Wentz Weekly: Is the Labor Market Slowing?

Wentz Weekly Insights
Is the Labor Market Slowing?

Recent Economic Data

• Job Openings and Labor Turnover Survey (JOTLS): The number of job openings the last day of January was 8.863 million, dropping only slightly from December but down about 1.56 million from a year ago. Job openings peaked at about 12.2 million the beginning of 2022 and have since fallen, but are still about 1.8 million above the pre-pandemic average of 7 million. At the same time, the number of hires and separations have also come down. On the separations side, the number of quits were at 3.4 million, seeing a large decline over the past 6 months and back to pre-pandemic level, suggesting the labor market is closer to being balanced with workers comfortable and less confident in finding a better job or higher paying job.

• Weekly Jobless Claims: The number of jobless claims for the week ended March 2 was 217,000 which was unchanged from the prior week. The number of continuing claims was 1.906 million, up slightly from the prior week which has been higher than pre-pandemic levels for several weeks now.

• ADP Employment: Data by ADP shows private payrolls rose 140,000, relatively in line with expectations. Gains were seen in all business sizes and nearly all business industries.

• Employment Situation: The headline number from the DOL labor report showed 275,000 jobs were added to the economy in February, a solid amount above the roughly 190,000 expected. However, the very strong 353,000 job gains made in January were revised down to 229,000 while December was revised down 43k. Still, the past three months have averaged a strong 265k. Job gains were seen in health care, government, restaurants/bars, and transportation/warehousing, and little changed or small losses in all others. The average hourly earnings rose 0.1% coming after a strong 0.5% increase in January, with the annual change at 4.3%, down from the 4.4% annual pace last month. The average work week has returned to pre-pandemic levels of 34.3 hours (up from 34.2 last month) after a sharp increase during the pandemic when workers were asked to work longer shifts. Moving to the household survey, the labor force increased but the number of people employed fell 184k to 160.968 million, the fourth decline of the past five months after a strong post-pandemic recovery. at the same time, the number of people unemployed rose 334k to 6.458 million for the fifth increase in the last seven months. As a result, the unemployment rate rose from 3.7% to 3.9%, the highest in 25 months. The underemployment rate, or U-6 rate, rose from 7.2% to 7.3%.

• ISM Services Index: The ISM services index was 52.6 for February, reflecting continued growth in the services sector, but slower growth than prior months with the index down a point from January with businesses noting a contraction in employment and faster supplier deliveries, but still concerned about inflation.

• Factory Orders: New orders for manufactured goods (factory orders) fell 3.6% in January, the third decline in the last four months, and down 1.6% over the past year. Shipments of manufactured goods fell 1.0% in the month and are down 0.4% from a year ago. The most important reading, shipments of non-defense core capital goods excluding aircraft, rose 0.9% in the month and is a key input to GDP for business investment.

• US Trade Deficit: The US trade deficit widened slightly in January at $67.4 billion, higher than $64.2 billion in December and about $4 billion more than expected. The increase was due to a $3.6 billion, or 1.1%, increase in imports to $324.6 billion, only slightly offset by a $0.3 billion, or 0.1% increase in exports to $257.2 billion. Over the past year exports have fallen 0.4% while imports have fallen 1.2%.

Company News

• Apple’s Struggles: Apple’s recent struggles continued last week with shares down another 5%. This came after a report by research company Counterpoint said smartphone sales dropped 7% in China including a 24% drop in iPhone sales through the first six weeks of the year. It added Apple has faced stiff competition after a resurgence from Chinese smartphone maker Huawei at the high end of the smartphone market and from aggressive pricing from other smartphone makers at the mid-market.

• Target’s Higher Margins Drive Shares: Target reported its quarterly financial results which were better than expectations, with its stock about 15% higher after, and guidance that was mixed. The upside to shares was driven by better margins than expected over less inventory markdowns, lower freight costs, favorable category mix, and lower shrink costs (like theft). It also announced it will be rolling out a new subscription service called Circle 360 for certain perks like free shipping.

• AMD Chips and China: Shares of AMD were lower early last week after a Bloomberg report said the company had hit a hurdle in selling its AI chips specifically designed for the Chinese market over concerns by the US Department of Commerce. The chips have a lower performance than those sold outside China, but US officials have said it is still too powerful and said it must receive a license before selling the AI chips to China.

• Intel’s Grant: A Bloomberg article noted Intel is close to receiving a $3.5 billion investment from the US government to produce advanced semiconductors for the military and intelligence programs. The funding would cover three years and comes from the $39 billion Chips and Science Act grant pool of funds which was designed to incentivize chipmakers to produce more in the US.

• JoAnn’s Potential Bankruptcy: Bloomberg reported the fabric and craft supplier JoAnn Inc. could filing for Chapter 11 bankruptcy as soon as this week. It added the company has had ongoing confidential discussions with lenders in which the bankruptcy filing could be part of a deal that would hand control of the company to its lenders while allowing it to shed off expensive debt.

• Disney’s Path to Streaming Profitability: Disney CEO Bob Iger spoke at a brokerage conference last week in which he said the company’s streaming operations are on a path to reaching profitability by the fourth quarter this year. They are achieving this through a new management structure for its direct-to-consumer business and removing $7.5 billion in costs. He added that when he took over CEO role late 2022 the task at hand was “more challenging” than he expected.

Other News

• The Beige Book: Released every 6-7 weeks, the Beige Book provides anecdotal evidence on economic activity over that period from each Fed district. The latest release last week noted economic activity increased slightly over the period, 8 reported modest growth and only 1 cited softening in economic activity. It said consumer spending inched down in recent weeks, households saw heightened price sensitivity, but notes there may have been weather effects. Districts saw a pickup in demand in residential real estate despite continued low supply. There was a shift in spending away from discretionary goods, while demand for services declined due to elevated prices with businesses finding it harder to pass on higher costs to consumers. On the labor side there has been slight easing in the labor market with greater labor availability.

• China’s 2024 Growth Target: In the annual gathering of China’s National People’s Congress, its largest political event of the year, China said it was aiming for an economic growth rate of “about” 5% for 2024, somewhat disappointing for markets. Meanwhile, the governor of the People’s Bank of China said there is still room to further cut banks’ reserve requirements, which refers to the amount of cash banks are required to keep in reserves, in effort to continue supporting the economy. A lower reserve requirement means banks have more freedom, such as lending, to do whatever with extra cash. The governor also said the central bank will use policy tools to mildly help inflation, where China has is dealing with deflation (prices have declined over the past year).

• Central Bank Headlines:
• The ECB: The European Central Bank held its policy meeting and announced its policy decision last week and did not make any changes to policy. The ECB is in a similar situation as the Fed and its comments after its policy meeting were similar as well – inflation is moving down but it wants more data to be confident enough it will return to 2% before cutting rates and loosening policy.
• The BoJ: Speculation has been on the rise that the Bank of Japan would tighten monetary policy this month by raising interest rates for the first time in 17 years. Its currency, the yen, and bond yields have moved higher in recent days after it saw multiple releases of better data and wage growth. The Bank of Japan is one of the last central banks in the world to keep rates at or below zero percent. Its next policy meeting comes next week.
• The Fed: Federal Reserve Chairman Jerome Powell testified in front of the Senate and House committees last week for two days but did not reveal anything new. He reiterated more data is needed but did say the Fed is not far from reaching the level of confidence (that inflation is returning to 2% goal) to begin cutting interest rates. There were a lot questions on real estate, from prices to affordability and rates, as well as commercial real estate and banks’ exposure there which Powell downplayed and said the weakness there does not pose a threat to the financial system.
• Fed Speak: In addition, there was a lot of Fed speak (other Fed policymakers making public remarks on policy). In his latest blog post, Bostic discussed how business leaders are ready to take on new investments at the first hint of a rate cut and talked about “pent-up exuberance” which could create a burst of demand and new investment once interest rates are cut and put risk on the inflation goal.
• Other remarks included Kashkari saying he sees two rate cuts at the most this year, Governor Bowman said not ready to cut rates and prepared to raise also if needed, Mester said if economy performs as expected can cut rates “later” this year but warned on risks of cutting too soon and inflation which could spark a resurgence in inflation.

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