The Employment Issue
Lots of interesting news this week where we address these important questions:
- Is the labor market cooling as quickly as some believe?
- How long can housing prices continue to rise?
- Is the trend towards services spending and away from goods continuing?
- Will anyone be able to get a job next year?
- Is inflation under control now? It’s not looking as good as many hoped.
- Is the labor market cooling at all? More data late in the week.
One last hat tip to former DKI Intern, Tristan Navarino. Tristan is now back in school for his senior year, but the work he did this summer on the DKI graphs you’ll see below made my job much easier this week. Credit to former (now graduated and employed) Intern, Dylan Kogan, for excellent work on these as well. Great job guys!
Ready for the week? Let’s dive in:
1) Job Openings Below 9MM:
On Tuesday, the July Job Openings and Labor Turnover Survey (JOLTS) report was published by the US Labor Department, and job openings have declined to just under 9MM. The market rose sharply because of expectations that a weaker job market would make it easier for Chairman Powell and the Federal Reserve to “pause” and not raise interest rates later this month. DKI has said for a year that the Fed is going to be more focused on the employment numbers than on the CPI.
The trend is positive for those hoping for an end to Fed rate hikes.
DKI Takeaway: Mixed thoughts on this one. The Fed needs a weaker employment market to put an end to the wage price spiral where employees demand raises to meet their higher cost of living which then leads to more inflation. While the market liked the drop in jobs available, it’s worth noting that there are still 1.5 jobs listed for every unemployed person and that part of the drop is related to fewer employees quitting. Either way, more employment stability and fewer job hoppers is a plus for productivity.
2) Housing Prices Rising Again:
The Case-Shiller National Home Price Index was reported for the month of June, and it was up by .9% vs May. After an incredible Covid-related run up in pricing, the index has now made up all of its losses from the prior year and is back at all-time highs.
Great news for sellers. Terrible news for buyers.
DKI Takeaway: Many (including DKI) thought higher interest rates would bring down housing prices. Instead, as the cost of a new mortgage rose, fewer people were willing to sell their home and pay more for a mortgage on a comparable or smaller house. The lack of inventory on the market has kept pricing high. With 30-year mortgages now solidly above 7.5% and housing prices at highs, affordability is at all-time lows despite substantial wage gains in recent years.
3) Best Buy ($BBY) Beats Expectations and Lowers Guidance:
Best Buy stock rose after the company reported earnings of $1.25/share which was down from last year’s $1.35, but above analyst estimates of $1.06. The company slightly lowered sales guidance for the second half of the year. Of greater concern, comparable store sales were down 6.2%
The market liked the earnings beat. Chart from Yahoo Finance.
DKI Takeaway: The spending trend towards services and away from goods continues. Consumers bought a lot of electronics in recent years as they set up work-from-home offices and new home theaters. In the past year, as the economy and social lives have reopened, consumers are getting out of the house and focusing on enjoying experiences. A weaker employment market might help, but there may be more services inflation on the way.
4) Payroll Data is Good but Also Disappointing:
The ADP payroll report came out on Wednesday. Private employers added 177,000 jobs in August which was below last month’s 371k jobs and expectations of 200k jobs. Relative to expectations and the last two fantastic months of job growth, this was a disappointment. However, if you check the charts below, you’ll see that job creation is still excellent compared to pre-pandemic results, and the overall employment situation continues to be excellent.
A good month, but trending down.
The employment situation remains strong.
DKI Takeaway: There’s a lot of noise in the numbers, and looking at the top graph, you can see job growth is erratic. Still, DKI has said for a long time that Powell and the Fed will be looking for a cooling employment market. The lower than expected payroll report combined with the previously noted reduction in jobs available means the Fed is less likely to raise rates at the September meeting. That prospect has sent the market up in anticipation of a less hawkish Fed.
5) Prices and Spending Increasing Where the Fed Cares:
While the Federal Reserve tracks lots of economic data, there are certain measures they prefer over others. The Core Personal Consumption Expenditures Price Index (PCE) is one of the “important” ones. The overall PCE rose from 3.0% to 3.3% in July and the more significant Core measure rose from 4.1% to 4.2%. As usual, services inflation remains a huge problem for the Fed. And as we’ve seen for a while now, the consumer continues to spend at an increasing rate.
The Fed wants to see the red line falling.
DKI Takeaway: Just as the employment data from this week makes a Fed rate hike in September less likely, more consumer spending at higher prices makes a Fed hike more likely. The main reason the overall PCE (blue line above) is lower than the Core number is the reduction in energy prices from last year’s highs. We don’t think those decreases are likely to continue for long unless we hit a bad recession. Neither of those options (higher energy prices or a recession) is good for stock prices.
6) Friday’s Jobs Report Stronger Than Expected:
At the end of the week, we got the non-farm payroll report. The US added 187,000 jobs in August. This was above last month’s 157k and above expectations for 170k. The unemployment rate rose to 3.8% vs the 3.5% expected. The market rose early on Friday in anticipation that a higher unemployment rate would cause the Fed to pause and not raise rates in September.
The labor market is still strong and growing.
DKI Takeaway: At this point, it seems slightly more likely that the Fed will pause in September rather than raise rates again. However, I have a slightly different take on today’s unemployment rate. The US only counts job seekers as unemployed. When employment rises and the unemployment rate rises, that means more unemployed people are coming in off the sidelines and looking for work. As wages rise, more Americans want to work. That’s good news for all of us.
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