Declining Payrolls: The Canary in the Coal Mine

Soft survey data and hard payroll numbers tell the same story-trouble for jobs.

KEY TAKEAWAYS

• Consumption is two-thirds of GDP and depends on confident consumers

• Job security is the biggest driver of consumer confidence

• Sentiment surveys show rising fear of job losses today and in the future

• Nonfarm payrolls historically decline before recessions, and they're trending down now

• The Fed must shift its focus from inflation to employment

MY HOT TAKES

• The labor market is quietly weakening despite headline strength

• Sentiment data shouldn't be ignored when the trend is clear

• Declining job creation is the real recession signal to watch

• The Fed risks falling behind if it doesn't pivot to jobs soon

• Confidence collapses faster than employment statistics show

• You can quote me: "Without jobs and job security, the entire GDP growth story falls apart."

Money trees. Did your parents ever warn you that "money doesn't grow on trees?" Sure, they did, and I think, by this stage in your life-and the fact that you are reading my newsletter/blog-you know this to be fact. Of course, we never stop looking to prove our parents wrong, and trust me, I am still searching as well. But the fact remains: for most of us, our primary source of money is our jobs.

Ok, let's go through it. We will start with the basic premise that consumption is important for economic growth because consumption makes up more than ⅔ of GDP. My long-time, faithful followers should know this by heart. Next, we move to one of my favorite musings: confident consumers consume. What makes consumers less confident? The real answer to this question is obviously a complicated one and is likely different for all of us, but what do you suppose is the one common, overarching driving force behind consumer confidence? Come on, I already gave you the answer to this question in the opening lines. ☝️ That's right, jobs.

If consumers are fearful of losing their jobs, they become less confident, and they are less likely to buy things-consume. Can we agree that the employment situation in the country is of paramount importance to maintain healthy GDP growth? Let's look at some pictures. Please, please oblige me. You can learn so much from pictures. Have a look.

This chart shows the University of Michigan Sentiment indicator for expected job loss in the next 5 years. Don't focus on the actual number (23%), which isn't good, but rather the trend which shows a growing sentiment that job losses will be on the rise. Check out this next sentiment snapshot.

This chart is from the Conference Board's Consumer Confidence indicator. The questions represented are respondents that believe that jobs are hard to get (blue line) and are not plentiful (green line) today, and that fewer jobs will be available (orange line) in 1 year. Here, we note a steady growing negative employment sentiment about current conditions and recent spike in negative sentiment about future employment. The trend is unarguably negative.

I just showed you some really important data that shows a growing concern about employment, which should certainly be taken into account when considering consumption and economic growth. However, many place little weight on these types of sentiment indicators, calling them "soft" numbers, because they are based on surveys which have a tendency to be biased. Though it may be true, one cannot ignore the clear trend of increasing negative sentiment toward the labor market.

Why not back away and look at some hard labor numbers. Have a quick peak at this chart and keep reading. We are almost there-stay with me.

This is a chart of New Nonfarm Payrolls (grey line) from 1975 through the pandemic. I added a 12-month simple moving average (orange line) so you can see a smoothed trendline. This chart also shows recessions (red shaded areas). By observing this chart, it should be clear to you that job creation declines noticeably prior to recessions. Can you see it? Of course you can, it's clear as daylight. This supports our "money doesn't grow on trees."

Now, let's look at one final slide. Be patient, I am going to wrap up right after.

This is the same chart as the last one, but it is zoomed in on the period following the pandemic through current. On this chart, we can see a clearly declining trend on monthly job creation. Did you forget what declines like this precede? Just look at the last chart! ☝️

Now, let's remember that the Fed has a dual mandate: tame inflation and maximum employment. Inflation is dangerous, especially when our incomes don't grow fast enough to cover price gains. If you didn't realize by now, maximum employment is kind of necessary to avoid recessions. While we know that it is nearly impossible to have low inflation and high unemployment, a balance can be achieved, but it requires the Fed to be on its feet and nimble enough to recognize the shift in mandate importance. Sometimes it must focus on inflation and other times it must focus on the labor market. If you just looked at all my pictures, it should be clear to you that a) a strong labor market is important to avoid recessions, b) consumers are increasingly worried about their jobs, and c) the Fed needs to worry about the employment situation right now. Finally, though it should not be a key takeaway, I feel, as a parent, that I have to remind you that money does not grow on trees.

YESTERDAY'S MARKETS

Stocks gained yesterday on residual momentum from last Friday's gains. Traders are feeling good ahead of important economic numbers that come later this week. Gold and cryptos continue to perplex, rising on some combination of inflation fears, a weaker dollar, and YOLO. 10-year Treasury yields ticked higher once again in yesterday's session.

NEXT UP

• S&P Global Flash US Manufacturing PMI (September) may have slipped to 52.2 from 53.0

• S&P Global Flash US Services PMI (September) probably declined to 54.0 from 54.5.

• Fed speakers today: Goolsbee, Bowman, and Bostic. Fed Chair Jerome Powell will speak around noon which could inject a bit of caffeine into the markets-don't miss this.

DOWNLOAD MY DAILY CHARTBOOK HERE