The last time US unemployment matched today’s 3.4% rate was in the 1960s. What’s also interesting about the comparison is that unemployment remained below 4% for 5 straight years back then, during a 9-year span without a recession. If we eliminate the mandated Covid recession, then we have several years of unemployment below 4% today. The steady drumbeat for a recession this past year is due to an inordinate focus on inverted yield curves and restrictive Fed policy. Normally, when the economy slows from a major expansion, it keeps slowing until it enters a recession. That will eventually happen again, but many lack the proper perspective that this economy is moving from the racetrack to the highway currently with no brick walls in sight, so far. They ignore what truly matters. Jobs! From our perspective, all the vague metrics that factor into official recession labels lack credibility if the economy is experiencing a historic deficit of workers to fulfill production demands. And can the pessimists please retire the false mantra that jobs lag? As we have often illustrated, unemployment lags during economic recoveries, but not when entering recessions. Unemployment typically begins working higher a couple of quarters before an official recession. Given the enormous buffer of record job openings, any quick multi-month uptrend in unemployment is not yet on the horizon. A capitalist culture values profit and it makes dollars and cents to shed workers when production brings backlogs below normal levels. Anything below 4% unemployment is essentially full employment, which today is becoming even fuller at 3.4%. As we can attest to firsthand, retirement and quit rates are high in the manufacturing sector, with no end in sight. Our personal connection to manufacturing operations illustrates a need for record production levels to prevent record backlogs from growing. Our managers are moving from the office after hours to work overtime on the production line, automation is up, wage hikes continue, and some production has moved out of state to address our labor shortages. The Fed will eventually slow the economy enough for the general labor supply to almost meet demand over the next year, but the downside for the economy and profits should be more subdued than historical metrics would suggest. How much of this profit recession was discounted at the October Bear market lows is up for debate, but the tight labor market is encouraging despite the drop in inflation.

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The need for more employees is ubiquitous throughout our economy, other than a hiccup with the mega-cap tech sector that overhired during Covid. With the Boomers retirement wave projected to increasingly create a vacuum of workers and a welfare burden over the next decade, employers will need to accelerate their adoption of automation, training legal immigrants and steering more candidates away from college to enter at younger ages. Despite the slowing economy, we still have almost twice as many job vacancies as the unemployed, far higher than in past tight labor markets. Real wages will keep contracting until inflation falls under 3 to 4% and company earnings will be restrained by nominal wage inflation this year. However, if we continue to have labor and production supply unable to meet demand, the economic bottom due in early 2024 should be modest relative to past recessions.

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Even if Labor Participation rates for working-age adults returned to the heyday of the 1990s, it would only employ about 10% of the Job Vacancies in our economy today. The problem is that we are in the early innings of a secular aging demographic trend that will guarantee a struggle to find workers for another 15 to 20 years. One path toward a partial answer could be adopting the long-held Northern European effort of companies seeking out kids in Junior High school to offer vocational training as an option instead of College. Of the 40% of kids in the US that graduate high school and attend college, 37% of these dropout. A University education is not for everyone, while direct vocational training through both trade schools and companies directly could provide a higher degree of job security and skills to address the labor shortfalls in the future. We estimate several million youths could be added to the labor pool.

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Throughout history, the economy oscillates from expansion to contraction. We had the most artificially stimulated expansion in history during Covid with a significant slowing over the past year on a rate-of-change basis. One question about this historic cycle is if there is a new paradigm. Is it possible that the normalizing of consumption and growth from such extreme growth rates qualify for what is normally a recession? The economic flight path came down in altitude from the Exosphere in 2021 to the stratosphere in 2022 but is far from a hard or even soft landing at this point. The fulcrum from which we risk a labor recession will arrive when inflation falls below 3 to 4% (Q4?), Thus far, the economy will have limited downside risk and earnings contraction due to the extraordinary demand for hiring millions more workers to increase production and services. Despite a stock market meeting our forecasts, our level of cash and defensive stocks was elevated in January due to caution over a projected downside risk in March to relieve overbought technical conditions. Mid to late February into mid to late March we continue to view as a higher risk period for stocks due to seasonal patterns.

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