Good Afternoon Income Investors!
"Red Hot" Jobs Aren't So Hot Anymore
The Treasury market has been exceptionally responsive to the Employment Situation Report, AKA the "Jobs Report". This is a result of the Fed telling us that the strong labor market is the main reason that interest rates are not getting cut. As a result, we've seen some sharp moves when the report comes out.
Last month we saw the media parading out headlines like "hiring surges" and experts' predictions were "blown away". Oh my, how can experts be so wrong? The economy is so strong! Let's party like it's 1999.
Over the past year or two, I've written numerous times about the jobs report in my Market Outlooks, and I've cautioned that we shouldn't read too much into monthly numbers, especially when they first come out. Instead, we should focus on the longer-term trends because economies have momentum.
So in January, the BLS reported 353,000 new jobs added, compared to the consensus projection for 180,000. Stupid experts! But wait, in February's jobs report, we have this line:
The change in total nonfarm payroll employment for December was revised down by 43,000, from +333,000 to +290,000, and the change for January was revised down by 124,000, from +353,000 to +229,000. With these revisions, employment in December and January combined is 167,000 lower than previously reported.
Hmm, 229,000 is only 49,000 more than the 180,000 the consensus projected. The original report was off by 124,000. Plus, the January numbers will be subjected to one more revision next month. So are we going to see headlines rewritten as "Experts predict jobs better than government agencies"?
I won't hold my breath.
Payroll numbers are quite volatile and subject to revisions. We shouldn't put too much weight on it. I encourage you to reread that article, but the cliff notes version is that the "jobs" number that is touted is the change in the total count of jobs. What the report actually measures is the number of jobs in the economy, and the change number is derived from subtracting last month's number from the current month's number. They aren't counting the 229,000 jobs added in January. They counted the 157.5 million jobs in January and subtracted the 157.3 million they counted for December to arrive at 229,000. Obviously, they aren't actually counting 157+ million jobs, they are doing surveys and then using statistics to project how many jobs there might actually be. So, being off 100-200k in either direction is actually very small (and unavoidable).
As a result, January's jobs report went from "hot" to below the 12-month average and it is nothing like the jobs growth we saw in 2022.
Employment Situation Report
Instead of looking at month-to-month, which is highly variable, we could look at the year-over-year change. The number of jobs in the United States increased by 1.77% from last year. Source
St. Louis Fed
On its own, that isn't a terrible number. However, the consistent downward trend over the past two years is a concern.
Unemployment Rising
Jobs are not being added fast enough to prevent unemployment from rising. Over the past year, the unemployment rate has gone from a low of 3.4% to 3.9%.
On an absolute basis, 3.9% is still on the low side, we've been in a very healthy economy where unemployment was higher. However, we need to remember that everything about economics is relative. The things we term as "good" or "bad" are caused by changes more than the absolute numbers. If you've lived in an area that has distinct seasons, you are familiar with the effect of the early days of winter feeling really cold. Then in the spring, the same temperature that felt "cold" in October will have you putting on a t-shirt and shorts and talking about how "warm" it is. Your body adapted to the dominant temperatures and it is sensitive to the change in temperature more than the absolute temperature itself.
When we look at unemployment before the GFC we see a very similar pattern with higher absolute numbers:
The bottom was reached, it bounced around, then it broke out.
We also saw similar activity in the two years leading up to the Dot-Com recession:
In both of those cases, once it broke out to multi-year highs, unemployment didn't come back down until after the recession.
The historical pattern is that unemployment rates start rising to multi-year highs shortly before a recession. They don't skyrocket to scary numbers until a recession is underway. Source
If you were on a committee with a mandate to keep unemployment low, the rise to 3.9% should concern you and should inspire action sooner rather than later. Is it going to motivate this particular committee? Probably not.
Recession Or No Recession? That’s The Question.
Every cycle is a bit unique. History might not repeat, but it sure can rhyme. While the market and the Fed are quite sanguine about the risk of recession, I continue to see weaknesses forming throughout the economy. The economy is one bad catalyst away from a recession starting. Predicting what that catalyst might be is difficult. Predicting exactly when it will start is impossible.
A recession scenario always scares investors. Panic will take over logical thinking, and investors will sell first and ask questions later. Fixed-income investments are among the best opportunities in the market today for two simple reasons: They are at low prices relative to history and they provide a more secure income during recessions.
Even if we are completely wrong, and a recession doesn't occur anytime soon, interest rates are going to come down. That means the prices of fixed-income investments will go up, and that means we want to own more fixed-income.
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