Job Growth Surges, but Is the Economy Booming?
A Closer Look at the U.S. Labor Market's Contradictory Signals
The recent U.S. employment report has sparked a flurry of commentary from money managers, research firms, and market newsletter writers. The report showed a surge in payrolls by 353,000, significantly surpassing consensus estimates of 185,000. Even the highest forecast of 300,000 fell short of the actual outcome. This data, coupled with the upward revisions of 126,000 to the past two months of data, suggests that job creation momentum is on the rise.
Despite these positive payroll numbers, other data from the Current Employment Statistics (CES), paints a different picture. The hours worked index fell by 0.3% in January. This suggests that the labor market is struggling, with employers working their workers much less per worker than they had been previously. Average weekly hours worked decreased to 34.1 in January, which is worse than April 2020's 34.2 and only slightly better than March 2020's 34.0. The decrease in work hours implies weak earnings, as reduced work hours mean less pay, regardless of hourly rates.
This decrease in hours worked over the last four months aligns with what we've seen in the household survey, particularly with full-time jobs. It appears that employers are reacting to weakness in the economy, not strength. If they were responding to strength, we would expect to see an increase in hours worked, not a decrease.
The CES is often considered the gold standard for policymakers and economists. However, recent benchmark revisions have shown a noticeable slowdown in the labor market starting around January and February of 2023. This suggests a change in trend, deviating from the previous steady upward trajectory. The Bureau of Labor Statistics (BLS), however, is reluctant to acknowledge short-term variations and instead aims to smooth out these fluctuations to maintain the perceived trend in the labor market. The BLS looks to follow the long term trend, adjusting jobs according to this trend. This is why we have been getting revisions downward for most of 2023 as they continuously overestimate the jobs being added.
The Current Population Survey (CPS), another source of employment data suggests a substantial decrease in employment over a four-month period. Full-time jobs saw a significant decline in December and a further decrease in January. This data, combined with the CES figures, paints a picture of a weakening economy, contradicting the optimistic narrative presented by the headline payroll report.
Hiring has slowed to its lowest pace since 2014, according to Bureau of Labor Statistics (BLS) data and the U6 rate or underemployment rate increased to 7.2%. As well, Labor market surveys from both the ISM manufacturing and services sector are indicating job shedding, a sign of contraction. The household survey showed a decline of 31,000 jobs in January, contrasting sharply with the establishment survey's reported growth. Furthermore, there has been a significant shift towards part-time work, indicating underlying economic weaknesses rather than strengths. Over the past year, many of the jobs added have been part-time positions. This shift towards part-time work suggests that the employment landscape might not be as robust as many believe.
This surge in jobs according to the CES has bolstered the case for the Federal Reserve to defer cutting interest rates until at least the second quarter, leading to a surge in Treasury yields. Short-dated Treasuries, which are more sensitive to monetary policy shifts, led the move, with 2, 5 & 10-year yields rising 20 basis points.
Despite this, there hasn't been a disinversion; the delta between the 2-year treasury and the 10-year treasury has remained the same, still inverted by approximately 35 basis points. If the economy was truly strong and running on all cylinders, and if these job reports were a reflection of the overall economy, then the 10-year treasury yield would not be under the 2-year. This is a basic principle of lending: the longer you borrow money, the higher the interest rate should be.
The bond market still expects rate cuts to begin later this year, with the December swap contract pricing in about 120 basis points of rate cuts this year, about 25 basis points fewer than before the jobs data. However, whether the Fed goes in March or May, the pivot has happened and monetary policy will be wind at the sails of fixed-income investors in this strong economic environment.
The tech-laden Nasdaq and benchmark S&P 500 also saw increases of 0.32% and 0.60% respectively, as investors reacted positively to robust quarterly results from major tech companies.
The U.S. dollar has also strengthened on the back of the jobs report, jumping the most in two weeks and pushing the currency back near levels last seen before the Federal Reserve's December pivot. The dollar gained against all the Group-of-10 currencies. (About: G10)
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