Happy Labor Day, friends! I hope everyone has had a relaxing weekend. Last week was all about the labor market, which is showing signs of deceleration.
This is potentially good news for the demand-driven components of inflation, but it is less than ideal news for the economy. The services industry, which was the largest source of new job creation, is finally starting to slow meaningfully. Led by travel and leisure, which has reduced job creation significantly as peak travel season begins to wind down.
The Big Picture
They say a picture is worth a thousand words. The meaningful decline in JOLTS openings and the quits rate are both signs of softening labor conditions. Something I've been discussing as an initial cautionary sign to be mindful of as the economy is likely beginning to slow down.
ADP data also suggests that wage deceleration is becoming more entrenched, as annual pay increases for those who choose to stay at jobs or find new jobs have both decelerated.
It's too early to say whether the slowing labor market is a sign of deterioration, though. For me to believe that it is I would need to see the following signs:
Jobless claims at 300K+ per week
Unemployment firmly above 4% and rising
Services industry in multi-month contraction
Non-farm payrolls finally going negative
A chart that may please Chair Powell, the rising labor force participation rate as shown below, is a sign that more are stepping off of the sidelines and rejoining the workforce. Many of these are 55 and older who had, in essence, retired during COVID. Inflation may be bringing this same contingent back to the labor market.
Bank of America believes that the job openings to unemployed ratio peaking and declining is a sign that the Fed can declare "mission accomplished", but I'm not so certain as there are some signs that inflation may re-accelerate before it ultimately declines (albeit likely temporarily).
Another curiosity within the labor market is the resurgence of unions, which have been successfully renegotiating major contracts for union members, such as those that work for UPS, with large pay increases.
Will this negotiating leverage continue to exist if the labor market does indeed deteriorate? Perhaps not, but certainly worth watching.
Shifting over to GDP, the Atlanta Fed GDPNow predictions are getting a lot of headlines for the aggressive estimation of 5.6% GDP growth for Q3, a forecast that exceeds the blue chip consensus markedly.
It is, of course, important to remember that the Atlanta Fed GDPNow model is not very accurate until we're closing in on the end of the quarter (at end of September). In essence it needs a wider sampling of Q3 econometrics to be relatively accurately.
Nevertheless, we do indeed live in extraordinary times. There's only been two other times that US GDP growth grew over 40%+ since the 1940s. One was 1949-1952. The other was 1975-1979. The latter period was one of intense inflation, which helped to drive nominal GDP just like we're seeing right now.
Fed Funds Futures are pricing in 5 rate cuts, starting in May of 2024 through January. The US central bank tends to respond with cuts when there are signs of the economy weakening meaningfully or some sort of crisis emerges (or both).
It's unlikely that if these projections come to fruition that a mythical 'soft landing' scenario plays out. Which begs the question, what do Fed Funds Futures traders think is going to happen that the market may not be pricing in yet?
One thing for bulls to potentially hang their hat on, however, is that earnings expectations have stabilized. Analysts seem to believe that the second quarter may have marked the bottom in this earnings recession. Whether or not that proves to be true is another matter altogether, but this optimism at least has captured the attention of animal spirits in the market.
