Don't Trust Unemployment Headlines — Details Matter | (12.2.22)
“Details matter. It's worth waiting to get it right." - Steve Jobs
What You Need To Know Today:
• The Bureau of Labor Statistics (BLS) released an updated U.S. unemployment rate this morning which came in at 3.7% — perfectly in line with the pre-report market expectation of 3.7%.1 The BLS also reported that 263,000 jobs were created in November, which was significantly stronger than the expected 200,000. But wait, how could this be the case? Didn’t I just tell you yesterday that the ADP came in well below market expectations? I did! There are multiple job creation components in today’s report in direct opposition to what ADP reported. For instance, the BLS reported 14,000 new jobs in manufacturing while ADP noted a loss of 100,000. Additionally, the BLS report showed a gain of 20,000 construction jobs whereas ADP reported a loss of 2,000. We know that construction and manufacturing are both experiencing significant slowdowns, so in what United States are they adding jobs?
TL;DR — The BLS & ADP jobs reports are directly conflicting with one another. Who is right?
• According to The Housing Survey portion of the BLS jobs report, there were 138,000 job losses — again, in direct opposition to the headline figure of 263,000 new job creations.2 This portion of the report is measured by calling a sample number of households and asking about their employment status. Okay… so the labor force is self-reporting a large decline in employment, and yet the unemployment rate has not changed? How? Well, this is possible because the overall labor force contracted by a greater amount (falling by 186,000 people). Remember, the unemployment rate only accounts for those who are unemployed AND actively seeking employment. If/when people stop looking and drop out of the “labor force” completely they are no longer counted. Therefore, we know that unemployment remained unchanged, but for the wrong reasons.
TL;DR — The U.S. unemployment rate remained unchanged, but for the wrong reasons.
Chart Of The Day:
There are multiple people who are credited with some version of the quote, “history repeats itself".” I know this because I spent some time this morning trying to track down who the first one was… In my opinion, the best and most accurate version of this saying was coined by Mark Twain when he said, “History never repeats itself, but it does often rhyme.” I believe and agree with this because this is the fashion by which financial markets move/evolve. Looking at what happened in the past, and more importantly, why it happened, can give us a good perspective when viewing what’s happening now and trying to project what the outcome will be.
Now, let’s apply this concept to the Federal Funds Rate and how today’s aggressively tight monetary policy from the Fed compares to historical lone-term rate hike cycles:
Between March 17 and November 2, 2022, the Fed hiked the Federal Funds Rate six times for a cumulative rate change of ~3.75%. Compared to the other long-term rate hiking cycles on record, that put today’s cycle in the 5th position for the cumulative magnitude (% change) of rate hikes (out of 12). Moreover, this position of “5 out of 12” was reached over a period of time that sits just 9th in total duration. This is concerning because we know that, historically, aggressive rate hiking cycles have led to prolonged recessions. That said, this is where we differentiate between “repeating” and “rhyming”…. simply knowing that we are heading into (or are already experiencing) a recession does not tell us what the details of the recession will be and how it will play out across the economy. Recessions are certainly NOT all equal. Nevertheless, at this point, the U.S. economy heading into one (again, if you don’t already think we are in one) is all but an inevitability.
Cumulative Fed Rate Hikes Since Start of Long Hiking Cycles3
TL;DR — The current Federal Funds Rate hike cycle is already the 5th largest in cumulative magnitude while being the 3rd shortest in duration. A recession seems inevitable (if you believe we aren’t already in one).
Source: Bureau of Labor Statistics — Unemployment Report
Source: Bureau of Labor Statistics — Unemployment Report
Source: Deutsche Bank Research.