Saturday, August 3, 2024

July jobs report shows slowdown, not recession. But still shows Fed screwed up

I had mentioned that Friday's US jobs report would be a big one, given that an election is on the horizon and that there had been evidence of economic growth slowing down. And that report definitely moved the needle.

Omigod! Are we now thinking about RECESSION? Especially when the increase in unemployment has now triggered one Rule that says we are already going down!

But then others were saying we this time may be different. Including the economist who set the Rule.

Sahm admits the trend in unemployment is not our friend, which I would agree with. However, I would also point out that the unemployment rate is actually 4.25% . And while that may sound like lame hair-splitting, I wonder what would be said if unemployment was at 4.24%, and reported as 4.2%, which would not have triggered the Sahm Rule.

There's another reason why this time may be different, and that's because the main source of the rise in unemployment isn't fewer Americans identifying as working, but instead is due to growth in the labor force. This was true in both June and July, where the number of "employed" grew in both months, but the labor force grew by much more, and UW Econ Professor Menzie Chinn notes that it is different than when we in the 2 non-COVID recessions in the 2000s.

Let's also note that jobs still grew in July (which usually won't happen in a recession), but the lower amounts of jobs being added is worth acknowledging. Job growth has kept getting smaller throughout the Biden presidency, and while we knew the post-vaccination and stimulus job booms of Biden's first 18 months in office were going to fade, growth has also declined in each 6-month period for the 2 years since then.

It's also the first time that we've had 2 straight months in the post-COVID world where the 3-month average for job growth was under 200,000 jobs a month. As you'll see, we are now back to a level of job growth that is similar to what we had in most of the Trump years, and in the year prior to Trump taking office. I'm going to give extra weight to the job totals from this year, along with 2019, which was Trump's last pre-COVID year in office.

The US stock market saw Friday's jobs report, and it freaked out.

The S&P 500 sank 1.8% for its first back-to-back losses of at least 1% since April. The Dow Jones Industrial Average dropped 610 points, or 1.5%, and the Nasdaq composite fell 2.4% as a sell-off for stocks whipped all the way around the world back to Wall Street.

A report showing hiring by U.S. employers slowed last month by much more than economists expected sent fear through markets, with both stocks and bond yields dropping sharply. It followed a batch of weaker-than-expected reports on the economy from a day earlier, including a worsening for U.S. manufacturing activity, which has been one of the areas hurt most by high rates.

It was just a couple days ago that U.S. stock indexes jumped to their best day in months after Federal Reserve Chair Jerome Powell gave the clearest indication yet that inflation has slowed enough for cuts to rates to begin in September.

Now, worries are rising the Fed may have kept its main interest rate at a two-decade high for too long. A rate cut would make it easier for U.S. households and companies to borrow money and boost the economy, but it could take months to a year for the full effects to filter through.

“The Fed is seizing defeat from the jaws of victory,” said Brian Jacobsen, chief economist at Annex Wealth Management. “Economic momentum has slowed so much that a rate cut in September will be too little and too late. They’ll have to do something bigger than” the traditional cut of a quarter of a percentage point “to avert a recession.”
Go back to one of the charts from above, and you can see that job growth in Spring and Summer 2024 is basically the same as the last half of 2018 and all of 2019. But as I've said a number of times before, there are a couple of notable differences in 2019 compared to today.

1. In 2019, the US unemployment rate was under 4%, and if anything, was going lower. In August 2019 it was at 3.6%, while today, unemployment is at 4.25% and has gone up 3/4 of 1% in the last year.

2. In Summer 2019, the Fed Funds rate was at 2.25-2.5%. And then in late July, the Fed gave in to Donald Trump's whining and started cutting interest rates below that. By comparison, the current Fed Funds rate is at 5.25%-5.5%, and the Fed decided against cutting rates in their late July meeting this year.

"But Jake, what about INFLATION?" When you're trying help businesses and consumers combat inflation, you need to be looking at how past inflation is causing injury (if it even has) and where is it going in the future. The real problem is that high interest rates are making it harder for businesses to borrow and invest, especially in home-building and manufacturing. Likewise, the high rates are keeping people from wanting to put homes with low-interest mortgages on the market, because it'll cost them more to move into a new place. This is causing the already-high cost of housing to be even higher and more out of reach for people that would otherwise want to buy a home.

It is also driving up the debt costs of a consumer that has helped to keep the economy moving along in 2023 and 2024, defying the "experts" who were predicting a recession 2 years ago. And with wage growth decent-but-not-great, you haev to wonder how much longer the consumer spending growth continues at the solid pace that we had in the first 2 quarters of 2024.

In addition, the inflation rates of Summer 2024 aren't all that much different than Summer 2019. We are told the the Personal Consumption Expenditures (PCE) Index is the number the Fed looks for when it comes to measuring what inflation is truly at. In 2019, PCE was hovering at or just below 2% through the Summer, after being above 2% for a sizable part of 2018. By comparison, since the Fed hiked rates to these multi-decade highs in mid-2023, PCE inflation has generally stayed at or below 3%, except for the first few months of this year, when corporations tried one last run of greedflation prices re-set for 2024 for many companies.

So if the PCE is maybe 1% higher in 2024 than it was in 2018, why are rates 3% higher now? Even if you go with a ratio argument ("PCE is 50% higher at 3% than 2%), explain to me why Fed Funds rates are more than double what they were 5 years ago. And that's BEFORE the Fed started cutting rates in the second half of Trump's last pre-COVID year.

Instead, the Fed has been looking backwards at what has happened with federal stimulus and post-COVID disruptions that spiked prices in 2021 and 2022, and is not looking at the post-COVID normal that we are in now. They have kept rates too high for too long, and now the jobs market has decelerated into "meh" largely due to that mistake.

Lastly, I'll repeat a Twitter observation I made that got a surprising number of responses.

Corporations, central bankers and other members of the Insiders Club had such success in keeping down wages and getting all the benefits of technology without having to pay more for it that they've gotten touchy now that we have a bit of balance returning to the working side of the equation. But I think 4% wage growth and 3% inflation is still fine, and the inflation side has been slipping down for the better part of the last 2 years.

Likewise, job growth is clearly lower and unemployment is creeping up. We aren't in a recession as of now, we are merely in a slower phase of growth compared to the Biden Boom that we had for most of 2021 through 2023, and 4.25% unemployment is still a level that we considered "full employment" up until Boomers started aging out of the work force in the mid-2010s. But it's still an avoidable error from the Fed to realize that we are in this lower-growth mode where keeping people in jobs and making it easier to pay their bils is more important than caring about whether inflation is at 2% or 3%.

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Thursday, August 1, 2024

Soft economic data makes Fed's delay in rate-cutting look all the more foolish

Back after a few days up North to get away and see some scenery. But I've still been keeping up with the data and developments in the world, and I'm a bit perplexed as to why our experts at the Federal Reserve aren't picking up on what seems pretty obvious.

That includes this report from the Census Bureau from today.

U.S. construction spending unexpectedly fell in June and the prior month's data was revised lower as higher mortgage rates weighed on single-family homebuilding.

The Commerce Department's Census Bureau said on Thursday that construction spending dropped 0.3% after a downwardly revised 0.4% decline in May...

Spending on private construction projects fell 0.3% in June after dropping 0.4% in the prior month. Investment in residential construction dropped 0.3% after falling 0.7% in May.

Outlays on new single-family construction projects decreased 1.2%. Spending on multi-family housing gained 0.1%. Mortgage rates surged in the spring, depressing homebuilding and sales.
It's not all bad, as April was revised significantly higher, indicating that the warm Winter and Spring got a jump on typical construction activity. But 2 straight months of cutbacks, and especially the decline in interest-rate-sensitive home building, are something that should cause us to at least be worried if the strength we've had in construction in the 2020s is coming to an end.

We also saw an increase in seasonally-adjusted new unemployment claims to their highest level in nearly a year. And this week's ADP payrolls report indicated that job growth slowed down at the start of the 3rd Quarter of 2024.

As a result and this and other recent soft data, Wall Street gave back a lot of its recent gains on Thursday.

The DOW Jones Industrial Average dropped by more than 700 points during Thursday's session, and ended up losing 494 points. Today’s selloff was a reflection of how the prospect of a slower economy is now viewed as a negative on Wall Street.
Piper Sandler's chief investment strategist Michael Kantrowitz reasoned Thursday's action showed markets digesting recent economic data as "bad news," despite potentially pointing to steeper Fed rate cuts in 2024.

"When yields go down it could still be a good thing going forward if it comes from lower inflation," Kantrowitz told Yahoo Finance. "But [not] if it comes from higher unemployment, bad [manufacturing data], bad earnings, and bad macro data."

Kantrowitz added that slower economic data may have been "good news a year ago when everyone was worried about inflation — that's not the case today."

And with a September rate cut from the Fed all but certain after Wednesday's policy announcement, investors on Thursday moved to price in even more aggressive moves from the central bank this year. Data from the CME Group showed traders pricing in a roughly 25% of a 50 basis point rate cut in September, up from just an 11% chance one day ago.
But would a September rate be too late to stop our apparent slowdown from becoming a standstill? 3 high-ranking Democratic senators (Elizabeth Warren (Mass.), John Hickenlooper (Col.) and Sheldon Whitehouse (R.I) sent a letter to Fed Chair Jerome Powell giving that concern as the Fed decided not to lower rates from their multi-decade highs earlier this week.

And the 3 Dems hinted that Powell is being scared off from doing the right thing to avoid the anger of Republicans, who don’t want a good economy ahead of the November elections.
In the letter, the senators said the data make clear there is ample evidence a rate cut is merited, as there have been consecutive decreases in the Personal Consumption Expenditures index, which is the Fed’s preferred inflation gauge.

Moreover, the letter adds, “The one-two punch of rising unemployment and slowing wage growth risks erasing the post-pandemic economic gains.”

The FOMC is not scheduled to meet again until [September], with some analysts expecting it will announce a reduction in rates following that meeting. Some Republicans, including Donald Trump, have suggested that doing so would be a political favor to Democrats.

In response, the three Democratic senators said in their letters that not cutting in response to the economic data would “indicate that the Fed is giving in to bullying, and is putting political considerations ahead of its dual mandate to ‘promote maximum employment and stable prices.”
Liz, Hick and Sheldon are right on the monetary policy here. The 12-month change in the core PCE index has been under 3% for all of 2024, and while wage growth is decent, it’s not anything that’ll cause costs to jump back up (in fact, the Employment Cost Index is growing by its lowest rate in 3 years).

And yet Powell and company are keeping the Fed Funds rate at double the rate of inflation in 2024. That’s a marked contrast to 5 years ago, when the Fed was caving to the complaints of Donald Trump and started cutting rates from a much lower level (2.5% vs 5.5% today), in a time when unemployment was lower then than it is today, with an Employment Cost Index and inflation number within 1% of the 12-month change that we are seeing today.

Maybe now that President Biden doesn’t have to worry about facing the voters, he might spend some of his remaining time in office to draw attention to the fact that the Fed was slow to react to higher prices in 2021 (they didn’t start raising rates until gas prices started spiking in March 2022), and had to drastically raise rates to their current, punitive levels to make up for it. Now the Fed is being far too slow in reacting to our post-COVID reality, and keep chasing the inflation that came from a one-time economic disruption (with a big side order of corporate greed) when that situation has long passed.

Tomorrow's July jobs report sure seems a lot more important than it did a week ago. If that comes in weak, watch for the talk of "RECESSION?" to pick up rapidly. Even if we aren't that close to it yet.
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Wednesday, July 24, 2024

Famliar sights, good things, and not-so-good things

Well, looks like we've got a sure sign that we're on the back half of the Summer. And that some things are still normal.

Also things weren't so bad south of the border.

But then we also get reminded not to get too happy-clappy, and that things will never be as easy as they seem.

Just keep finding a way, Crew. Find a way.

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Tuesday, July 23, 2024

Wisconsin Number 1 for wage growth in the last year?

I had mentioned that things are going well in Wisconsin's job market. But I didn't know that we were having the best wage growth in America?
Gov. Tony Evers, together with the Wisconsin Department of Workforce Development (DWD), today announced Wisconsin ranked first in the nation for inflation-adjusted hourly earnings growth during February, March, and May 2024, and second in the nation during April, according to the preliminary data on private sector worker earnings released by the U.S. Bureau of Labor Statistics. The news comes as, last week, Gov. Evers and DWD announced preliminary data show Wisconsin hit its second consecutive monthly record for employment.

“Whether we’re looking at our nationally top-ranked wage growth, our record-high employment, or our strong workforce participation, it’s clear that Wisconsinites are working and working hard, and our economy continues to have positive momentum,” said Gov. Evers. “We’ve made it a priority to build a strong 21st-century workforce to support a strong 21st-century economy, and it’s making a difference for working families across our state. This accomplishment reflects not only the dedication and resilience of our employers and our workforce, but it also shows that together we’re building a more prosperous future for our state.”

For February, March, April, and May, year-over-year statewide earnings growth totaled 7.9 percent, 6.4 percent, 4.4 percent, and 6.2 percent, respectively, based on data from the U.S. Bureau of Labor Statistics’ Current Employment Statistics (CES) program and the Consumer Price Index. The CES survey covers hourly earnings by workers at private sector establishments.

Statewide, the average hourly earnings for May 2024 totaled $33.76. The Milwaukee-Waukesha-West Allis area led the state with average hourly earnings of $34.97, followed by Madison at $34.48 per hour and Eau Claire at $31.63 per hour.
I'm trying to find the data table, which seems to be derived from the Occupational Employment and Wage Statistics (OEWS), which get compiled by the Bureau of Labor Statistics. But the last thing they have published is from May 2023 for Wisconsin's metro areas and the state as a whole.

UW-Madison Professor Menzie Chinn has a similar story up on Econbrowser, but it's got a longer-range view, which shows that inflation-adjusted average wages had slipped after the end of the COVID pandemic, and only the rally in the last year has allowed real wages to exceed pre-COVID levels.

You wish the early 2020s hadn't seen the erosion that it did. But there's no doubt that as inflation has gotten under control in the last 12-18 months, Wisconsin's workers are seeing gains in their pay, and it seems like we should try to keep these good times going as best we can.
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Sunday, July 21, 2024

Thank you Mr. President. Now LET'S BEAT THE BAD GUYS

Well, there is this.

And then this.

That's what had to be done, Mr. President. It's not fair, but sometimes the voters aren't going to reward good results, and aren't going to latch onto you no matter what you say or do. And to be honest, Jpe Biden only got nominated in 2020 because calls from the big wigs were made telling many of the other Dem candidates to drop out endorse him (including Kamala Harris), Most Dem voters went along with it so we could get on with the business of beating Trump.

So the shoe went on the other foot here, where the big wigs and insiders told Biden to get out to improve the chances of beating Trump. And I assume Biden's immediate endorsement of VP Harris was part of the deal that was made. Don't fuck around in Chicago, just do the right thing and agree to back Harris, pick a good running mate, and get back to the mission at hand.

Do that, and the whole "senile old white man who is cringy to watch" factor now lies with Trump. MAGAts may not care about that, but the other 2/3 of America likely will, and have it be part of their voting calculations. Throw in a heavy dose of Project 2025 talk, and the inevitable racist/misogynist BS that will tick off anyone with a drop of decency, and I think the Dems chances of winning at all levels in November just went up by quite a bit.

LET'S DO THIS.
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Friday, July 19, 2024

June Wis jobs report - things are really good

Right before Donald Trump spoke in Milwaukee on Thursday night, we got a big Wisconsin jobs report for June.
Place of Residence Data: Wisconsin’s unemployment rate remained at 2.9 percent in June, 1.2 percentage points below the national rate of 4.1 percent. Wisconsin’s labor force decreased 100 over the month and increased 4,000 over the year. The number of people employed increased 600 over the month to a record-high 3,048,600 employed.

Place of Work Data: Total nonfarm jobs increased 9,400 over the month and increased 30,900 over the year to a record 3,048,000 jobs. Private sector jobs also increased, adding 6,700 over the month and 25,100 over the year to a record-high 2,639,000 private jobs.
In addition, 1,200 of the seasonally-adjusted loss of 1,500 jobs in May was revised away, so this is a net gain of 10,600 jobs over the last state jobs report.

And it was largely good news throughout the report. Construction gained 900 jobs and 500 were added in manufacturing, meaning there was even more people added in those sectors than you usually get in June. Professional and Business Services had a large increase of 4,100, and leisure and hospitality also had higher than normal Summer hiring (+1,600 on a seasonally adjusted basis, and +17,200 in raw numbers).

State government also contributed 3,800 jobs to the June gains, but that comes after 4,600 jobs in that same sector were lost in May. Both seem related to the fact that UW schools let out earlier than normal, meaning jobs were “lost” earlier than the models would anticipate, and then come back as “gains” as June. Still a net loss of 800 in state government over the 2 months, but no biggie either way.

For the household survey, it continued a trend we’ve seen for the last three months – labor force staying around the same, and a slight increase of Wisconsinites listing themselves as “employed”.

That’s a good combination to have, but also shows a state that is likely near its capacity, and continues the challenge of attracting people to our state.

One way is through better wages, which does seem to have been happening in the last 12 months in our state, to a point where inflation-adjusted wages are well above where we were before the COVID pandemic.

I don't think we're going to continue at a pace of 9,400 jobs gained a month. But it's undeniable that Wisconsin's jobs market is in a great place, and if anything, it's gotten better in 2024, in contrast to the slowing down that we've seen in the national jobs stats. ).

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Wednesday, July 17, 2024

Retail sales, home building shows more proof of a moderate economy

With the case for interest rate cuts growing in the last couple of weeks, we looked to Tuesday's retail sales report for June to see if a Springtime slump in consumer spending was continuing as Summer began.

Pretty good, all things considered. And the drop in auto sales seems to be related to a wave of cyberattacks that hit car dealers last month, so expect a rebound there once things return to normal.

But those numbers also aren't so strong that it should re-fire inflation. In addition, note that part about home building being "softish". That got reiterated on Wednesday with a report that showed home building was up in June, but still down from the month before.
Building Permits
Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 1,446,000. This is 3.4 percent above the revised May rate of 1,399,000, but is 3.1 percent below the June 2023 rate of 1,493,000. Single-family authorizations in June were at a rate of 934,000; this is 2.3 percent below the revised May figure of 956,000. Authorizations of units in buildings with five units or more were at a rate of 460,000 in June.

Housing Starts
Privately-owned housing starts in June were at a seasonally adjusted annual rate of 1,353,000. This is 3.0 percent (±10.5 percent)* above the revised May estimate of 1,314,000, but is 4.4 percent (±12.7 percent)* below the June 2023 rate of 1,415,000. Single-family housing starts in June were at a rate of 980,000; this is 2.2 percent (±12.1 percent)* below the revised May figure of 1,002,000. The June rate for units in buildings with five units or more was 360,000.

Housing Completions
Privately-owned housing completions in June were at a seasonally adjusted annual rate of 1,710,000. This is 10.1 percent (±10.6 percent)* above the revised May estimate of 1,553,000 and is 15.5 percent (±12.6 percent) above the June 2023 rate of 1,480,000. Single-family housing completions in June were at a rate of 1,037,000; this is 1.8 percent (±10.3 percent)* above the revised May rate of 1,019,000. The June rate for units in buildings with five units or more was 656,000.
The completions are especially interesting to me, as those numbers have been consistently higher in 2024, which could eventually play a role in reducing the lack of inventory that has caused much of the affordability issues in the housing market.

Conversely, permits are significantly lower than where they were at the start of 2022, and while they rose in June, that came after 3 straight months of declines, and the overall trend is still down.

This is yet another reason that I believe the higher interest rates are holding back the economy. And while I think the Fed wants some of that, I think the plan was for that lack of activity to drop home prices due to a lack of demand. Instead, I'd argue that the higher rates are preventing people from wanting to put homes on the market, and the lower amount of permits in 2023 and 2024 will mean lower inventory in the future, and can keep home prices higher than they should be.

I'd hope the Fed would cut rates when they meet in 2 weeks, to get in line with an economy whose GDP and inflation are both running around 2.5%. But sadly I think we are waiting until September for that, assuming things stay on the same trajectory. I just hope it's not caused unnecessary strain on a consumer that has helped keep the economy moving long past what the "experts" have thought.
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