Labor Market Cooling?

Last week revealed a downside miss in job growth creating widespread headlines that the labor market is off the boil. Water boils at 212 degrees Fahrenheit. The scalding temperature that burns human skin is above 120 degrees. Metaphorically, the worker shortage crisis has cooled from boiling to just scalding. The record number of unfilled jobs in the US reached the boiling point in early 2022 with 12 million job openings along with broken supply chains that boosted headline inflation to 41-year highs of 9%. Today’s job shortage stands at 9.6 million. A normal supply chain and a balanced labor market should occur once unfilled jobs decline to the 5 to 7 million range. The current 9.6 number represents cooling, but far too hot to worry about a hard landing recession and surging unemployment. One year ago, a survey of economists concluded that 72% expected the US would be well into a Recession in the first half of 2023. Today 78% of economists say there is a greater than 50% odds of a recession within a year – if you can follow that math. Bulge bank analysts and economists are typically weak forecasters, but this past year has been among their worst with this being the most over-forecasted recession in history. Analysts naively rely upon proxy indicators with excellent track records to target future recessions and surging unemployment. Forecasters simply failed to grasp the scope and duration effect upon demand from record artificial stimulus. The equivalent of 20 to 25% of the entire US GDP was added as Fiscal and Monetary stimulus in the 2 years of Covid from March 2020 to March 2022, hence the 41-year inflation peak. Hundreds of billions more will be spent this year and next to further stimulate our economy while capacity constrained companies still struggle to keep up with current demand. So labor is indeed “cooling”, but it’s far from cool. 

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Surveys often reveal it’s impossible to please most of the people most of the time. When job creation was strong after the pandemic, the outcry was to run for the hills over fear of higher inflation and recession inducing interest rate hikes. Now that hiring trends are lessening, Bears say the tide has turned and the Fed will be forced to lower interest rates soon to stave off a deep recession. Yet the economy and job market remain healthy. Like the housing market that has limited inventories to sell, the labor pool has similarly evaporated to the point that fewer workers can be hired. This is a rare cycle where demand can grow while supply shrinks, due to worker scarcity. Employment is surpassing record highs monthly with unemployment stuck near record lows. This is still a very tight labor market with no hint of slack overall that would indicate we are on the cusp of recession. When the economy moves from supply shortage to surplus, then it will be time to raise the warning flag.

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Many used to lament that the labor problem stems from lack of desire or need to find a job. While the enormous rise in Government handouts and lower thresholds to garner disability checks may be a problem, overall worker participation is quite high. Female participation is the highest ever, while the Male participation rates imply there a couple million working age able bodied candidates that can’t or choose not to enter the workforce compared to 2 or 3 decades ago. With aging demographics, the solutions go beyond stopping Government disincentives to work and kicking out highly educated foreigners from our Universities upon graduation. Increased rates of legal immigration and worker training are the secular ingredients necessary for the US to remain the world’s most dominant economy.

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This continued evidence of a vibrant but supply constrained US economy with falling rates of inflation mean the equity Bull market can continue. The 2022 Bear market in the major indices was due to a removal of valuation expectations that discounted Central Bank money printing that was reversed last year. In 2023, further monetary deflation combined with Government inflation still favors higher earnings growth expectations and multiples expansion. The biggest warning flag today is that the economy has improved so much that Bank of America and Goldman Sachs among other big banks are rapidly reducing their odds of any recession on the horizon. Google searches for recession have now collapsed. So, if complacency and optimism return, we may be just a few quarters away from a contraction in the economy and corporate earnings downgrades.

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 July is one of the most seasonally positive months of the year for stocks and we had forecasted a summer peak near July 28th (the high came one day later on the 31st). Our short-term patterns now expect a brief trading low in the August 4th to 10th period in the 4400’s basis the S&P 500 Index as illustrated below. The markets will deal with an important test on August 10th when the CPI report is released. The Headline inflation (with food and energy) will likely show a sharp year-over-year uptick as an unusual deflationary data point drops off. The Fed’s core PCE inflation measure will stay north of 4%, double their target rate. This should cause the odds market to increase expectations for yet another rate hike and keep money market cash earning well above 5% annualized. For investors, we expect the next time period to convert idle cash back into equities will be late August – early September period and in October. Stock indices should bottom between their 50-day and 200-day moving averages.

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