A version of this post first appeared on TKer.co
The stock market rose to an all-time high, with the S&P 500 index hitting an all-time high of 5,762.48 at Monday’s close. The S&P rose 0.2% this week to end the week at 5,751.07. The index is up 20.6% year-to-date and 60.4% from its October 12, 2022 closing low of 3,577.03.
On Friday, we learned that the U.S. economy created a healthy net 254,000 new jobs in September. While the numbers confirm that the labor market has not collapsed, the pace of net job creation has slowed from levels seen earlier in the cycle.
Hiring rates have recently attracted attention as a labor market indicator. In addition to measuring people hired into newly created jobs, this indicator also captures people hired into existing jobs vacated by retirees, laid-off workers, etc. It is trending downward and could be a sign of future problems.
Employers hired 5.32 million workers in August, according to the Job Openings and Turnover Survey (JOLTS) report. Although the number of employed people far exceeds the 1.61 million people laid off during this period, the employment rate (the number of employees as a percentage of the employed workforce) has fallen to 3.1% and is currently coincides with the lowest level of the business cycle.
As we’ve been discussing for some time, layoff rates remain low, hovering around 1% below pre-pandemic levels. That’s good.
But now that labor market tailwinds are weakening, we need to be at least a little wary of resting on our laurels of the economy’s low layoffs.
“Employment rates pick up before layoffs,” Neil Dutta of Renaissance Macro explained in a research note on Tuesday.
This makes sense, given how well-managed companies operate.
Employers know hiring freezes are not good news.
When the economy starts to turn down, companies typically don’t hire people one month and immediately send them to unemployment offices the next month.
Unless you have a big business or are facing financial disaster, you probably don’t want to resort to layoffs. Because what happens when business activity picks up quickly and those workers are needed?
First, companies can reduce or freeze hiring. This means we do not fill new job openings or fill roles vacated by former employees. It’s a relatively easy way to cut down on expenses.
If the problem persists, the next option could be layoffs.
It’s worth mentioning that layoff activity doesn’t need to increase for the unemployment rate to rise. Think about it. Even when the economy is strong, many people are laid off every month, but when hiring activity is active, many return to work quickly. If the same number of people are laid off in an economy where hiring is slow, more job seekers will not be able to return to work and the unemployment rate will rise.
the story continues
Stay alert
The JOLTS survey provides data on job openings, hiring activity, layoffs, and turnover, which helps predict the future of key economic indicators such as net job creation, unemployment, and inflation.
For example, if the level of job openings posted by employers is high and rising, we would expect paid employment to increase and unemployment to decline or remain low. Higher turnover rates may reflect workers’ confidence in a labor market with increasingly competitive wages, which is a sign of rising inflation.
Today, the JOLTS indicator to watch may be the decline in employment rates, as the labor market is cooling but layoff rates are still declining.
The question is whether the economy, currently backed by the Federal Reserve, will develop in a way that leads to stable or rising employment rates. Friday’s news that the United States continues to create jobs at a healthy pace is encouraging.
And let me be clear: most indicators point to a strong economy with continued healthy growth. In fact, the employment rate today is higher than during most of the 2009-2020 economic expansion. Today’s discussion is not about sounding the alarm. However, we must always keep in mind the fact that economic downturns are bound to occur. And these economic downturns often come with early warning signs.
Confirmation of macro cross current
There were some notable data points and macroeconomic trends to consider last week.
The labor market continues to add jobs. U.S. employers added 254,000 jobs in September, according to the BLS Employment Situation Report released Friday. This was the 45th consecutive month of increase, confirming once again that the economy is expanding demand for labor.
Total employment was 159.1 million, an increase of 6.8 million from the pre-pandemic high and a record high.
The unemployment rate, or the number of workers who identify as unemployed as a percentage of the civilian labor force, fell to 4.1% during the month. Although it continues to hover near 50-year lows, the index is near its highest level since October 2021.
Key indicators continue to reflect job growth and low unemployment, but the labor market is not as hot as before.
Wage growth will accelerate. The average hourly wage in September rose 0.4% from the previous month, up from the 0.5% pace in August. Year-on-year, this metric has increased by 4.0%.
The number of job openings will increase. Employers filled 8.04 million job openings in August, up from 7.71 million in July, according to the BLS Job Openings and Turnover Survey. While this is still slightly above pre-pandemic levels, it is significantly down from the March 2022 high of 12.18 million.
The number of unemployed people during this period was 7.12 million, and the number of job openings for each unemployed person was 1.13. Once a sign of excess demand for labor, this indicator is now below pre-pandemic levels.
Layoffs remain sluggish. Employers laid off 1.61 million people in August. Although difficult for all those affected, this figure represents only 1.0% of total employment. This indicator continues to trend close to pre-pandemic lows.
Although hiring activity has cooled, it continues to far outpace layoff activity. Employers employed 5.32 million people in the month, down from 5.42 million in July.
The number of people quitting is also decreasing. In August, 3.08 million workers left their jobs. This equates to 1.9% of the workforce. It remains below pre-pandemic trends.
Low turnover can mean many different things. The number of people who are satisfied with their jobs is increasing. Workers have few opportunities to work outside the country. Wage growth is slowing. Fewer people are placed in new, unfamiliar roles, increasing productivity.
Salaries for those who change jobs remain high. According to ADP, which tracks private sector salaries and uses a different methodology than the BLS, the annual salary growth rate for job changers in September was 6.6% from a year earlier. For those who kept their jobs, wages increased by 4.7%.
The number of unemployment insurance claims is increasing further. The number of new applications for unemployment benefits rose to 225,000 for the week ending September 28, down from 219,000 the previous week. This indicator remains at a level historically associated with economic growth.
Card usage data remains strong. From JPMorgan: “As of September 25, 2024, our Chase Consumer Card spending data (unadjusted) was up 0.6% from the same day last year. Chase Consumer Card data through September 25, 2024 Based on the U.S. Census’ estimate of September’s retail sales month-over-month control index is 0.13%.
Gas prices will fall. From AAA: “Despite literal and figurative storm clouds at home and abroad, the national average for a gallon of gasoline is still down 3 cents from last week to $3.19. Hurricane Helen’s damage continues to impact gasoline supplies. Although there was little impact on the area, demand in the affected areas was decimated due to infrastructure destruction and power outages.
Mortgage interest rates will rise. The average interest rate on a 30-year fixed-rate mortgage rose to 6.12% from 6.08% last week, according to Freddie Mac. From Freddie Mac: “Mortgage interest rate declines have stalled due to a combination of rising geopolitical tensions and a rebound in short-term rates that suggests market enthusiasm for rate cuts was premature. Looking ahead, mortgage rates have fallen by 1.5 percentage points over the past 12 months, home price growth has slowed, inventory is rising, and incomes continue to rise this fall. Conditions for buyers are improving and will continue through the rest of the year.”
There are 146 million homes in the United States, of which 86 million are owner-occupied, and 39% of them are mortgage-free. Almost everyone with mortgage debt has a fixed-rate mortgage, and most of those mortgages were fixed-rate before interest rates soared from their 2021 lows. What all of this says is that most homeowners are not particularly sensitive to changes in home prices or mortgage rates.
Construction spending will decrease. Construction spending in August decreased by 0.1% to an annual rate of $2.13 trillion.
The research on manufacturing doesn’t look very good. From S&P Global’s September U.S. Manufacturing PMI: “September’s PMI survey delivered a number of disappointing economic indicators regarding the health of the U.S. economy. Factories reported lower monthly production due to weak new orders. It reported the largest decline in 15 months, with further declines in employment and raw material purchases as producers reduced operating capacity.
Similarly, ISM’s September Manufacturing PMI suggested a contraction in the industry.
Keep in mind that when you’re under stress, soft survey data tends to be more exaggerated than hard data.
The survey about the service looks great. From S&P Global’s September Services PMI: “U.S. service sector companies reported a strong end to the third quarter, with output continuing to grow at one of the fastest rates in two and a half years. GDP rose 3.0% in the second quarter, and a similar strong performance is expected for the three months to September.What is encouraging is that the influx of new business in the service sector is the first in 27 months since August. Researchers have already reported that lower interest rates have boosted demand for financial services, which, along with health care, have been performing particularly well. .”
Short-term GDP growth forecasts remain positive. The Atlanta Fed’s GDPNow model projects real GDP growth to rise at 2.5% in the third quarter.
Putting it all together
We continue to receive evidence that we are experiencing a bullish “Goldilocks” soft landing scenario in which the economy falls to a manageable level without going into recession.
This comes as the Federal Reserve continues to adopt very tight monetary policy in its ongoing efforts to control inflation. More recently, the Fed has been less hawkish in recent months, even cutting interest rates as inflation has fallen significantly from its 2022 highs.
Further rate cuts would be needed for monetary policy to be characterized as accommodative or even neutral. This means that they must be prepared for a prolonged period of relatively difficult financial conditions (rising interest rates, stricter lending standards, declining stock valuations, etc.). All of this means that monetary policy will be relatively unfriendly to markets for some time to come, and the risk of the economy slipping into recession will be relatively high.
At the same time, we know that stock prices have a discount mechanism. That means prices will bottom out before the Fed signals a major dovish shift in monetary policy.
It’s also important to remember that while the risk of a recession may be increasing, consumers are coming from a very strong financial position. Unemployed people can get jobs, and people with jobs can get raises.
Similarly, many companies have fixed their debt at low interest rates in recent years, so their corporate finances are healthy. Despite the looming threat of higher debt servicing costs, rising profit margins are giving companies room to absorb higher costs.
At this point, any recession is unlikely to turn into an economic disaster, given that the financial health of consumers and businesses remains very strong.
And as always, long-term investors should remember that recessions and bear markets are just part of the trade when entering the stock market with the aim of generating long-term profits. Despite some turbulent years in the market recently, the long-term outlook for the stock market remains positive.
A version of this post first appeared on TKer.co
