Discover more from The Weekly Tearsheet
Week In Review: The Bright Spot in Friday's Jobs Report
Last week’s economic data primarily centered on the labor market. We got the JOLTs job openings report, the Employment Situation report, the ADP jobs report and also Challenger and Gray’s announced job cuts report. On balance the job market reports showed that the economy is beginning to weaken, although the overall numbers are quite strong. The Employment Situation report showed that job growth remains robust, and unemployment ticked down. The bond market reacted negatively to the jobs report as the initial take was that the Fed needs to keep tightening. Stocks were closed for the Good Friday holiday. That said, not everything in the jobs report was inflationary.
One of the positives from Friday’s Employment Situation Report was the increase in the employment-population ratio. While the business press focused on payroll and unemployment numbers, the real story is in the employment-population ratio. Here is a graph of the employment-population ratio going back to the 1940s.
The employment-population ratio stayed in a pretty narrow range from the end of the Korean war to the end of the 1960s. From there it increased as women entered the work force en masse from the 1970s to the 1990s. The employment-population ratio peaked along with the NASDAQ 100 in 1999 and has been steadily falling since. Since then, the employment-population ratio has fallen, and it probably is being driven by retirees. That said, the employment population ratio of the 1990s is much more relevant than the ratio of the 1950s.
The employment-population ratio can be looked at as a proxy for the capacity utilization number for the manufacturing economy. When the employment-population ratio is high, there is strong demand for jobs, and workers are in the drivers seat when it comes to wage negotiations. When it is low, we are usually in a recession when companies are letting go of workers. Fun fact: up until the mid 1970s, a “lay off” meant that the company would hire you back as soon as the economic hiccup passed. Union laborers were “laid off” when factories would re-tool for whatever assignment awaited. The concept of a permanent layoff didn’t really emerge until the mid 1990s.
So what pushed down the employment-population ratio in the aftermath of the pandemic? Long COVID is a possibility, and perhaps some older workers decided to retire early. It is still somewhat of a mystery, and all sorts of explanations are thrown out there. It isn’t COVID deaths - Since February of 2020, the US population increased by 6.6 million people and the number of employed people increased by 2.2 million. FWIW, the number of people self-employed increased about 300k from 2020 to today, and I find that surprising given that the mass acceptance of remote work has vastly increased the number of side hustles people can pursue. I figured it would be more, and I also think that the proportion of 1099-ers will only increase over time.
The ADP Employment report showed that wages increased 6.9% on a year-over-year basis. The low end of the wage scale saw the biggest growth - for example leisure and hospitality workers saw pay increase by 9.6%. Transportation increased by 7%, as did construction. Rising wages will do more to bring back workers than anything else. That said, the employment situation report showed average hourly earnings rose by 4.2%, so there there is evidence that wage growth is weaker.
The Fed has to be happy to see the increase in the percentage of people working. Now that supply chain driven inflation is done, and real estate driven inflation is just about over, the last component is the tight labor market. The Fed has been trying to address the demand side of the labor market by raising rates. Solving the problem by adding workers is a much less painful process.
There were some weaker labor numbers last week as well. The JOLTs job openings report last week showed a decrease in job openings from 10.6 million to 9.9 million. This is another signal that the labor market is coming more into balance. We also saw an uptick in announced layoff plans according to outplacement firm Challenger, Gray and Christmas. So despite a jobs report that reported a decrease in the unemployment rate, signals are definitely pointing to a weaker jobs market going forward.
The Fed Funds futures got more hawkish on the jobs report. Going into Friday’s report, the Fed Funds futures were handicapping a 50-50 chance of another 25 basis point increase in the Fed Funds rate at the May meeting. Now the futures are predicting a 70% chance. That said, all of the scenarios see the Fed funds rate topping out at a range of 5.00% - 5.25%, which is 25 basis points from here. They see the most likely end-of-year forecast to be a range of 4.25% - 4.50%, which is 50 basis points lower than right now.
Earnings season kicks off this week with the big banks announcing on Friday. The banks will be under intense scrutiny, especially the regional banks. Expect pointed questions from analysts regarding deposit trends and exposure to commercial real estate. We are seeing weakness in commercial mortgage backed securities, especially those backed by office properties.