, which was the fourth consecutive month below 50, and the sixth month out of the past seven below 50. Back orders have been down for three consecutive months, while new export orders have been in contractionary territory for four straight months. Of the fifteen industries in the survey, only two reported growth; primary metals, and petroleum and coal products. There was also evidence of labor market weakness as the report noted that, “Many panelists’ companies confirm that they are continuing to manage headcounts through a combination of hiring freezes, employee attrition, and layoffs.” That’s more confirmation of a cooling labor market.
The services ISM survey, which had been much stronger than the manufacturing survey, suddenly dropped below 50 for the first time since the Great Recession (ex-pandemic). New orders crashed from 56.0 to 45.2, also the lowest since the Great Recession. New export orders remain in negative territory and the backlog of orders is low and falling at 51.5. Similar to the manufacturing report, the services report noted weakness in employment: “Employment contracted due to a combination of decreased hiring due to economic uncertainty and an inability to backfill open positions.”
The surveys also report what respondents are saying about current and expected business conditions. So it came as a surprise that forward-looking comments in the services survey, which had been so strong, were markedly glummer than those in the manufacturing survey. This does not bode well for the economy as services account for around 80% of all economic activity.
The housing market continues to disintegrate after the Fed admitted that inflation was “not transitory” in December 2021. Since then prices as measured by the Case-Shiller home price index have fallen for four consecutive months. Six months ago housing prices were rising at an astonishing 20.8% y/y rate, but in October they had slowed to a “mere” 9.2% y/y rate. While that is an improvement, it’s still dramatically higher than the long-term average of only 3.8%. Most other measures of the housing market are deteriorating at an equally jaw-dropping rate. For instance, as shown in the second chart, since the Fed’s “moment of clarity” in December 2021, the rate on the 30-year mortgage has more than doubled from 3.1% to 6.8%, and as a result existing home sales have fallen a sickening -33% over that same time period. Similarly, new home sales have fallen -24%, starts have fallen -19%, and permits have fallen -29%.
Despite the decline in prices, they are still too high relative to wages as seen in the first chart. And as a result the Affordability Index, which accounts for both prices and mortgage rates, is at its lowest in over 37 years.
Taken all together, the charts mean that even though housing market prices and activity are crashing through the floor, they still have a long way to go. This is a deflating bubble. What a mess, this town is in tatters.
The Federal Reserve’s minutes of the December meeting revealed no surprises. It’s (my words): “Get out of the way, we are coming through and no you are not going to get your rate cuts this year.” Here is an actual quote:
“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautions against prematurely loosening monetary policy.”
And the Fed strongly suggested to the financial markets they’d better stop causing trouble with any over-optimism about, again, rate cuts in 2023: “…an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.”
The yield curves continue their descent into a dark place.
That’s a lot of info… it’s all pointing one way.