Commentary
The January jobs report Establishment Survey showed that the economy added 517,000 new jobs, wildly beyond the consensus estimate of 185,000 jobs. Net revisions for November and Decembber resulted in an additional 71,000 more jobs for the last three months. (It is generally believed that 200,000–250,000 jobs are required to accommodate population growth.) The unemployment rate printed at 3.4 percent.
The January jobs print, as usual, includes a statistical adjustment that is beyond the scope of this article. The methodology of the adjustment can be reviewed here. and the detail for 2023 can be found here. The Household Survey, which is determined differently, showed 265, 962 new jobs. Raw (unadjusted) jobs data showed only 152,844 new jobs. The January jobs adjustment can often cause widely disparate changes in the number of new jobs as well as doubts about the accuracy of the January jobs report.
Futures dropped on the news, as did the equities markets when they opened, while bond yields increased, signaling a “risk 0ff” market environment and disappointment in Wall Street’s earlier sanguine anticipation that the Federal Reserve would slow its rate hikes. We don’t see that happening and believe the Fed’s terminal rate—that is, the interest rate where the Fed is neutral after achieving a 2 percent year-over-year inflation rate—will settle between 5.5 percent and 6.0 percent. The current rate is 4.75 percent.
Analysis and Outlook
As we wrote earlier in this column, we anticipate a recession later this year. Many of the fourth-quarter 2022 revenues from major companies, particularly in the tech sector, have failed to meet expectations. We anticipated this when many of them announced layoffs prior to releasing their earnings reports. We expect this will result in growing margin pressure, additional cost-cutting, layoffs, and efficiency enhancements among a broad array of companies in an effort to maintain profits.Today’s jobs report really doesn’t substantially alter our recession call from late last month. We base that on:
- the jobs creation today not being robust across wide sectors of the economy, as shown in our jobs by average weekly wages schedule, below;
- the likelihood the Federal Reserve will continue to raise rates after today’s report;
- a deeply inverted yield curve;
- concerns about the debt ceiling rattling markets and consumer sentiment;
- Japan and China flooding the U.S. market with goods as they attempt to export their way to growth after re-opening;
- combined with high inventories in the fourth quarter, 2022 GDP report; and,
- increasingly negative consumer sentiment and behavior.
We expect first and second quarter 2023 GDP to print at around 1 percent. We anticipate a recession will commence in the third quarter and will be declared sometime in 2024.
What follows is a more in-depth discussion of data supporting our views.
Optional Discussion of Economic Details
Where the Jobs Are and What They Pay
While there is no denying this is a very favorable report, most of the new jobs were in the lower-paying leisure and hospitality sector and in the education and health services sector. The latter tends to have to have significant government support. The third sector with big gains was professional and business services. This tends to be a routine January increase as companies and accounting firms hire on new staff for audits and tax compliance to address the reporting requirements for tens of thousands of companies requiring auditors, accountants, and other “bean counters.” Finally, there is a significant annual statistical adjustment discussed above that can substantially alter January’s jobs result.
Federal Reserve
Chair Jerome Powell’s news conference on Feb. 1, where he discussed a 25 basis-point increase in the annual interest rate on the Fed’s overnight borrowings, stoked market hopes that the Fed would soon pause its recent unrelenting march of rate hikes. Had this morning’s data been available to him and the Federal Open Market Committee, we believe it is highly likely that he would have been discussing instead a rate increase of 50 or 75 basis points, maybe even a full point. (A basis point is 1/4 of 1 percent.)As can be seen in the inflation data below, we’re experiencing disinflation—a reduction in the rate of inflation—and even deflation—a reduction in the cost of goods—in most commodities. But real wages in lower-wage occupations are also increasing. Other wages may be “sticky” as well, meaning they will remain high even if inflation is ultimately crushed. Thus, we may see services inflation continuing even as goods inflation is reduced. That view is supported by this morning’s ISM Services Report, which returned to growth for January and showed wages increasing in the services sector.
Debt Ceiling
Much of the debate around the debt ceiling is political hyperbole. The United States takes in sufficient cash to meet its debt obligations, even without an increase to the debt ceiling, so the likelihood of an actual default on our bonds is, frankly, absurd. That’s not to say a lengthy delay on the debt ceiling would not harm the economy; it would. Contracts would be postponed and frozen, payments would be delayed, new government hiring would be delayed, etc. But the Republicans should absolutely leverage the ceiling to work toward a balanced federal budget, given our debt is over 120 percent of our GDP.Yield Curve
The two-year/10-year yield curve remains inverted, continuing a trend we’ve seen since since last summer. As regular readers will recall, investors opting to put their money into ultra-safe two-year notes instead of businesses indicates a lack of confidence in the overall economy. More money coming into the two-year note, which pays a fixed amount of interest when issued, causes the bond price to increase and thus the yield to go down. Investors “park” their money in Treasurys and await developments. Yields, overall, are declining as inflation expectations decline. Inverted yield curves are generally considered to be leading indicators of an upcoming recession, but not always.
Inflation Data
Most prices expenses of daily living are declining, as can be seen from this interactive chart available here from the census, a snapshot of which is captured below. Nevertheless, we can see that while prices are declining, they remain higher than they were before the pandemic. Egg prices, in the dark black line, have gone parabolic due to a number of factors, including bird flu, feed prices, and state regulations banning caged-bird eggs.
The Beveridge curve, which measures the unemployment rate relative to jobs opening rate, printed at 3.5 percent and 6.7 percent, respectively, for December, the last month for which data are available. It has been distorted since the pandemic began. It is a continuing indication of workers staying home and not pursuing employment, thus causing wages to increase. If prospective workers not seeking employment were in the workforce, they would be included in calculating unemployment rate and Beveridge curve would better correlate to the job opening rate and also narrow the curve as job openings would be fewer. The curve would shift further down the vertical axis.
The International Monetary Fund cites four prominent factors for the worker shortfall affecting the Beveridge curve:
- generous income support inhibits a willingness to seek and take up jobs;
- a mismatch between the types of jobs that are available and the willingness of people to fill them;
- parents of young children exiting the workforce amid continued disruptions to school and childcare; and
- older workers withdrawing from the labor force.
Consumer Sentiment and Behavior
The IBD/TIPP Economic Optimism Index, a survey of 1,200 people, printed lower for January, indicating people have a negative view of the economy. Lending Tree credit card statistics show balances have increased and an increase in credit card delinquencies, which has been happening since the summer of 2021, but continuing to increase.Watch our Twitter account @stuysquare for developments.
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DISCLOSURE: The views expressed, including the outcome of future events, are the opinions of The Stuyvesant Square Consultancy and its management only as of Feb. 3, 2023, and will not be revised for events after this document is submitted to The Epoch Times editors for publication. Statements herein do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. This article includes forward looking statements as to future events that may or may not develop as the writer opines. Before making any investment decision you should consult your own investment, business, legal, tax, and financial advisers. We associate with principals of TechnoMetrica on survey work in some elements of our business.
Our economic and business commentaries most often tend to be event-driven. They are mostly written from a public policy, economic, or political/geopolitical perspective. Some are written from a management consulting perspective for companies that we believe to be under-performing and include strategies that we would recommend were the companies our clients.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
