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Written by: Tim Pierotti
As I say every time I utter anything about Non-Farm Payrolls, this is a terrible data series that tends to be meaningfully revised in the following months and even a year later by the Bureau of Labor Statistics. That said, the numbers today shocked me. They shocked the market as well as equity futures have reversed lower by more than 1% and the all-important 10-yr yield has crossed again above 4.8%. The favorite ETF of the macro degenerate gamblers, the TLT (reflects the 10yr) is looking down by over 2% pre-open. So, the market is saying: hot print, too much growth, too much demand for inflation to fall.
The street was looking for 150k jobs which would be consistent with the overall slowly softening trend. On Wednesday, the maligned ADP survey showed a rapid softening in new hires with an 89k print. Today’s Household Survey, from which the Unemployment Rate is derived, matched the ADP data showing only 90k jobs created. Given there was no growth in participation (had to have been down small but rounded up to a flat 62.8%) the Unemployment rate increased to 3.8% from 3.7%.
The piece of data most surprising to me is the positive revisions to previous months. Historically, when the economy is slowing, revisions are almost always to the downside as they have been the previous 5 months (In upturns, the revisions are almost always up). So, I and I think consensus would have offered very favorable odds to anyone who wanted to make a bet there would have been a positive revision. Importantly, it makes the 336k number harder to dismiss. It is simply harder to assume that it will be revised lower in the next few months.
Overall, the picture across employment is sideways and increasingly inconsistent. The hiring trend is way down and so are quits. Wage growth is down, but 45% of small businesses, 2x the LT average, can’t fill open roles according to the August NFIB survey. Initial claims are still bouncing along the bottom but continuing claims are rising a bit, suggesting that the unemployed are having a slightly harder time finding a job. Contrary to this spike in the NFP’s, WARN notices, which large companies provide to states when they are doing large layoffs, have inflected higher. In other words, the data is all over the map.
Our view is that there are three important factors supporting the labor market: the secular labor shortage which has led to some level of “labor hoarding”, continued excess fiscal spending, and the continued strength of the housing market. The first of those, the secular labor shortage simply isn’t going away and therefore we think unemployment stays well below historical precedent as the economy bares the brunt of a higher cost of capital. The fiscal stimulus will remain present even as accumulated pandemic savings slowly shrink with each passing month. The key risk to labor markets is mortgage rates approaching the previously unthinkable 8%. We are getting to the end of a surge of multi-family completions and there we are seeing pricing come under pressure and inventory rise. While single family supply will remain anemic, it is hard to imagine that builders will not be dissuaded from spec building in the face of such a crippling hit to buying power. The NAHB (National Assn. of Homebuilders) sentiment survey has rolled hard already reflecting this. Housing is critically important and employs millions of Americans. The majority of job losses during the GFC in 2008 were from housing. I’m not by any means calling for a crash again in housing prices, but I do intuitively assume activity will continue to fall and therefore we will begin to see meaningful layoffs in construction and all
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