Jobs report signals continued rise in rates, but…


Comment

August jobs printed 315,000 new jobs, slightly above the consensus estimate of 300,000 jobs. This was more than 200,000 fewer jobs than in July 2022 and August 2021. The June and July revisions combined to create 107,000 fewer jobs than previously reported. It is generally estimated that 200,000 to 250,000 jobs are needed to cope with population growth.

The jobless rate was 3.7%, up 0.2 percentage points from last month and down 1.5 percentage points from 5.2% last August. The labor force participation rate was 62.4%, up from 61.7% printed in August 2021, and up 30 basis points (bps) from July. (A basis point is defined as 1/100th of a percentage point.)

August jobs by average weekly earnings from BLS data. (The Stuyvesant Square Consultancy. All rights reserved. © 2022)

We are largely at the same level of jobs we had before the pandemic, 152.5 million, but the trajectory of job creation that would have occurred during this period is lost, probably permanently. The question now is whether, with a slowing economy and a Federal Reserve (Fed) reining in low interest rates, the current trajectory can be sustained or whether job creation will flatten or decline.

The majority of jobs were, again, in low-wage sectors, such as leisure and hospitality, and largely government-supported sectors, such as education and health services. That said, professional and business services, a higher-wage sector, also posted a strong employment performance, with 68,000 jobs, with an average weekly wage of over $1,400. However, only two sectors posted employment growth over the past month: retail trade and financial services; the others have decreased considerably.

Annualized average real wages, which we report on a quarterly basis, rose only $108, or 0.2%. However, annualized real wages fell in a number of job categories. (See details in our September jobs report in a month.)

Other information

The Fed’s balance sheet is shrinking from the ramp-up that began during the pandemic in February 2020, but too slowly, in our view. It is expected to accelerate this month, to $95 billion, as the Fed allows a “burn-off” (i.e. allowing it to mature without redemption) of its portfolio of Treasury securities. ($60 billion per month) and mortgage-backed securities ($35 billion per month). This is intended to create a ‘soft landing’, but we believe this will only exacerbate the current yield curve inversion that we have been concerned about for some time.

While we’re hoping Fed exhaustion will contract the yield curve inverted, which seems to happen, somewhat, towards the end of August (as this chart shows), we’d like to see the yield at 10 years at a higher rate than two years.

Epoch Times Photo
Inverted two-year and 10-year yield curve for August 2022. (The Stuyvesant Square Consultancy)

To date, the inversion on 2-year and 10-year Treasury bonds is 21 bps. We would like to see the Fed reduce its balance sheet much more quickly, as we have been hoping for since last year, but we are concerned about maintaining market liquidity during periods of rising interest rates.

The Institute for Supply Management’s print of the manufacturing purchasing managers’ index, the manufacturing PMI, saw August growth of 52.8%, unchanged from July. PMI Institute Services posted growth of 56.7%, up 1.4 percentage points from June. A reading above 50 signals growth. (The August Services PMI is still pending.)

The Job Vacancies and Labor Turnover Survey (JOLTS) showed that the number and rate of vacancies reached 11.239 million (+199,000) and 1.8% , respectively, in July, according to the latest available data.

The revised second-quarter 2022 productivity and nonfarm labor costs, released Sept. 1, fell 4.1% and 10.1%, respectively. As we noted in the June jobs report, labor productivity in the first quarter of 2022 fell to its lowest level since 1947. As a result, unit labor costs for this quarter rose increased by 12.6%, which worsened our inflation. While the data for the second quarter of 2022 showed an improvement compared to the first quarter of 2022, increasing productivity should be a public policy priority as it will help reduce inflation.

Household debt service as a percentage of personal disposable income continues to rise, especially consumer debt. As the Federal Reserve Bank of New York reported, “Credit card balances saw their largest year-over-year percentage increase in more than 20 years, while overall limits on cards marked their largest increase in more than 10 years. This is to be expected in an inflationary economy where wages are not keeping up with rising prices and workers are turning to credit cards and consumer loans to maintain their way of life.

Total business inventories are ridiculously high and the highest on record, a factor mentioned by many respondents in the ISM report.

July housing starts, released Aug. 22, were at a seasonally adjusted annual rate of 1,674,000. That’s 1.3% below June’s revised rate of 1,696,000, but 1.1% above from the July 2021 rate of 1,655,000.

The IBD/TIPP index of economic optimism for August was virtually unchanged, down just 1% to 38.1. It has been largely stable since June. (The index signals optimism at 50 or more.)

Comment

The Federal Reserve Bank of Atlanta expects the third quarter of 2022 to post growth of around 2.6%. The projection is based on increased growth in personal consumption expenditure, primarily in food and accommodation services and non-profit institutions serving households in the second quarter of 2022. Incidentally, this is an interesting correlation, with 20% of US households saying they can’t afford to pay their utility bills and even more worry about being able to pay their rent. One might assume that the increase in food services is that the homeless are eating in restaurants with funds from non-profit organizations.

Epoch Times Photo

The two quarter declines in the first and second quarters of 2022 marked a technical recession, which will need to be confirmed by the National Bureau of Economic Research’s Business Cycle Dating Committee, likely after the second data revision on September 29. However, we reiterate our thesis that much of the negative GDP (gross domestic product) in the first and second quarters of 2022 was attributable to an anomaly in imports and inventories, as we explained in more detail in our report on GDP for the second quarter of 2022.

Inflation continues to print at an unacceptable level. To the extent that it slows when it prints on Sept. 13, we believe this would be primarily attributable to Fed tightening and a slowing economy.

We continue to believe that real overnight rates will need to move to 3.5-5% and stay there for at least three quarters, to completely extinguish inflation and, more importantly, inflationary expectations. To do this, we reiterate our call for the Fed to increase the limit on Treasuries and mortgage-backed securities it allows to “burn” to at least $125 billion during its next meeting this month to further reduce the Fed’s balance sheet. rapidly. In effect, it would be yield curve control to invert the inverted yield curve and bring the economy back to realistic conditions. Otherwise, we are in for a long, long period of economic malaise as the Fed pursues a “soft landing”. We think the Fed should look into a sharp, short recession to bring the economy back to pre-pandemic growth.

The misleadingly named and recently signed Inflation Reduction Act is troubling, as the minimum tax provisions will likely offset the investment decisions needed to boost our now-record productivity. As we explained in detail in our April jobs report here, prices are a function of the money supply and the quantity of goods (MV = PQ). While the Fed is reducing money supply (M) with quantitative monetary policy tightening, Capitol Hill and the President have made a big mistake with fiscal policy that discourages capital investment, which will further reduce labor productivity and, therefore, the quantity of goods and services (Q) in the economy. The new law flies in the face of Fed policy, conflicting with the Democrats’ stated intention to fight inflation.

We expect third quarter 2022 GDP to be around 2%. We are monitoring ‘grey swans’ (i.e. events that are known and likely to occur, but assumed to be unlikely) in the Taiwan Strait, Ukraine and Europe, and will post information about these in our Twitter feed, @Stuysquare.


DISCLOSURE: Opinions expressed, including the outcome of future events, are the opinions of The Stuyvesant Square Consultancy and its management only as of September 2, 2022, and will not be revised for events after this document is submitted to the editors. of The Epoch Times for publication. Statements contained herein do not represent and should not be considered investment advice. You should not use this article for this purpose. This article includes forward-looking statements about future events that may or may not develop in the author’s opinion. Before making any investment decision, you should consult your own investment, business, legal, tax and financial advisers. We partner with the directors of TechnoMetrica on surveying work in certain elements of our business.

Note: Our reviews tend to be event driven most of the time. They are primarily written from a public policy, economic or political/geopolitical perspective. Some are written from a management consulting perspective for companies we believe are underperforming and include strategies we would recommend if the companies were our clients.

J. G. Collins

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JG Collins is Managing Director of Stuyvesant Square Consultancy, a strategy consulting, market research and advisory firm in New York. His writings on economics, business, politics and public policy have appeared in Forbes, the New York Post, Crain’s New York Business, The Hill, The American Conservative and other publications.

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