Under the Surface, Cracks Are Emerging in US Labor Market
Comment of the Day

July 07 2023

Commentary by Eoin Treacy

Under the Surface, Cracks Are Emerging in US Labor Market

This article from Bloomberg may be of interest to subscribers. Here is a section:

“It seems clear that the labor market is cooling, and if we are correct about the pending benchmark revisions, the extent to which the labor market has cooled will take many by surprise,” said Richard Moody, chief economist at Regions Financial Corp.

The underemployment rate, a broader measure of labor-market slack than the headline unemployment rate, is at its highest level in almost a year as more Americans report working part-time for economic reasons. That number rose in June by the most since the immediate onset of the pandemic.

While some employers continue to struggle to attract and retain workers — which has helped keep wage growth elevated — higher interest rates and a gloomy outlook may be starting to weigh on labor demand.

Eoin Treacy's view

As I discussed in the audio/video last night, employment data is unreliable. How it is gathered, and how it reflects reality on the ground is not especially accurate. More importantly employment data is a lagging indicator.

Conditions need to deteriorate before they are reflected in corporate hiring decisions. The job openings report was designed in the hope of creating a leading indicator. The facts on the ground are companies leave job advertisements open even if they have no intention of hiring immediately.

Meanwhile, yield curve inversion, falling PMIs and underperforming banks are lead indicators. I am fully aware I sound like a broken record, but I have been performing this role for long enough to have learned ignoring the portent of lead indicators is not a good idea.

The Dollar is pricing in potential for interest rate differentials to contract. The market has been conditioned over the last 15 years to expect an explosion in central bank balance sheets every time there is a threat of economic contraction.

Gold has been consolidating in anticipation of the Dollar rolling over and the trend of positive real rates reversing.

Quantitative tightening has, so far, a solid record of sparking deflationary fears. No one questions the tendency of the quantitative easing to spark asset price inflation, but few are willing to consider the antithesis. That is also a solid rationale for why the tech sector remains so resilient. It is the primary beneficiary of a low-rate environment.

The challenge for investors is the market is displaying the same behaviour now as is late 2021. I describe that as a willingness to look past the looming problem to the certainty of the essential solution. There is an order of operations to take account of. Economic conditions have to first deteriorate enough to spur monetary and fiscal action. To think earnings will be immune to that kind of volatility requires a suspension of critical faculties consistent with a mania.

The Nasdaq-100 is pausing around the psychological 15,000 level but is still holding a sequence of higher reaction lows. 

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