Jobs, GDP, And Other Data All Say, ‘Stagflation’

NEW YORK (September 6) — The Bureau of Labor Statistics (BLS) announced 142,000 new jobs this morning, according to the Establishment Survey, a collection of job creation data from businesses. The number is well below the 165,000 consensus estimate. June and July jobs creation figures were also revised down by 61,000 and 25,000 new jobs, respectively, bringing the average non-farms jobs creation figure for the last three months to a less-than-robust 116,000 new jobs.

The BLS’s Household Survey, which polls the number of people taking jobs, and is viewed as eliminating workers taking more than one job, printed higher at 168,000 new jobs. The unemployment rate edged down, to 4.2%. Some 120,000 people joined the labor force. The “U6,” which is the percentage of the population that is unemployed, plus all persons marginally attached to the labor force, plus total employed part-time for economic reasons, plus all people marginally attached to the labor force, printed slightly up at 7.9. This created a four-month trend and up 80 bps since this time last year.

Analysis

Let’s look at our exclusive schedule of July and August Jobs Creation by Average Weekly Wages.

Jobs creation was, again, led by those positions that tend to have government support, like Private Education & Health Services, which added 47,000 new jobs, net, including 44,100 Healthcare and Social Services jobs. (We do not include “official” government jobs payrolls in our chart. Such government payrolls added another 24,000 jobs, or 16.9%, of the 142,000 net new jobs reported today by the BLS.) The low-wage Hospitality sector added 46,000 new jobs.

The biggest job losses were in the higher wage manufacturing sector, which lost 25,000 jobs in Durable goods manufacturing, but gained 1,000 jobs in the Non-durable manufacturing sector.

Higher paying jobs creation was, again, virtually moribund, save for Construction, and Financial Services that added 34,000 and 11,000 jobs, respectively. If one eliminates direct government jobs and jobs like education, healthcare, and social services that are largely supported by the government, net jobs creation was a very anemic 71,000 new jobs.

Economy Generally

The higher unemployment print last month, at 4.3 percent, triggered the Sahm Rule that we wrote about in our Second Quarter GDP report. Basically, the Sahm Rule says that a 50 basis point (BPS) increase in the unemployment rate over the lowest three-month moving average of the unemployment rate in the prior 12 months signals the start of a recession. Today’s data causes a Sahm rule print of 53 bps, so the data point remains in effect for the August unemployment data. It also appears that our long-standing inverted yield curve is close to resolving, which heightens the likelihood of recession.

We continue to believe that today’s job numbers, and those discussed below under Other August Data, sets up the economy for the “stagflation” we warned about in our First Quarter GDP report. A big part of that is that we believe that the Fed will quietly acquiesce to an inflation rate that is 100 bps, to as much as 150 bps, higher than the pre-pandemic rate of around 2% and that it will only accelerate.

The preliminary print of Second Quarter GDP was 3%, year-on-year, in the second estimate. See the chart from the International Monetary Fund, linked here. Most of Western Europe is not doing as well, but several developing countries are doing considerably better.

We continue to be troubled that so much of the US GDP growth, as well as job growth, is fueled, directly and indirectly, by enormous government spending. Much of the purported US “growth” is from the government; around one-third of our total GDP, among federal, state, and local government expenditures.

This interactive chart, from the IMF, shows how excessive our debt to GDP ratio, at over 123 percent, is relative to other G7 economies. Only Japan and Italy are worse off. Finally, we are troubled by the enormous P/E ratios of the “Mag 8” and the rapid accretion of AI related stocks. We’re concerned that much of this is FOMO by retail investors, as well as institutions following the crowd. It resembles the “dot-com” bubble we saw at the turn of the century, when many on Wall Street were still in grammar school.

Federal Reserve Policy

The Federal Reserve’s latest Summary of Economic Projections (informally, its “dot plots”), from June, show a central tendency of 1.8 to 2.3 percent growth for the years, including 2024, through 2026, down somewhat from the March projections. We also saw we exceeded the upper threshold of the central tendency for 2024 unemployment, at 4.1% back in the June unemployment rate. The economy is both stronger and weaker than the Fed anticipated: stronger in GDP; weaker in employment. It supports our view that we are heading into a period of stagflation.

The Fed minutes from the July meeting and the Fed’s Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reflected tightening commercial real estate and consumer lending. Fed staff continue to characterize the vulnerability of the financial system as “notable.”

Alternative Fed Policy Tools

We have said for quite some time that the Federal Reserve balance sheet is too large; much larger than it should be, given how far we are from the pandemic. As of September 2, the Fed balance sheet was still at $7.112 trillion; roughly where it was in October 2020, still in the height of the pandemic and just $300 billion less than it was at the start of the Biden Administration in January 2021. Before the pandemic, the Fed’s balance sheet was just $4.1 trillion.

We believe the Fed recognizes an enormous risk to middle market and regional bank commercial real estate loan portfolios that originated during the ZIRP or near-ZIRP rates that prevailed in the aftermath of the 2008 financial crisis come to maturity. We suspect that is much of the reason for Chair Powell’s talk of a rate cut at Jackson Hole. Given a 4.2% unemployment rate, a 3% GDP, and other factors, we don’t think the data supports a rate cut if the Fed’s priority is returning headline inflation to 2%. But, then again, we think the Fed’s higher priority is to assure a “soft landing.”

We continue to believe, as we have said for months now, that monetary policy, and the Fed’s effort to assure a “soft landing” continues to be far too accommodating, and has been a longer-term mistake. We see it in the continuing Trimmed Mean Inflation rate, at 1.68%, the same as it was in December 2020, when trimmed mean inflation commenced its gallop to 6.94%, just two years later.

Our continuing inflation bears out the obvious effect of the excess money supply and bloated Federal Reserve balance sheet.

Fiscal Policy

Readers should regularly look at the schedules of “Household Debt and Credit”, prepared quarterly by the Federal Reserve Bank of New York, to monitor debt and delinquency figures, particularly among “Generation Z”; young people 18 to 29 who are the principal drivers of family formation that drives so much of GDP. Fiscal policy is adding another trillion dollars to the national debt every 100 days.

All that cash sloshing around — from fiscal and monetary policy — has, we think, artificially boosted asset prices, including home prices and securities values, above where they would otherwise be. We believe it sets up a reckoning in the future: either continued inflation (as the spending continues and deficits increase) or a sharp and perhaps lengthy recession; the kind of lengthy economic malaise we saw after the 2008 financial crisis.

As we have said for some time, failing to arrest this fiscal and monetary policy — and soon — will, we believe, result in a Hobson’s Choice of policymaking, where future prosperity is at substantial risk.

Looming “Gray Swans”

There are at least four looming “Gray Swans” facing the economy. “Gray Swans,” rather than “Black Swans,” are events that can be foreseen, but are unlikely. Black Swans are totally unpredictable. (A Gray Swan is comparable to a hurricane in hurricane season, whereas a Black Swan would be something like a devastating earthquake.)

Virtually all the looming Gray Swans we can foresee are attributable to bad national policy choices. They include:

• De-dollarization. The choice to try to weaponize the dollar against Russia to punish it for its invasion of Ukraine has backfired and led several nations to do direct settlements in their own currencies in the coalition we now call the “BRICS+”. We discussed the prospect of this happening here in February 2022. It has now come to be with the passage of the “21st Century Peace Through Strength Act” (H.R.8038), which I discussed further here. Critical national security allies like Turkey and India, who had always played both sides of the adversaries in the Cold War, are moving closer to embrace Russia and the BRICS+ because of reckless US fiscal and national security policy.
• Oil Shock. With the Israeli/Hamas War ramping up, we are gravely concerned about the state of the strategic petroleum reserve. The United States uses about 20.5 million barrels of oil a day, on average. The Biden Administration tapped America’s Strategic Petroleum Reserve to artificially lower oil and gasoline prices to reduce inflation after 2021 election losses in “purple” Virginia and a near loss by Governor Phil Murphy in New Jersey. At the time, the Washington Post said the results showed the “wind was at the back” of the GOP. The Biden White House tapped the SPR again in October 2022, shortly before the midterm federal elections. Given flashpoints in Eastern Europe and the Western Pacific, a dearth of needed oil in the US SPR in the event of a conflict could strangle the economy with expensive fuel costs. We now have less than a three-week supply of oil in the SPR, assuming the average use of 20 million barrels a day.
• Municipal bankruptcy. The stress and costs of migrants could force a technical default on municipal general obligation bonds of some “sanctuary cities.”
• Widening wars in Three Theaters. Geopolitical risk has been escalating for some time: Ukraine’s offensive into the Kursk region of Russia, while minor, raises tensions and the risk of retaliation. This morning, President Zelensky reportedly asked the Biden Administration for permission to attack deeper into Russia using US weapons. The Biden Administration has been hesitant to approve such initiatives in the past. Russia’s Putin has repeatedly warned he would retaliate against the US and NATO if Ukraine’s offensive in Russia expands, including making long-range ballistic missiles available to the Western nation’s adversaries. China has been increasingly belligerent toward both The Philippines and Japan and continues its “demands that the United States stop military collusion between the U.S. and Taiwan, stop arming Taiwan and stop spreading false narratives about Taiwan,” as it reiterated in a statement made after National Security Adviser Jake Sullivan met with China’s President Xi. An overflight by both Chinese and Russian bombers within Alaska’s Air Defense Identification Zone (ADIZ) was intercepted by North American Air Defense at the end of July. The Israeli/Hamas War continues with talks of a ceasefire or a peace deal dashed by Hamas’ murder, most recently, of six civilian hostages, including an American from Long Island.

Prognostication

We expect the economy to slow and unemployment to rise. We think GDP for the third quarter will print at 2%, +/- 25 bps in October and for headline inflation to remain about the same, 3%, +/- 25bps.

We reiterate our view that we’re on the cusp of a “stagflation” cycle, with tepid growth, higher unemployment, and continued inflation. Currently, the “Misery Index,” an old measure of the economy from the Carter years that simply adds the unemployment and the inflation rate, is at 6.7%, down from 6.9%.

It is highly likely the Fed may reduce rates at its September meeting, given today’s jobs print and notwithstanding the core inflation number of 2.6% Both prints are the last of the key data points before the Fed’s September meeting. We would prefer the Fed to stand pat until the end of the year.

Other August Data

The second estimate of GDP printed at 3% annual growth, so higher than the original estimate of 2.8%. PCE Inflation, ex-food and fuel, was down from the prior quarter estimate at 2.6%.

The Institute for Supply Management’s Manufacturer’s Purchasing Managers Index (PMI) at 47.2 for August is slightly higher than the 46.8 that printed in July. But, it is also below market expectations of 47.5 Key elements of the survey, show the industrial economy contracting, Critical factors, like slowing new orders and higher customer inventories, point to a slowdown. (There had been a brief March growth number of 50.3. A reading of below 50, signals contraction.) Prices continued to increase, faster, from 52.9 to 54. The August ISM Services Index, had printed at 51.5, up from 51.4 in the July print. Nevertheless, details of the print appear to point to a slowing economy.

The Job Openings and Labor Turnover Survey (JOLTS) for July, released Wednesday, printed considerably worse, with 237,000 fewer job openings in July than in June. This is the lowest JOLTS opening since January 2021. There were also 1,132,000 fewer job openings than last year. However, there were 273,000 more hires in July than in June.

Privately owned housing units authorized by building permits in July, released August 16th, were at a seasonally adjusted annual rate of 1,396,000. This is 4.0 percent below the revised June rate of 1,454,000 and is 7.0 percent below the July 2023 rate of 1,501,000. Privately owned housing starts in July were at a seasonally adjusted annual rate of 1,238,000. This is 6.8 percent (±10.3 percent)* below the revised June estimate of 1,329,000 and is 16.0 percent (±10.5 percent) below the July 2023 rate of 1,473,000.

Personal income and outlays, for July, released August 30th, showed disposable personal income up 0.3 percent in current dollars and also up 0.1 percent in chained 2017 dollars. (“Chained dollars” is a measure of inflation that considers changes in consumer behavior in response to changes in prices.) Personal income in current dollars was up 0.3 percent.

The June Personal Consumption Expenditures (PCE) Index from a year ago, excluding food and energy, released the same day, and reported to be the Federal Reserve’s preferred measure of inflation, printed at 2.6 percent, year-on-year, unchanged for three months. PCE inflation, also called “headline inflation,” printed at an annualized 2.5 percent, the same as last month. Annualized inflation rates have barely budged for a month, with the biggest move being only 20 bps.

The RCP/TIPP Economic Optimism Index (previously the IBD/TIPP Economic Optimism Index) for September, printed at 46.1. The index has printed in negative territory — below 50 — since September 2021.

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The views expressed, including the outcome of future events, are the opinions of this firm and its management only as of September 6, 2024, and will not be revised for events after this document was submitted to Seeking Alpha 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 investment, business, legal, tax, and financial advisers. We associate with principals of Technometrica, co-publishers of the TIPP Economic Optimism Index, on survey work in some elements of our business.

Views expressed in this article are opinions of the author.