U.S. Economy Added 263,000 Jobs in September, Labor Market Shows Signs of Cooling The labor market isn’t easing as fast as the Fed wants to meet its inflation target
The increase, while still robust, was less than August’s increase of 315,000 and the monthly average gain of over 400,000 during the first half of the year.
Leisure, hospitality and healthcare companies hired the most workers last month, the Labor Department said. Retailers and warehousing and transportation businesses cut jobs.
The unemployment rate fell to 3.5% last month from 3.7% in August, matching a half-century low that was last reached in July.
The participation rate eased slightly to a seasonally adjusted 62.3% in September from 62.4% the prior month, the Labor Department said. Prime-age women—those age 25-54—led the decline in September following a jump the prior month, continuing an uneven pattern for female participation since the pandemic hit.
There were 4.8 million people who cited caring for children as a reason for not having a job, according to the Census Bureau’s Household Pulse Survey released this week. An additional 1.7 million said they weren’t working because they were caring for an elderly person.
Annual gains in average hourly earnings eased to 5.0% in September, still rapid but below August’s 5.2% pace and the slowest rate since December 2021. (…)
Also:
- the two prior months were revised up by a combined 11k.
- The private sector added 288k (244k in services, +4k MoM). The government shed 25k workers vs +60k on average in the previous two months.
This stacked bar chart shows the deceleration in aggregate payrolls (hours x employeds x wages) growth. Weekly hours are flat since July and new jobs are slowly slowing.
Note, however, that hourly wages (black bar), while still up 5.0% YoY, rose 0.3% MoM in each of August and September, a 3.6% annualized rate. Wages for private production and nonsupervisory employees are up 5.8% YoY but 4.4% annualized in each of August and September and +4.0% a.r. in services. Is this a 2-month aberration or an indication that this still apparently very tight labor market is not spiraling wages up?
At a +0.3% monthly pace, the YoY prints will drop from 5.0% to 4.1% in December and 3.8% in March.
If productivity growth returns to its 2015-2019 average of 1.2%, the inflationary impact of wages would be in the 2.5-3.0% range. This might prove a big if given that productivity growth averaged -0.4% in the last 4 quarters. Low productivity growth would push inflation up, or drag profit margins down.
In the meantime, Americans’ aggregate payrolls (i.e. spending power) is decelerating from +8.5% in 2021 to +7.3% a.r. in Q3’22 and +6.2% in Aug-Sept, barely keeping pace with PCE inflation.
FedEx Ground to lower holiday volume forecasts -internal memo
The FedEx Corp (FDX.N) division that handles most of the company’s e-commerce deliveries expects to lower volume forecasts to reflect its customers’ plans to ship fewer holiday packages, according to an internal memo obtained by Reuters.
The confidential message sent to the 6,000 independent contractors that handle delivery and trucking for FedEx Ground in the United States follows the global shipping giant’s Sept. 15 withdrawal of its full-year forecast due to an unexpected first-quarter profit drop of more than 20%. (…)
“We expect there to be downward adjustments to volume forecasts,” Paul Melander, a FedEx Ground senior vice president, said in the message to the unit’s delivery contractors earlier this week. The new forecasts will be released on or about Oct. 21, he said.
“These changes will reflect the latest information from customers about how they anticipate current conditions are likely to decrease their volumes this holiday season,” said Melander, who added that FedEx will further revise volume forecasts as warranted leading up to the start of the Christmas package delivery season. (…)
Over the last two weeks, more than a dozen Ground delivery providers told Reuters that their volumes are down anywhere from 5% to 15% so far this year versus the same time in 2021. (…)
Walmart, one of FedEx’s largest customers, in late July warned that its shoppers were cutting back purchases of nice-to-have goods as prices for necessities surged.
- Haver‘s aggregation of consumer goods demand in the world’s major economies fell by 2.1% y/y in Q2. That’s in part because of a post-pandemic shift away from spending on goods towards spending on services. But it is in part a consequence of a fading boost to consumer spending from the looser monetary and fiscal policies that were enacted during the pandemic. It’s no coincidence, however, that as goods consumption has slowed that there have been ripple effects on economies that are highly dependent on world trade and commodity prices. Citigroup’s surprise indicators, for example, show that incoming economic data for Asia, Australia, Canada and New Zealand have elicited a much higher tendency to disappoint consensus forecasts on the downside over the past few weeks.
Weaker consumer demand for goods and growth surprises in trade-dependent economies
The Jobs Market Is Still Too Hot Slight deceleration in pace of job gains unlikely to change any minds at the Fed
(…) This is the last monthly jobs report that will come out before the Fed’s rate-setting committee meets next month, and it doesn’t seem like a strong argument to raise the target range on overnight rates by anything less than 0.75 of a percentage point.
(…) The drop in the unemployment rate is a problem. It came about in part because the labor force—people who are working or actively looking for work—shrunk. So, even though pandemic worries continue to abate, many people still aren’t going back on the job hunt. And that is helping keep the labor market very tight. (…)
- Pace of Fed’s Rate Increases Worries Some Economists Rapid rate increases provide less time for central bankers to study their economic effects.
About this hot labor market:
John Mauldin observes that job openings, typically much lower than the number of unemployed Americans, rose above the level of unemployeds since March 2018, well before Covid-19:
What we’re looking at is more than a policy problem or a health problem. Yes, COVID removed a bunch of people from the labor force. Yes, the various fiscal and monetary responses made some of it worse. But all that is minor. The real problem is demographic. (…)
John submits that the large number of retiring baby boomers that started in 2010 is the main cause of the tightening labor market: “This labor shortage isn’t temporary. It’s structural, it’s demographic, and it isn’t going away. It may improve somewhat, but even a return to 2018 conditions won’t restore the “normalcy” employers want.”
Interesting, but then why did private openings drop 13% between November 2018 and December 2019 while real GDP rose 1.3%?
In the chart below, with all lines indexed at February 2020 = 100, we see that, in early-2018, job openings (blue) exceeded the real GDP line (black) for the first time since 2001 when JOLTS data began. Suddenly, companies were boosting hiring faster than GDP for the first time since 2000. Why?
- the economy was strong and accelerating, inflation and interest rates were at generational lows;
- the average manufacturing workweek reached its highest level since WWII;
- overtime hours reached their 2000 peak;
- productivity was accelerating at rates above the 2011-2017 average;
- corporate profits were booming;
- the 2017 Trump’ Tax Cut and Jobs Act poured an extra $2 trillion into corporate America’s coffers (!!).
Recall that the 2008-09 recession destroyed 17% and 28% of the manufacturing and construction jobs respectively vs 6% overall, causing many skilled workers to change trade. When needed during the 2018 boom, much fewer were available or qualified for these above average paying jobs.
No surprise then that employers scrambled between June 2017 and April 2019, with multiple offerings across the U.S. for the same jobs, enabled by increasingly popular social recruiting sites.
In less than 18 months, the combined job openings in manufacturing and construction (green) jumped 48% compared with 10% for all other sectors. Yet, manufacturing production was flat during that period with new orders up only 0.2%. Construction spending rose 6.3%. These openings were clearly not all new jobs.
And yet, even with multiple counting, job openings declined in late 2019, before really taking off in 2021.
Total private job openings have declined 16% from their March 2022 peak, but openings in manufacturing and construction have not cracked in spite of sharply rising interest rates.
Duplicate offerings remain. Job openings in manufacturing and construction are more than double their June 2017 level while manufacturing production is only 2.5% higher and construction spending is 40% higher. This artificially strong demand could evaporate with just a few clicks by HR people
Demand for construction workers remains solid because projects under construction are lagging the decline in new projects due to the lack of workers (e.g. housing starts dropped 12.7% since spring but units under construction are still up 2.0% for the same period). There seems to be a jobs cliff coming there.
New manufacturing orders peaked in June but are only down 1% since. But the goods sector is directly targeted by the Fed. In a typical recession (e.g. 2001) or soft landing (2015), new orders decline 10% and manufacturing employment stalls at best. And now, a booming USD!
Jobs, and particularly job openings, in these 2 sectors are clearly at risk in coming months. And no doubt that multiple job listings are not limited to these two sectors.
Focusing on job openings like the FOMC does to gauge the labor market carries risks of misinterpretations and unusual lags in a usually lagging indicator. This chart is fantasy.
The Fed could be surprised by rapid declines in openings like last month’s -1.1M. The last openings data are for August. Private employment was growing 579k per months in Q4’21, +356k in Q3’22 and +281k on average in August and September. Demand is clearly waning, but the Fed is still aggressively tightening monetary policy that always works with a lag.
There will be pain, indeed!
- From S&P Global’s PMI: “September data indicated only a modest rise in employment at service providers. The rate of job creation was the slowest since December 2021.”
- A recent KPMG CEO survey revealed that 39% of top CEOs have reportedly instigated hiring freezes and 51% are considering workforce reductions over the next six months in preparation for a potential recession. It should not take long to cancel these job openings. August’s -1.1M drop in job openings is not surprising in this context.
Actually, the fact that hourly wages rose only 0.3% MoM in each of August and September, a 3.6% annualized rate, is indicative of restraint on the part of business leaders. Indeed, this table of the last 2-month annualized wage growth rates far from suggests we are near a wage/price spiral (number on left is % of total employment):
- 0.4% Mining & Logging: ……………………….-1.4%
- 10.4% Retail Trade ……………………………… 0.5%
- 16.1% Education & Health Services: …………. 1.0%
- 14.7% Professional & Business Services: ……. 1.2%
- 8.4% Manufacturing: …………………………… 2.9%
- 10.4% Leisure & Hospitality : …………………… 3.6%
- 3.7% Other Services: ………………………….. 4.3%
- 5.0% Construction: …………………………….. 4.4%
- 4.2% Transportation & Warehousing: ………… 7.4%
- 5.9% Financial Activities: ……………………… 8.0%
- 2.0% Information: ……………………………… 14.5%
- 14.2% Governments: …………………………… 5.3% (July/August)
Employees accounting for 50% of total employment saw wage gains of less than 3.0% annualized in the last 2 months. The next 19%: less than 4.5%. Transportation and Warehousing wages should slow down (e.g. FDX, WMT, AMZN); Financial Services will suffer from the bear markets and Information will be impacted by the tech slowdown.
Goldman Sachs estimates that a Jobs-Workers Gap of 2 million would “reduce labor market overheating sufficiently to slow wage growth to a rate compatible with the inflation target.” The Gap suddenly closed 40% to 4.3M in August after job openings fell 1.1M. At the March-August monthly rate of -225k, the Gap would reach 2M in 10 months (June ‘23) but a few more months near August’s decline could happen given the growing bite from the Fed’s aggressive tightening.
PAIN FULL!
This J.P. Morgan chart (via The Market Ear) provides an idea of the potential pain rising interest rates can eventually inflict to the economy:
Interest payments as a % of GDP based on current yields
JPM
- Stan Druckenmiller brings memories of the pre-Volcker era, as related by Steve Blumenthal:
Stan said we are getting to the point where the debt is so high we won’t be able to service it. If we use the CBO’s 3.80% interest cost estimate on our debt, which Stan believes is optimistic, by 2027, the interest expense alone on the government debt eats all health care spending. By 2047, it eats all discretionary spending, and by 2049 it eats all Social Security spending.
The interest costs on the debt are so high that they cripple our ability to service the next generation, and Stan added he’s not even sure about the ability to support the current generation. When Stan said that, [CNBC’s] Joe Kernen’s head sunk low, leading Stan to joke that he has an extra cyanide tablet if he’d like it.
Stan thinks the system collapses sometime before 2035.
Blumenthal concludes:
We’ve been kicking the can down the road, but at some point, the road ends. The can can’t be kicked any farther. Stan’s math makes sense. The long-term forecast remains the same: larger-than-normal recession and larger-than-normal bear market coming in the years ahead.
2035 is but 12 years away. At what point will the U.S. Treasury bond market wake up to this reality? What about the USD?
This could well be the Fed’s unspoken objective: prevent interest rates from getting crazy high for long. The U.S. simply cannot afford that.
Will Biden Embargo U.S. Oil? The White House is considering a self-defeating ban on refinery exports.
The White House called in oil executives for a meeting to discuss Hurricane Fiona recently—then accused them of reaping windfall profits and threatened an export ban. In August Energy Secretary Jennifer Granholm sent a letter to refiners threatening “emergency measures” if they didn’t reduce exports. The risk that the Administration follows through on its threats has grown since OPEC+’s production cuts this week, even though it would be counterproductive. (…)
The big problem is five U.S. refiners have shut down in the past two years. (…)
Gulf Coast refined fuel doesn’t comply with California’s stringent environmental standards, and some doesn’t even meet U.S. specifications. That’s one reason one million barrels a day of U.S. distillate is exported to Latin America. If these exports stopped, our neighbors would have to find other fuel sources such as Russia or Venezuela, which refines Iranian crude. (…)
A July study from the American Council for Capital Formation (ACCF) estimated that an export ban could result in 1.3 million barrels a day of shuttered U.S. refining capacity in the Gulf Coast. This would reduce crude oil production in central states such as Oklahoma and the global fuel supply.
This would mean higher U.S. fuel prices, especially on the East Coast, which depends more on imports. The ACCF study estimated that an export ban would reduce U.S. GDP by $44 billion next year and increase prices for more than two-thirds of U.S. consumers. It would do the opposite of the Administration’s ostensible goal.
President Biden may do it anyway because he feels backed into a corner by OPEC. It would rank as his single most self-defeating energy policy—in a long, long line of them.
Elections are only a month away…
The FT’s Big Read: The new oil war: Opec moves against the US Saudi Arabia and Russia’s agreement to cut oil production in defiance of Washington may upend the global energy order
A possible ban on Russian supplies by the London Metal Exchange would be a seismic event for the metals industry, cutting some of the world’s biggest companies off from the main global marketplace.
The exchange has yet to make a decision, but on Thursday launched a formal three-week discussion process on the possibility of banning Russian metal, potentially as soon as next month.
In practice, a ban would simply mean that metal from Russia — which accounts for about 9% of global nickel production, 5% of aluminum and 4% of copper — could no longer be delivered into any warehouses around the world in the LME network, which store metal used to deliver against futures contracts when they expire. (…)
Should the LME go ahead and ban new deliveries of Russian aluminum, that would remove the potential overhang of stock. When Bloomberg first reported on the LME’s plans for a discussion paper last week, aluminum prices jumped as much as 8.5% — the biggest intraday rise on record — as traders who had been anticipating an inflow of Russian metal rushed to reverse their short bets. As of Friday, prices were up about 10% from last week’s 19-month low.
Of course, the LME is considering this drastic step because it’s worried about a similarly disruptive possibility if it doesn’t take action: that Russian metal that many consumers refuse to touch will flood onto the exchange and cause its prices to stop being useful as global benchmarks.
In fact, one of the reasons it is considering a quick rollout of any possible ban is that a decision to proceed could prompt a rush by holders of Russian metal to deliver it on the exchange before the restrictions came into place. (…)
The simple fact of the discussion is likely to cause Nornickel’s sales to Europe to drop significantly, given that it creates uncertainty at a crucial time of the year for sales negotiations, one of the people said.
That means that a ban by the LME could lead to the Russian companies being forced to accept lower prices. (…)
Canada Adds 21,000 Jobs in Tight Market; Unemployment Falls to 5.2% Hourly wages rose more than 5% for fourth straight month
(…) The rise in employment ended three consecutive months of losses from June through August, during which the economy shed more than 113,000 jobs. (…) Hours worked fell 0.6% in September. (…)
“The recovery was largely driven by a rebound in education jobs. So the gain in September can’t be viewed as a true reacceleration in employment,” said Royce Mendes, head of macro strategy at Desjardins Securities Inc. (…)
The participation rate, which has trended downward since May, fell to 64.7% last month, Statistics Canada said, as the number of people in the labor force fell by 20,300. The labor force is down by about 80,000 since May. (…)
Goldman Sachs: “Today’s report was mixed, with the unemployment beat offsetting the slight moderation in wage growth, but overall implies that the labor market remains tight. (…) By reducing the probability that the economy is in a recession, today’s report and yesterday’s hawkish speech by Governor Macklem increase our confidence that the BoC will hike by 50bp hike in October.”
But NBF has a much different take:
(…) Still, a 21K rebound after a cumulative loss of 113K in the previous three months does not indicate a strong labor market. September’s data benefited from a jump in the education sector after three months of highly suspect losses. Excluding this sector, which has caused a lot of volatility in recent months, employment was down 25K in September, a third decline in 4 months for a cumulative loss of 57K jobs.
Other details in the September report are not particularly bright, including the weak rebound in full-time employment, which remains down 89K since its peak in May. That’s also the case for private employment, which is down 87K from its April peak, despite this month’s gain.
The downward trend in hours worked since June is also consistent with an economy that has been stagnant for several months. True, the unemployment rate is still low and fell in September after the sharp rise in August, but there is reason to believe that the labor market is less tight than it was earlier this year. Indeed, the average hourly earnings of permanent workers rose at 0.2% in the past month, its slowest pace since April and in line with its past ten-year average.
The Bank of Canada has committed for other rate hikes, but this morning’s data reinforces our view that a pause will be necessary soon to assess the delayed impact of its actions. With a weakening of domestic demand, companies are realizing fast that their labor needs may not be as high as they believed earlier this year and are perhaps stopping the bidding war to attract employees that has generated high wage inflation. Even if mass layoffs are avoided, hiring freezes in the face of strong population growth are likely to increase the unemployment rate in the coming months.
EARNINGS WATCH
From Refinitiv/IBES:
Through Oct. 7, 20 companies in the S&P 500 Index have reported earnings for Q3 2022. Of these companies, 65.0% reported earnings above analyst expectations and 35.0% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 18% missed estimates.
In aggregate, companies are reporting earnings that are 2.9% below estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 7.0%.
Of these companies, 50.0% reported revenue above analyst expectations and 50.0% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 26% missed estimates.
In aggregate, companies are reporting revenues that are 0.2% below estimates, which compares to a long-term (since 2002) average surprise factor of 1.2% and the average surprise factor over the prior four quarters of 2.7%.
These 20 companies (12 consumer-related, 5 techs) reported revenues up 12.2% and earnings up 3.8% (-2.9% surprise factor). By comparisons, in early July, 18 of these 20 companies had reported Q2 revenues up 12.0% and earnings up 15.4% (+4.1% surprise factor).
- The estimated earnings growth rate for the S&P 500 for 22Q3 is 4.1%. If the energy sector is excluded, the growth rate declines to -2.6%.
- The estimated revenue growth rate for the S&P 500 for 22Q3 is 9.7%. If the energy sector is excluded, the growth rate declines to 6.4%.
- The estimated earnings growth rate for the S&P 500 for 22Q4 is 5.2%. If the energy sector is excluded, the growth rate declines to 1.3%.
Analysts have been adjusting their estimates mostly downward and across the board in recent weeks…
…but really not significantly in total: since mid-September,
- Q3 growth estimates declined from +5.0% to +4.1% (from -1.7% to -2.6% ex-E);
- Q4 growth estimates declined from +6.3% to +5.2% (from +2.3% to +1.3%
ex-E). - 2023 growth estimates declined from +7.9% to +7.7%.
Trailing EPS are now $221.82. Full year 2022: $223.34. Forward 12-m: $234.39. Full year 2023: $240.97.
As of Friday’s close:
- The S&P 500 median trailing P/E is now 17.4 (17.2 last week, 17.7 two weeks ago). On forward: 15.3 (15.1 and 15.7).
- The 6 largest stocks by weight (24.2% of the index) have an average P/E of 44.0 (45.8 and 47.0). On forward: 28.1 (29.0 last week).
- 39% of the companies have a P/E below 15.0 (41% and 39%). On forward: 48% (49%).
- 19.4% (21.6% and 19.6%) are below 10x. On forward: 20.6% (22.2%).
Inflation matters: S&P 500 trailing P/E: 16.4x; median P/E: 17.4x.
- Average P/E: 17.4, median P/E: 1957-1973: 17.4; inflation: average: 2.9%, median: 2.9%
- Average P/E: 11.5, median P/E: 1973-1989: 10.4; inflation: average 6.5%, median: 5.9%,
- Average P/E: 19.0, median P/E: 1989-2022: 17.9; inflation: average 2.4%, median: 2.2%
Rule of 20 P/E: 22.7
The Q3 earnings season begins this week. Let’s watch the “E” and guidance.
- Strong USD headwind to sales
- Cost inflation (mainly labor) and excess inventories headwind to margins
- tax changes effective in 2023
“Things like inventory, labor costs and other latent expenses are wreaking havoc on cash flow,” a Morgan Stanley team led by Michael Wilson — one of Wall Street’s staunchest bears — wrote in a note. “The market has started to see cracks with some bellwether stocks reporting both top-line and bottom-line misses in recent weeks.” (Bloomberg)
U.S. banks’ Q3 profits set to shrink on economic risks, deal slump
(…) Analysts expect profit at JPMorgan to drop 24%, while net income at Citigroup and Wells Fargo is forecast to decline 32% and 17%, respectively, according to Refinitiv I/B/E/S data.
Investment-banking powerhouse Goldman Sachs Group Inc (GS.N) is expected to report a 46% plunge in profit when it reports on Oct. 18, while earnings at rival Morgan Stanley are seen falling 28%. The drop comes as corporations’ interest in mergers, acquisitions and initial public offerings dried up. (…)
JPMorgan President Daniel Pinto told investors last month that he expected the bank’s investment banking fees to fall between 45% and 50% in the third-quarter.
For some investment-banking businesses, weakness was exacerbated by a decline in large private-equity buyouts. Dealmaking in that market dropped 54% to $716.62 billion in the third quarter from the same period last year, according to Dealogic data.
U.S. banks wrote down $1 billion on leveraged and bridge loans as rising interest rates made it tougher for them to offload high-risk debt onto investors and other lenders.
“We are expecting further losses on these deals,” said Richard Ramsden, an analyst at Goldman Sachs who oversees research on large banks. “It’s going to vary quite a bit,” depending on where the transactions were initially priced and how much exposure remains, he said.
Wall Street banks took combined losses of $700 million on the sale of $8.55 billion in loans and bonds backing the leveraged buyout of business software company Citrix Systems Inc , Reuters reported last month, citing a person familiar with the matter.
Analysts also said banks will set aside more reserves in anticipation of more soured loans. (…)
IBES data show overall Financials earnings down 10.5% YoY in Q3.