Wentz Weekly Insights
Labor Market Slowly Returns to Pre-Pandemic Levels
One month after unemployment returned to pre-pandemic lows (in July), solid job growth continued in August with another 315,000 jobs added in the month. The 315,000 job gains was enough to take the total number of people employed back above pre-pandemic levels from February 2020 as well. In addition, August saw one of the largest influx of people to the labor force in years with another 768,000 individuals added, bringing the labor force participation rate (the number of people employed plus the unemployed, divided by the population) to 62.4%, tying the highest level since before the pandemic. However, the prime working age population still has some catching up to do. The prime age participation rate (age 25-54) was 82.8% in August which is still below the pre-pandemic high of 83.1% in February 2020 (which also happens to be the highest since 2008).
The rise in people entering the labor force caused the unemployment rate to climb to 3.7% from 3.5%, but that is no need for concern – right now we would rather have people enter the labor force. Why? There are still over 11 million job openings which is roughly two job openings for every unemployed person. The number of open positions was expected to come in around 10.3 million in August, but was one million more than expected, the data combined from these two reports suggest the Fed’s aggressive tightening has yet to affect the labor market.
Wages continue to climb with the average wage up 0.3% in August but falling below the average 0.4% monthly increase over the past 12 months. Compared to a year ago wages are up 5.2%, matching the y/y gains of the past two months but slowing from the peak 5.6% rate in March. Wages are growing, but only in nominal terms. If you look at “real” wage growth, or inflation adjusted, with inflation estimated to be 8.2% y/y in August, employees are earnings 3.0% less than a year ago (5.2% wage growth minus the 8.2% rate of inflation). One of the downsides of the report was the average hours worked in a week fell by 0.1 hours to 34.5 hours, essentially erasing the job gains.
Markets initially celebrated the report, sending stocks higher, then it turned out to be another good news is bad news type event after stocks reversed course and moved lower to finish the day down 1.1% on Friday. The data was strong enough to keep Fed on path of raising rates to a level near 4.0% by year end, up from its current 2.50%. This message was also heard from several Fed policymakers last week. Many of the comments reiterated that rates will move higher with no intention to cut rates in 2023 in effort to avoid mistakes made in the past of prematurely making a pivot when inflation was not under control (as in the 1970s). We expect stocks and bonds to remain on the roller coaster ride for the remainder of 2022 and going into 2023, similar to what we have experienced in the first half of the year.
Week in Review:
Markets got off to a slow start to the week, in continuation of the selloff from Friday the week prior. However, stocks were able to finish well off the lows of the day on the second lowest trading volume day of the year. Energy led the way with a 1.5% gain thanks to a 4% increase in crude oil while technology was the clear underperformer. The S&P 500 fell 0.67% while the NASDAQ fell 1.02%.
Stocks opened higher Tuesday until a report from Taiwan said Taiwanese soldiers fired at a Chinese drone that was flying in its airspace, after multiple warnings to withdraw, and additional Fed speak that reiterated there is no expectation rates will be cut in 2023 as the Fed tries to fight inflation. Morning data showed the number of job openings moved back near record highs, rising 1 million to 11.239 million while home prices cooled, but still are 18.0% higher from a year ago. Breadth was poor with declining stocks well outpacing advancing stocks and the S&P 500 falling 1.10% with energy the clear underperformer after a 5% drop in oil as reports said OPEC+ will not consider production cuts.
Stocks began Wednesday mixed in a more quiet day, with Fed speak remaining in the headlines as Cleveland Fed President Mester said she expects rates to rise above 4% and remain there through 2023 with no interest rate cuts expected in 2023. In other news, Eurozone inflation was higher than expected for August preliminary data, Russia’s Gazprom shut off gas supplies to Europe, China manufacturing conditions contracted for the second straight month in August, and Covid spreads to more of China’s largest cities. Treasury yields continued to rise across the curve and equities continued to struggle with the S&P 500 down 0.78% for the day and finished the month of August down 4.2% after falling 8.5% from the recent highs mid-month.
Stocks opened the first day of September Thursday on edge after China’s Chengdu went under a covid lockdown, the largest city since Shanghai. Several reports that the U.S. government instructed Nvidia and AMD to stop shipping certain chips to Russia and China had semiconductor stocks lower which dragged down tech, but the remainder of the market was able to recover from early weakness and close mostly higher as better than expected economic data was released Thursday morning. The S&P 500 finished 0.30% higher while the NASDAQ lost 0.26%.
The headline Friday was additional Covid lockdowns in China, the U.S. calling Iran’s latest nuclear deal “not constructive,” but more importantly a U.S. labor report for August that showed 315,000 jobs were added and a large amount entered the labor force to look for jobs, sending stocks higher initially. However that was short lived as the market digested the report that wages keep moving higher and additional people entered the labor force making it more likely the Fed will maintain aggressive rate hikes. For the day the S&P 500 finished down 1.07%.
For the week, oil made a brief move higher and almost hit the $100/barrel mark again over the first half of the week, but fell 11% over the last several days of the week to settle the week lower at $87/barrel. Bonds sold off again as Treasury yields were higher across the curve with the 10-year yield ending at 3.20%. The major indices finished as follows: Dow -2.99%, S&P 500 -3.29%, NASDAQ -4.21%, and Russell 2000 -4.74%.
Recent Economic Data
- Home prices, according to the monthly Case Shiller home price index, rose 0.3% in June, slowing from the 1.3% increase in May. Over the past 12 months, the average home price in the 20-city index was 18.0% higher, decelerating from the 19.9% pace in May, and 20.6% rate in April, but still in the 95th percentile. It is important to note prices are still increasing at a solid rate, just at a lower rate than the first half of the year. Tampa continues to lead the way out of the 20 cities in the index with a 35.0% year-over-year increase, followed by Miami (+33.0%), and Dallas (+28.2%), with Minneapolis (10.4%), Washington (+10.8%), and Cleveland (+12.8%) at the bottom of the 20 city list.
- The number of job openings on the last day of July was 11.239 million, much higher than the 10.3 million openings expected, about 600k more openings than the end of June, and rising to the highest level since May. The number of separations was little changed at 5.9 million with 4.2 million of those being people that quit jobs, also little changed from the month prior. The level of job openings and quits remains near record highs, indicating the labor market remains very tight.
- The Conference Board’s consumer confidence index increased to 103.2 in August after three months of declines and is better than the 97.4 estimate. The present situations index improved to 145.4 from 139.7 in July for the first monthly gain since March, while the expectations index improved to 75.1 from a 9-year low in July of 65.6, however being below 80 still suggests recession risks.
- Monthly ADP employment data shows private payrolls increased 132,000 in August, about half the increase that was expected and follows a 268,000 increase in July. Payroll growth has slowed from an average pace of 395,000 the first half of the year to 200,000 over the past two months as companies shift to a more conservative pace of hiring, ADP notes. In addition, total payrolls for the first time in August exceeded the pre-pandemic peak (and all-time high) of 121.453 million on February 2020 with 121.571 million in August.
- The number of jobless claims for the week ended August 27 was 232,000, down 5k from the week prior with the four-week average moving down 4k to 241,500. The number of continuing claims was 1.438 million, up 26k from the prior week, with the four-week average 1.428 million, up slightly from the prior week.
- In it revised estimate, the Bureau of Labor statistics said U.S. worker productivity decreased on an annualized rate of 4.1% in the second quarter, a slight upgrade from the 4.6% decline in the original estimate, which follows a 7.4% annualized decline in the first quarter. The 4.1% decline was due to a 1.4% decline in output, revised up from a 2.1% decline, while hours worked increased 2.7%, a little higher than 2.6% in the first estimate. Also important, unit labor cost, or how much it cost to produce one unit, increased 10.2% in the quarter, slightly better than the 10.8% increase that was estimated in the first release.
- The ISM index for August was 52.8, indicating the 27th consecutive month of expansion and activity that held steady from July, although the lowest since June 2020. New orders bounced back to 51.3 after showing a contraction in July at 48.0, production improved as well to 50.4, while the best news was the all important prices index fell another 7.5 points to 52.5 for the lowest since June 2020.
- Monthly spending on construction in the U.S. fell 0.4% in July for its second consecutive monthly decline that followed eight months of solid gains. The drop was driven by a 1.5% decline in spending on residential construction as the housing market cools which was offset with a 0.8% increase in nonresidential spending. Compared to a year ago spending is up 8.5%, driven by a 14.0% increase in residential and a 3.1% increase in nonresidential.
- One month after unemployment returned to pre-pandemic levels, the Department of Labor said total payrolls increased another solid 315,000 in August, but due to downward revisions in June and July the net gain is 208,000. Notable job gains were seen in professional and business services (+68k), health care (+48k), retail (+44k), and manufacturing (+22k). But perhaps the biggest news in the report was another 786,000 individuals entered the labor force, bringing the labor force participation rate to 62.4% for the highest level since prior to the pandemic February 2020 (63.4%). As a result, the unemployment rate rose to 3.7% from 3.5%, while the underemployment rate, or the U-6 rate, rose to 7.0% from 6.7%. The average wage rose 0.3% and is up 5.2% from a year prior which is good but still below the level of inflation with real, or inflation adjusted, wages down 3.0% over the period. One of the only downsides to the report was the average work week fell to 34.5 hours for the lowest level in years, down from 34.6 hours last month, and even though jobs were added in August, the total number of hours worked declined.
- Several Chinese internet companies, including Alibaba, JD.com, will be in the first wave of audit inspections by US auditors. The US and China recently came to an agreement to allow the Public Company Accounting Oversight Board to inspect financials of U.S. listed Chinese companies, a new policy that is required from the SEC to avoid being de-listed from U.S. exchanges.
- Snap, parent company of Snapchat, announced it will cut 20% of its workforce, or about 1,200 jobs, and undergo a major restructuring of its business, including scrapping a number of initiatives. In the internal memo from its CEO, the company said its revenues are tracking well below expectations.
- According to company filings to the SEC, the U.S. government is restricting sales of certain chips to China and Russia effective immediately. Nvidia said in a filing its graphic chips that cover products that “may be used in, or diverted to, a ‘military end use” will need a new license for any future exports to China and Russia, while AMD said its AI chips were being restricted for the same reason.
- Disney is considering a membership program that could offer a package of discounts and/or perks for a periodic fee, per a report from the WSJ, similar to a program like Amazon’s Prime.
- Fed speak last week included the following:
- Richmond Fed President Barkin – said the economy is not currently in a recession but says it represents similar dynamics to a post-war economy in that at the end of the war inflation spikes and the economy often enters a recession as it adjusts to a post-war economy. He says the pandemic created these similar dynamics.
- Minneapolis Fed President Khaskari – said he was pleased with the market reaction to Powell’s speech at Jackson Hole. He said the markets misinterpreted the last FOMC meeting (markets ended up moving higher after the meeting), saying the reaction after Powell’s speech suggests people are now understanding the seriousness of the Fed’s commitment on getting inflation back to 2%.
- NY Fed President Williams supports rates at a restrictive stance that he expects to be required “through 2023.”
- Cleveland Fed President Mester said she sees it necessary to move the rate somewhat above 4% and hold it there (the size of rate increases will depend on the inflation outlook at each meeting). “I do not expect to cut the fed funds rate next year”. Mester talked about how in the 1970s there was a mistake on claiming an inflation victory that led the Fed in a “stop-and-go monetary policy world” and they don’t want to make that mistake again while saying it is far too soon to say inflation has peaked
- Reuters reported last week Alibaba and JD.com, among others like Yum China, will be one of the first U.S. listed Chinese companies to undergo an audit inspection next month. The Public Company Accounting Oversight Board notified Alibaba and others of a pending inspection to take place in Hong Kong next month. The Securities and Exchange Commission and Chinese regulators reached a deal to end a dispute that could have delisted many Chinese companies from U.S. exchanges by allowing U.S. auditors full access to Chinese company’s financials with no redactions, with the discretion to select which companies to inspect.
- The price of crude oil, and many energy stocks, experienced another volatile week. The volatility came from original reports based on remarks from the Saudi Energy Minister that OPEC would cut production to balance the markets after futures markets became disconnected with fundamentals. Toward the beginning of last week, reports said OPEC+ was not considering production cuts, sending prices lower again, along with recession and demand worries, then the OPEC+ Joint Technical Committee said it endorsed statements by the Saudi Minister on cutting production. In addition, the G7 nations agrees on a proposal to cap prices refiners and traders can pay for Russian oil through the denial of shipping insurance and finance in effort to limit revenue to Russia. On Monday (September 5), OPEC+ held its monthly meeting and concluded and agreed to a small supply cut for October of 100k barrels per day, bringing the level back to August levels after a brief increase in September. Analysts say the move is inconsequential in volume terms but enough to send a message to the markets and deter short-sellers to maintain efficient functioning of the market.
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The Week Ahead
It is a holiday shortened week with bond and stock markets closed Monday for Labor Day. It will be a quieter week on the economic and earnings calendar. On the economic calendar notable data releases include the ISM services index on Tuesday, trade data Wednesday, and jobless claims on Thursday. There will be plenty of Fed speak with public appearances from Fed policymakers just about every day this week with the highlight being Jerome Powell’s speech on monetary policy Thursday morning. In other central bank news, there are several central bank policy meetings across the globe. The European Central Bank meets this week with its policy decision on Thursday where the greatest odds are for a 75 basis point increase in its policy rate. The Reserve Bank of Australia and the Bank of Canada meet as well. On the earnings calendar, notable quarterly results will be released from GameStop, Nio, and Academy Sports Outdoors Wednesday, DocuSign on Thursday, and Kroger on Friday. There are many brokerage conferences this week as well and, as we are a little over half way through the third quarter, could include commentary or updated guidance on the current quarter. Meanwhile, Apple will hold its launch event Wednesday where it is expected to unveil its iPhone 14 lineup that is expected to include four new iPhone models.