On Friday, February 5, markets were set to rise no matter what the employment data showed. If they beat to the upside, that would validate the reflation/pent-up demand narrative. If they disappointed, well, that would simply mean more fiscal and monetary largesse (which financial markets love). Either way, heads markets rise; tails, ditto.
Labor Market Signals: Positive, Negative and Mixed
As it turns out, there was validation for every viewpoint in the latest Bureau of Labor Statistics Employment Report:
· Negative: The Establishment (Payroll) Survey grew just +49K disappointing the consensus view of +105K. Worse, December was revised down by -87K and November by -72K.
- Leisure/Hospitality: -61K
- Retail: -38K
- Transportation/Warehousing: -28K
- Manufacturing: -10K
- Banking/Finance: -3K
· Positive: State and Local Government: +67K (But this means that payrolls in the rest of the economy were -18K!)
· Mixed: The Unemployment Rate (U3) fell to 6.3% (good), a decline that was mainly due to a -406K fall in the labor force, i.e., people dropping out having given up (bad).
· Mixed: The workweek rose to 35 hours (+0.9%). Hours worked in Leisure/Hospitality rose +2.4% and +1.3% in Retail, even as there were significant pink slips in these sectors. This tells us that businesses chose to meet demand by working the existing staff OT instead of hiring, just in case the rise in demand proved to be temporary.
· Negative: The diffusion index in the Labor Survey fell to 48.1 in January from 61.9 in December. Fifty is the demarcation between expansion and contraction, so this means more firms were laying off than were hiring.
· Positive: Average hourly earnings rose +0.2%. This was due to the mix of employment (the rise in state and local jobs which pay above average) and to the expansion of the workweek.
· Negative: “Permanent” job losses rose to 3.5 million; the number of unemployed for more than six months reached 4 million; the number of labor force dropouts is more than 4.3 million with more than 50% of these in their prime working years (ages 25-54); the average duration of unemployment rose to 26 weeks, up from 21 weeks in September.
· Positive: For the third week in a row, the Department of Labor (DOL) reported that there was a fall in Initial Unemployment Claims (ICs) in the state programs and in the special Pandemic Unemployment Assistance programs (PUA). The chart and table show a fall from 1.422 million the week of January 16 to 1.165 million the week of January 30. [Note: As indicated last week, the California data were troublesome showing huge declines for two weeks in a row. Last week, about half of those decreases were reversed. What caught my eye was the fact that Illinois data showed a -58% decline (-55,089). Remember, there were major winter storms in the northern part of the country during this reporting week. Other states in the path of the storms also showed declines, (though not to the extent of Illinois) indicating that IC filings may have been impacted by weather. Will know more with the next DOL release on Thursday, February 11.
It is quite clear that severe damage has been done to the labor market. The chart and table showing the number of people receiving some kind of unemployment assistance remains near 18 million. The first bar in the chart (left hand side) is the data for March 14, 2020 – call that the pre-virus “normal.” That number is 2.1 million. The downward slope from mid-October to mid-January, implies that it will be February 2022 before we reach the pre-pandemic level.
But wait! America’s businesses have figured out how to substitute technology for physical bodies. In 2020, productivity measures show a rise of 4%. This is a productivity growth rate we haven’t seen for nearly a decade. Thus, the February 2022 date mentioned above is likely nothing more than a number in my calculator. Because of the damage done by the pandemic to the labor market (automation, labor force drop-outs, permanent job losses…) a return to the robust labor market of 2019 may be years away!
The passage of the $1.9 trillion “stimulus” package by Congress will likely add to the GDP, but the addition will be nowhere near the $1.9 trillion increase in debt. Still a possibility in the legislation is a timed step ladder to a $15/hour minimum wage. This will only accelerate the move by businesses to automate. The businesses that pay minimum wages are those in the struggling Leisure/Hospitality and Retail sectors. Expect more “permanent” job losses there as a result. While markets are worried about inflationary impacts from such increases, inflation from this source isn’t a real threat.
The “stimulus” does provide significant support for state and local governments, and those governments began rehiring (mainly school districts) perhaps in anticipation of such. Then, of course, there is the $1,400 checks for many American household members. The last two times we had “helicopter” money, early in the pandemic and then this past December, funny events occurred in the equity markets (the rise in the stock price of bankrupt Hertz last May, and of course, the recent GameStop
As an aside, “Helicopter Money” was a concept I laughed at when Ben Bernanke re-introduced this Milton Freidman notion in a November 2002 presentation to the Washington D.C. National Economists Club. At that time, he was a member of the Board of Governors of the Fed. But it is a reality in today’s topsy-turvy world. A continuation of such money drops has two implications: 1) each successive dose has a weaker and weaker impact on the economy because the populous saves more in anticipation of paying higher taxes (an economic concept known as Richardian Equivalence), and 2) massive debt increases weaken the dollar and risk its “reserve currency” status. This is a big deal because most international trade is done in dollars causing high demand for the currency. A loss of “reserve currency” status would weaken the dollar and be highly inflationary as the cost of imports and many foreign sourced raw materials would skyrocket. “Reserve currency” status, while not currently pressing, could become an issue if dollars really do grow on trees.
There has been a spike in interest rates in 2021. The 10-Year U.S. Treasury Note yielded 0.93% on January 4 and that yield was 0.56% at the end of last July. On Friday, February 5, the yield had spiked to 1.17%. Market participants are clearly worried about inflation. They are concerned about the enormous increases in debt, not only by governments, but also by the corporate sector.
In my past few blogs, I have argued that consumer inflation, in the classic sense of a rise in the Consumer Price Index (CPI), is nowhere in sight. The pent-up demand narrative makes no sense when the pent-up items (services like restaurants, airlines…) represent a small percentage of consumption and even a smaller percentage of GDP. In addition, we are currently seeing pent-down demand in “stay at home” items (appliances, home improvement…) which will only accelerate when the pandemic is over. The CPI is much more sensitive to rents, tuition, and medical costs which make up 45% of the index and are currently deflating.
Like recent market phenomena (Hertz, GameStop), a temporary untethering of markets from economic reality can occur, and this can persist for long periods of time. Interest rates can certainly rise from here, and they are likely to do so as long as inflation remains a worry. But when the inflation indexes don’t respond and reality sets in, interest rates will retreat. Remember, the Fed has already committed to keeping rates where they are for several years.
Things to Ponder
- The worst stocks, from a fundamental point of view, significantly outperformed the overall market in January.
- More “Helicopter Money” will hit most Americans’ checking accounts in the next several weeks. Money really does grow on trees in Washington D.C.
- SPACs (Special Purpose Acquisition Companies) raised $83 billion in 2020, six times more than in 2019. These companies have no specific purpose except a promise (“hope”) that they will do something with the money thrown at them that will produce a return for the investor. Only “old-fashioned” people want to know what their money will be used for.
Over the past year, Bitcoin’s price has risen 600%, and Tesla’s