Markets React To Less Than Stellar Jobs Data; Consumers Are Driving On Empty

The equity market appears to have succumbed to the growing list of weakening economic data. The major stock indexes fell significantly this week, including on Friday in the wake of the August jobs report.

Trader sentiment has now shifted from buying small caps to selling them (note the Russell 2000 fell nearly -6% this week). Small caps are the last to be bought in a market run-up, and the first to be sold as sentiment shifts from “risk on” to “risk off.” But small caps weren’t the only losers as the tech space suffered. The tech-heavy Nasdaq index lost -5.77% on the week with every one of the Magnificent 7 off for the week (-5.5% using a simple average) and now off nearly -15% from the peaks made just 30-45 days ago. Nvidia, in particular, has fallen more than -20% from its peak which was put in just nine trading days ago (August 23^rd). As the table shows, the bloom appears to be off the rose!

Most of the incoming data appear to be showing an economy, not yet in Recession, but slowing significantly. As noted in prior blogs, such trends don’t suddenly stop at neutral or reverse themselves without some exogenous event or some economic policy change.

Jobs

Friday’s (September 6^th) Nonfarm Payroll number, at +142K, undercut the consensus estimate of +165K. Still, the U3 Unemployment Rate fell by 0.1 percentage points from 4.3% to 4.2%. Without the automatic add from the Birth/Death model, that number would have been flirting with the zero line, or even negative. [Note: BLS adds about +100K jobs per month based on a long-term trend of the growth of small businesses which are not surveyed in the monthly jobs report. That trendline is insensitive to changing economic conditions.] Worse, prior months’ revisions cut -86K jobs from June and July. Financial markets were forewarned by the JOLTS (Job Openings and Labor Turnover Survey) and by the ADP jobs report earlier in the week. And, all week, the equity markets struggled. Through Thursday, the S&P 500 was down nearly -2.6%. Then came Friday’s jobs report, and the selling began in earnest.

Wednesday’s JOLTS indicated that job openings had fallen. The chart shows the ratio of job openings to the number of unemployed. Note that, excluding the Pandemic, at 1.07, this ratio is the lowest is has been since 2018, indicating that jobs have been drying up. And the downtrend doesn’t look like it is going to stop anytime soon.

Fed Chair Powell has told us at various times that this ratio is important and that the Federal Open Market Committee is focused on it.

Besides being forewarned by the JOLTS report, the equity markets should have been prepared for a less than stellar jobs report as ADP’s jobs numbers, reported on Wednesday, came in short at +99K, a big miss from the consensus forecast of +145K. This was the weakest ADP report since January 2021, and, as indicated earlier, the number of job openings has rapidly deteriorated. We haven yet seen a spike in the weekly Initial Unemployment Claims data, but we think that is coming.

· Employers are still hoarding labor after the 2022-2023 experience of the inability to fill open positions. But, as profits become harder to attain, such hoarding will cease.

· According to outplacement firm Challenger Gray and Christmas, layoffs surged in August to nearly +76,000 (the most for any August since the 2020 COVID episode and August 2009 before that). That number of layoffs is 33% higher than the average for August. In addition, Challenger indicated that hiring hit its slowest year to date pace going back to 2004.

· Due to the BLS’ August survey period, the surge in layoffs, as noted by Challenger, doesn’t appear to have been captured in BLS’ jobs data. We note that the large negative revisions for June and July do indicate a weakening jobs market. Those layoffs, as noted by Challenger, will likely show up in the September jobs report.

· The sister Household Survey, from which the unemployment rates are calculated, showed up with job growth of +168K, and that was enough to lower the U3 Unemployment Rate to 4.2% from 4.3%. Digging deeper, however, we see the following:

• Of that +168K employment increase, +264K were “Part-Time for Economic Reasons (PTFER),” meaning that full-time work was desired, but wasn’t available.
• In July, that PTFER number was +346K, and the July + August numbers showed the largest two-month increase in that count since April and May, 2020! As a result, the more comprehensive U6 Unemployment Rate rose to 7.9% from 7.8%, the highest it has been since October 2021. Clearly, the number of full-time jobs is below the demand for them.
• The number of people holding more than one job because they cannot find full-time work rose +65K in August after rising +133K in July. They now represent more than 5% of the workforce and, according to Rosenberg Research, is the highest since the Great Recession.
• In addition, the ranks of the self-employed, those people who, once released from their job, take on “consulting” work to make ends meet, grew by +425K over the July-August period. Yet another sign of strain in the jobs market.
• Remember, BLS counts full-time and part-time jobs the same. But they clearly are not. In August, according to the Household Survey, full-time jobs fell -438K and multiple job holders increased +65K after growing +133K in July.
• Full-time employment, as counted in August’s Household Survey, is down -0.8% from a year earlier. According to Rosenberg Research, in the eight Recessions dating back to 1970, the loss of full-time employment of this magnitude has been associated with Recession 100% of the time.

• Looking at the chart of employment changes by sector, one sees the leading growth sectors are the usual suspects: 1) Leisure & Hospitality, 2) Health Care and Social Assistance, 3) Construction, and 4) Government.
• On the other end, Manufacturing lost -24K jobs. We have written in past blogs that we believe that Manufacturing is already in Recession. Such job losses appear to put the icing on the cake.
• Even the red-hot technology sector showed up with a net loss of -7K jobs in the August data.
• Retail lost -11K, reinforcing our view that the consumer has been tightening the purse strings, especially with the savings rate down to 2.9% from an already lowly 4.4% a year ago. Pre-pandemic, as seen on the chart below, this number was in the 6%-8% range. The implication is that, with full-time jobs contracting and the savings rate at rock bottom, growth in consumption will be at a premium.

Expectations

Expectations play a large role in consumer spending. If the consumer is confident that their income will be growing, they will spend more freely. On the other hand, if income expectations are low, perhaps not. The chart below, from the University of Michigan’s Consumer Sentiment Report, shows that income expectations are at the low end and have been falling for the past year; not very encouraging for GDP growth going forward. The loss of retail jobs is usually a sign of a weakening consumer.

GDP

The Atlanta Fed’s GDP Nowcast for Q3 (July through September) currently stands at a 2.1% annual growth rate. Same for the St. Louis Fed’s forecast. In Q2, GDP grew at a 3% clip due largely to a strong consumer. In July and August, the consumer continued to spend, taking down the savings rate to 2.9%. However, as noted above, consumer expectations for income growth are low, and with depleted savings and consumers primarily looking for bargains, we expect a significant slowdown in GDP growth in Q4. In the latest Fed Beige Book (a compendium for business views), the anecdotes implied that nine of the 12 Federal Reserve districts were experiencing much slower growth and even some contraction.

In addition, many of the world’s economies, China in particular, have seen significant slowdowns in economic growth, and, as a result, U.S. exports have slowed while the U.S. consumer was still on a spending binge. The resulting negative balance of trade (Imports>Exports) is also a negative in the GDP calculation. Thus, we expect Q3’s GDP (in the 1% to 2% range) to be lower than Q2’s 3% rate of growth, and Q4’s to be lower yet.

The Fed

With inflation already on the wane, and U.S. consumers tapped out, it is a near certainty that the Fed will lower rates at next week’s meeting. The only question that remains is whether it is a 25 or 50 basis point reduction (i.e., 0.25 or 0.50 percentage points) in the Fed Funds rate (currently at 5.25%-5.50%). So, 25 basis points is for sure, and the market’s odds of a 50-basis point decrease is in the 35% range. Of course, incoming data could change those odds. Our opinion is that the Fed is behind the curve and should reduce by 50 basis points. But if we had to bet, our money would land on 25. The chart shows that durable goods are already in deflation. As indicated earlier, trends don’t magically reverse without a reason.

Final Thoughts

The equity market ran into a bit of trouble this week (ended September 6^th), with the major indexes down -3% to -6%. Nvidia, the leader of the Magnificent 7 pack, fell nearly -14% for the week after delivering a great Q2 report, but apparently not good enough for the markets’ heightened expectations. Anyway, it appears that the bloom is off the rose for equities, at least until the markets find a new theme to excite investors (AI is apparently now passe).

The jobs report appeared to show decently at +142K for the headline. But it was less than consensus (+165K) and prior months revisions (-86K) really spooked Wall Street. In addition, while not yet showing up in the official weekly unemployment claims data, the Challenger outplacement firm’s data indicated that August’s layoffs surged and that hiring slowed to a 20-year low!

While the U3 unemployment rate fell from 4.3% to 4.2% (normally good news), the U6 rate rose to 7.9% from 7.8%. The U3 rate is somewhat misleading because BLS counts part-time jobs as equal to full-time ones. The fact that full-time jobs have fallen nearly 1% from a year ago doesn’t impact the BLS data because they were replaced by part-time. Many people are working part-time because full-time isn’t available. In addition, multiple job holders are growing. Both of these trends are clear signs of stress in the all-important jobs market. Perhaps those are the underlying reasons for the recent downdraft in equities.

Manufacturing lost -24K jobs in August (adding credence to our view that Manufacturing is already in Recession), retail jobs were lower by -11K, and even tech jobs shrank (-7K).

While the U.S. consumer has been on a spending binge, expectations for income growth have all but disappeared. This, along with depleted savings and rising credit delinquencies lead us to believe that Q3 GDP will be much lower than Q2’s 3% growth rate.

Finally, the Fed meets soon (September 17-18). There has been good progress on inflation, and, as we have discussed in past blogs, the lagged impact of disinflating (and deflating) rents will continue to push inflation down through year’s end. In fact, we believe we could see some deflation in 2025. While we think the Fed is way late to the rate reduction scenario (Canada already reduced their Fed Funds equivalent rate by 75 basis points), if we were betting, we would put our money on a 25-basis point rate cut, not 50. Why? Because the year/year inflation numbers are still above 2% (Shhh – the annualized three-month numbers are now below 2%), and this Fed appears to be backward looking.

(Joshua Barone and Eugene Hoover contributed to this blog.)