The headline jobs number this morning was +223K which was roughly in line with the +200K estimate. Revisions to prior months job gains were relatively minor. Leisure and hospitality industries accounted for +67K new jobs last month while the healthcare sector added +55K. Unemployment rate stubbornly low at 3.5% but roughly 720K people reentered the workforce and that’s a good thing. We are still searching for the roughly 3.5M additional workforce participants who were in the labor force when COVID started but have since gone missing. Not a small number – but we will tackle that next week with a detailed note on the labor market and overall labor participation rates.
The most important thing, however, isn’t these headline numbers: it’s the trend emerging in the wage growth data. It’s slowing and not by a little. Average hourly earnings just +.3% MoM (below estimates). The workweek declined -.3% MoM (also weaker than expected) and hours worked declined -.1% MoM (also missing estimates). Tough and tight financial conditions are slowing the economy on many fronts. The super cocktail of higher Fed funds rates + quantitative tightening (Fed balance sheet shrinking) + M2 money supply cratering (money supply now growing less than when COVID started) has purposefully weakened demand, brought commodity prices down, and now is softening a very tight labor market. Like novocaine, tighter financial conditions eventually work.
The Fed will hike another 25 bps in February – but that might be it. The economy is approaching recession and while the Fed portrays itself as a nonpolitical body, everything in life is politics. EVERYTHING. The Fed is to blame for getting too far behind the market when it came to identifying and dealing with rising inflation a year ago. Fed chair Powell and Co. wont like now getting blamed for driving the economy into recession 18 months prior to presidential elections. Don’t fear a recession, embrace a recession. Investor sentiment and positioning already extremely bearish. When it comes to softening economic data, “bad” now means “good.” When the market gets a mere whiff that the Powell Pause on rates might be in the cards, it’ll rip. Just have to be there to catch it. Stay long.
Richard Barrett
Chief Investment Officer
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