People are getting laid off but there are job openings

Stocks rose yesterday as traders weighed the possibility of a softening labor market. The market has digested a 50-75 basis point rate hike later this month, and now sets its sights on today’s monthly job figure.

Flip side. A key, real-time metric on the labor market is the weekly Initial Jobless Claims number from the Department of Labor. The number measures first-time filings for unemployment. In other words, it accounts for folks who were just laid off. It is a weekly number reflecting the past week’s activity making it far timelier than most other releases, some of which reflect economic activity months ago. When this indicator rises steadily, it can be viewed as a sign of upcoming distress as companies typically trim their workforces when they are struggling. Additionally, all of those out-of-work people are likely to spend less money until they can secure a new position. Uh-oh, did I just mention “spend money,” as in consumption…as in 2/3 of GDP?

I am sure that you can see that high unemployment leads to decreased economic growth…it’s just logical. Therefore, as you might guess, our government would like to ensure that unemployment remains low. In fact, our government has emboldened the Federal Reserve with a mandate to keep unemployment in check. It is the second part of the Fed’s so-called dual mandate, the first being keeping inflation in control. As you all well know by now it is no easy task. Theoretically, it is near impossible for the Fed to be successful.

Have you ever heard of the Phillips Curve? It is sometimes thrown around by Fed members in their interviews and speeches. It is named after economist William Phillips and it captures his theory that there is an inverse relationship between wage growth and the unemployment rate. When unemployment is low, the tight labor market forces hiring companies to raise wages as they compete with a smaller number of applicants. As labor costs rise, companies, faced with declining profitability, are forced to raise prices…inflation. So, if the Fed is doing its job and keeping unemployment low, according to the theory, it will cause inflation. This has been one of the principal drivers of the current inflation that we are experiencing.

Ok, back to the weekly employment figures. Do you remember back to 2020? You are excused if you have expunged it from your memory for health reasons. Let me remind you about the employment situation back then. In the months leading up to the pandemic the unemployment rate hovered below 4% after steadily trending down following The Great Recession. In fact, it was at its lowest level since the late 1960s. Then came the pandemic and the initial lockdowns. The unemployment rate spiked to 13%! The weekly jobless claims number topped 6.16 million in mid-April! That’s a lot of job losses for one week. By the end of 2020, weekly layoffs were lower, but still quite high, averaging around 800k per week. By the end of 2021, the weekly number receded to an average of 260k. The unemployment rate also trended downward and now rests at 3.6%…only 0.1% above where it was before the pandemic. Throughout 2021, Fed messaging was clear: we are not going to raise interest rates until unemployment was in control. By November, the Fed shifted gears. The labor market was healthy… and inflation was out of hand. The Phillips Curve now loomed over the Fed – tight labor conditions have contributed to inflation. It was time to fight inflation by raising interest rates. So, here we are after a few rate hikes. Inflation is still high, and many are starting to wonder if a recession is on the horizon. Oh, and those weekly Jobless Claims numbers appear to be trending up and, in fact, came in higher than expected yesterday with a 3^rd consecutive week above 200k. Traders hoped that the trend would cause the Fed to possibly ease up on the path of rate hikes – positive for equities.

Today we will get the monthly employment numbers from the Bureau of Labor Statistics. Economists estimate that the unemployment rate for June was 3.6%, same as May. They further expect that 268k new jobs were created for the month, far less than May’s 390k new jobs. Is the labor market weakening and the trend reversing? Will this lead to lower wages and lower inflation? It is too early to know if the trend will persist. However, I will leave you with these numbers. According to the Bureau of Labor Statistics, there are currently 11.254 million unfilled job openings. The weekly employment figures also include the total number of existing employment claims (the total number of recipients), and the latest figure has that at 1.33 million. So, it would seem that there are plenty of opportunities for those unemployed who want to work. Does that look like the hallmarks of a tight labor market?

YESTERDAY’S MARKETS

Stocks rallied yesterday on hopes that the Fed may slow down its rate hiking due to a weakening economy. The S&P500 rose by +1.50%, the Dow Jones Industrial Average gained +1.12%, the Nasdaq Composite Index jumped by +2.28%, and the Russell 2000 Index added +2.43%. Bonds slipped and 10-year Treasury Note yields added +7 basis points to 2.99%. Cryptos jumped by +7.40% and Bitcoin advanced by +6.04%.

NXT UP

• Unemployment Rate (June) is expected to come in at 3.6%, same as May.
• Change in Nonfarm Payrolls (June) may have slowed to 268k from May’s 390k.
• Next week: EARNINGS SEASON BEGINS. Additionally, we will get an important read of CPI and PPI, among other things. Check back on Monday for details and calendars.