The October employment report was a mixed bag. Of course, the big non-farm payroll gains grabbed the headlines, and you can’t argue that it wasn’t good, but there were some other important details.

On the positive side:

·         The economy created 261k jobs, exceeding expectations of 205k, and gains were widespread across industries.

·         Gains for the prior two months were revised upwards by a total of 29k.

On the negative side:

·         It was the least amount of job gains in the post-pandemic era, which is since December 2020.

·         The y/y growth rate of job gains fell sharply to +3.6% from +3.9% last month and +4.7% in December 2021.

·         The unemployment rate rose from +0.2% to +3.7%.

·         The labor force participation rate slipped from -0.1% to 62.2%. It’s been hovering stubbornly between 62.2% and 64.4% all year.

·         In the household survey, the number of unemployed people rose by +306k and the number of employed people fell by -328k, just the opposite of the

Establishment survey’s 261k.

Wage gains of +0.4% m/m and 4.7% y/y were as expected. It’s good that workers are getting paid more, but its nowhere near enough to beat inflation.

There is nothing in this report that will change the Fed’s relentless charge to slay inflation.

Although job gains were stronger than expected, that was last month. Let’s look forward, and we’ll get a more complete picture. We’ve already seen the pace of job gains is slowing, and that will continue since we have only barely recovered all the jobs lost, and we are heading into a recession. But job gains are a coincident indicator. That is, 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 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 red box until the month the recession starts, month 0. Then you get the job losses in the green 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 (recovering) jobs now, it can start losing jobs very abruptly.

The point of the charts is that while job gains were strong in October, they are slowing and they will likely start falling in a few months.

There were at least two commentators who more or less stole the words out of my mouth this morning, but more succinctly: a CNBC commentator said, “employment is the last thing to go (down)”. Tom Porcelli, Chief U.S. Economist at RBC Capital Markets said, “It’s a grind into a slower backdrop. It works this way every time” – as in all those recession lines doing the same thing every time.

Another measure of the employment situation can be found in the Institute of Supply Management (ISM) surveys. The ISM manufacturing survey total is bumping along the bottom (50) at 50.2, while employment is right at 50.0. The services survey (80%-85% of the economy) has a better total at 54.4, but employment has just slipped into negative territory at 49.1.

Tech companies, who were the first to be so aggressive in hiring during the pandemic, are now the first to let people go after the pandemic has ended and a recession is coming. Recently, Amazon announced that it is freezing corporate hiring for months, while Lyft is cutting 700 jobs. Mark Zuckerberg, CEO of Facebook/Meta, said in a call earlier this year that, “Realistically, there are probably a bunch of people at the company who shouldn’t be here.” In September, Sundar Pichai, CEO of Google, said, “There are real concerns that our productivity as a whole is not where it needs to be for the head count we have.”

The large-scale government data would support that case. Productivity, which is simply the amount of output, let’s call it widgets, produced per hour, is shrinking at -1.4% y/y compared to the long-term average of a positive +1.9% y/y. When productivity shrinks, by definition, it’s taking an employee longer to make more widgets per hour, or more employees are creating the same number of widgets per hour. That’s what Pichai and Zuckerberg are talking about – too many employees. And when productivity falls, that makes the labor cost of producing one widget (a unit) higher. So unit labor costs are growing at +6.1% y/y as opposed to the 20-year average of +1.2%. That’s another dose of inflationary pressure.