Market Snapshot | July 2022
Transcript of the video:
LIZ ANN SONDERS: Hi, everybody. Welcome to the July Market Snapshot. I hope everybody is having a wonderful summer. I’d like this to be A Quick Update On The Labor Market. I Want To Touch On The June jobs report, which was last week, but I want to go into a little bit more deep of a dive, a look under the hood a little bit.
Let’s start with what was the headline for the June reading. Usually, the first headline that comes out when the Bureau of Labor Statistics releases the numbers is the number of non-farm payrolls, and at up more than 350,000, that was above expectations. I think expectations were around 268, so a very strong number.
The problem is that there’s another survey. So payrolls is a survey done by the Bureau of Labor Statistic. They just survey companies for how many employees are on the payrolls. There’s an additional survey that’s done over the course of the same month called the Household Survey. It’s from the Household Survey that the unemployment rate is derived. And I’m going to get to the unemployment rate in a minute, but here’s a look at the Household Survey. And here you see a less robust picture. In two out of the last three months, the Household Survey has shown a loss in jobs. This is important for a couple of reasons. One, an important difference between the two is the Household Survey is just that, it’s a survey of households. And the question is asked, ‘Are you working or you’re not working?’ And it picks up more recent changes in the employment situation because it also captures things like gig workers, or self-employed, or household workers. And, importantly, at inflection points the Household Survey tends to lead the Payroll Survey. So, yes, the payroll number was fairly strong, but we have seen that weakness in the Household Survey.
The other interesting thing that happened on Friday, last Friday, when we got the report, is I saw countless headlines to the effect of ‘The strong Jobs Report makes a mockery of recession claims. There’s no way we could be heading into a recession with payrolls still strong and still growing.’ So here’s where I think a little bit of a history lesson might help. So I’m going to show a series of multiple charts. I’m going to go through them fairly quickly.
But, first, the top is just the past year or so non-farm payrolls, and, indeed, they are continuing to go up. This is in the level terms, the number of payrolls.
Now, on the bottom, you see the two prior recessions, the COVID recession in 2020 and then the Great Recession from 2007 to 2009. And those are the same payroll figures, but here I’m going to throw in recession bars. So that’s the COVID recession, and you see payrolls were actually at their peak. They had not declined ahead of time. They were at their peak when, ultimately, the recession was dated as having started in February.
Let’s look at the Great Recession, tied to the global financial crisis. Again, payrolls not only were near their peak, they still had another month of an increase, even though, ultimately, down the road, the bureau that dates recessions said it started in December of ‘07.
Let’s move on to the three prior recessions. You’ve got the 2001 recession tied to the bursting of the internet bubble, the somewhat mild 1990-1991 recession. And then back to the doozy, the bottom chart here is the double dip recession. So let’s start with the 2001 recession tied to the bursting of the tech bubble. Again, here it started. You had only had one month of a dip in payrolls, yet, ultimately, the recession was declared as having started at that point. If we go back to the 1990 almost into 1991 recession, again, only one month of a retreat from a fairly high level in payrolls. And, again, the bottom chart covers the back to back recessions in the early ‘80s. So here I’m covering both of those recessions because they were in such a condensed period of time. But look at both recessions. Payroll is still rising when, ultimately, we found out the recession had already started. And in the case of the second of those two recessions, right at the peak.
We can go three more back. We can look at the pretty brutal 1974 recession. Then there was a recession in the very late 60s into 1970. And then prior than that into 1960. So, again, let’s throw up the recession bars. In the case of the ‘73-’74 recession, payrolls were still growing even after we found out the recession had started. How about ‘69 to ‘70? Again, payroll is still growing, even though we found out recession had started. Again, after the fact, because there’s always that lag. And it was right to the peak in the 1960 recession.
The point of all of this is that payrolls are a coincident indicator. They don’t tend to give you a heads-up by having month after month after month of deterioration, and then we say, ‘A-ha, maybe a recession is underway.’ So just keep that in mind.
Let’s look at the unemployment rate. That’s the other big headline that comes out when we get the Jobs Report. So this is a long-term look, simple look at the unemployment rate going back to the post-World War II period of time. Again, the gray bars are recessions. And what do you see here? And people say, ‘Boy, a 3.6% unemployment rate, I would expect to see that go way up before it would signal a recession.’ The rub there is that the unemployment rate is not only a lagging indicator, it’s one of the most lagging indicators. All you have to do is do a visual look at this, and you see that the unemployment rate has always been near its low point when recessions have started. The point is that recessions come, and recessions drive up the unemployment rate. It’s not that the unemployment rate goes up and that leads to a recession. You can see the same thing coming out of recessions. Typically, not only is the unemployment rate at or near its high point, it’s often continuing to rise, the nature of a lagging economic indicator.
The other problem with the unemployment rate is it’s affected by several forces. Number one, I mentioned the Household Survey, from which the unemployment rate is derived. Now you would think, ‘Okay, Liz Ann showed that chart. It was a big decline in household employment, more than 300,000. Wouldn’t that suggest that the unemployment rate would have ticked up?’ It did not tick up. It actually stayed flat at 3.6%. But the reason why it didn’t tick up given the loss of jobs was for what they call the wrong reasons. It’s that the labor force participation rate actually down-ticked again. And you can see that that has rolled over a bit from the recent high, which was nowhere near where we were pre-pandemic. You can see that pre-pandemic point just before the big drop.
We can also look at what’s called the prime age labor force participation rate, folks in between 25- and 54-years-old. That has also rolled over. There had been a lot of hope, and certainly a lot of hope on the part of the Fed, that we would see participation pick up. If that had happened, we probably would have seen that shift in the unemployment rate. But the fact that has moved down, that’s why a loss of jobs did not cause the move up in the unemployment rate. But this is absolutely something to watch for when we collectively look at labor market indicators in the future.
Now, I mentioned payrolls being a coincident indicator, the unemployment rate being a lagging indicator. So what are the leading indicators for the labor market? Well, separate from the monthly Jobs Report that we get, there’s a weekly report on initial unemployment claims. That is a leading indicator, in fact, the most popular and well-watched index of leading economic indicators put out by the Conference Board on a monthly basis. It has 10 components, one of which is initial unemployment claims. Now, they can be volatile on a week-to-week basis, so one of the ways that economists and strategists like myself look at it is using a four-week moving average, as it tends to smooth some of that short-term volatility. You can see, again, recessions here. And in this case, you tend to see a bit of a pickup, not much, though, but a bit of a pickup leading into recession, so you get a bit of a heads-up.
So where are we here? If you took a quick look at this latest turn up you would say, ‘Nothing to see here, no big deal.’ But it’s rate of change that matters. It’s that directional change, the inflection point, and that we show here. So the average percentage increase in the four-week average of initial claims right to the start of recessions, historically, is 20%. And since the early April low in unemployment claims were up 36%. So we have started to see those leading indicators turn in a direction that points more to recession than soft landing, which everybody is still hoping for.
Then you can look at indicators that lead the leading indicators. Obviously, things happen in advance of somebody losing their job, having to go and file for unemployment insurance. And one of them is just simply companies announcing job cuts. So you’ve got the Challenger, Gray & Christmas data on job cut announcements. I know this looks odd that I’ve just got the chart on the left-hand side, but there’s a reason for that. This is the full albeit short history in this data, it only goes back to 2007. So when you look at that full history, especially in the context of the massive spike that occurred during the COVID recession and then the plunge thereafter, it doesn’t look like a meaningful move up. But let’s take the magnifying glass a little bit closer and you can see that that jump has not only moved job cut announcements into positive territory, they’re up 60% year-over-year. So that’s a meaningful shift in the background conditions, those leading indicators that lead the leading indicators, and that ties into weak business confidence. We got some data this week on small business confidence. Very, very weak. And I think that that supports what we’re seeing here, all suggesting that the strong labor market data we’ve been seeing in terms of traditional metrics might start to fade at this point.
There is some good nominal news that came out. Wages continue to be fairly decent, but the problem is in nominal terms. So this is a wage growth tracker. It’s a median measure of wages. It’s similar to average hourly earnings that gets reported with the Jobs Report, but that’s an average and it can get skewed by mix shifts. This is a median measure, so it doesn’t have as much volatility driven by mix shifts. And you can see that wages are still growing at about a 6% rate. On the surface, that would seem like good news, but as anyone that lives in the world of having to fill up your car and shop for food, and understands that the inflation picture is such that if you do real wages, you subtract inflation, we’re in negative territory.
So the net of all of this is that we had the most recent Jobs Report met with a lot of headlines that suggested ‘labor market is still incredibly robust, recession is unlikely.’ I don’t want to be a Debbie Downer here, but I think under the hood, the labor market data is actually a little bit weaker and the leading indicators suggest a weakening from here. The silver lining, however, is that the sooner a recession happens, the sooner it’s over. And from a stock market perspective, we have discounted, I think, already probably a mild recession. We may still have to go through the rerating process in terms of corporate earnings, but a lot of that negative economic news that I think is just coming to fruition and we’re starting to stack up the dominoes that suggests this is more likely a recession, but the sooner we’re in it, the sooner we get out of it. And I think that, to some degree, is what the market has reflected. So probably bumper your news from here, but I actually think getting a recession sooner is more of a positive story for the remainder of 2022 than if we push that off until later this year.
So thanks, as always, for tuning in. And we will see you next month.