Nonfarm Payrolls August 2023



Fall may be arriving a tad early in Laborland as the temperature in America’s job market begins to cool! August figures mark the third consecutive month in which payrolls expanded by less than 200,000. Please keep in mind that 200,000 was a bit of a “magic number” for employment in the “post-GFC, pre-pandemic era.” The private sector did the bulk of the heavy lifting adding 179,000 jobs last month as government jobs increased by 8,000. Meanwhile, the official unemployment rate jumped to 3.8% and U6 broke through the 7% threshold to close out August at 7.1%. Labor force participation ticked higher to 62.8% with hourly earnings steadily clipping along at 4.3% YoY. As is typical this time of year, BLS politely checks in to give us an idea of how overly optimistic or pessimistic their figures are likely to be in the current year. These numbers are preliminary; the final estimate is expected in February of next year. Well, it turns out the Bureau of Labor Statistics has overstated jobs by about 306,000—on a relative basis this is roughly twice the average historical variance! It’s a good thing we use pencils (not pens) when it comes to government data. Of course, JOLT’s have been quietly pointing in this direction for the past several months—job openings from January through July have decreased by ~2.4M. Now, there are still nearly 9M job openings in the US. So, demand for labor among employers is still very strong, but the need to “staff up” at any cost is clearly beginning to abate. More on that below.   
Man, it is hot here in TX (literally), and the heat is definitely on at the Federal Reserve (figuratively)! Mr. Powell stepped up to the mic and delivered his highly anticipated comments regarding the state of the US economy and monetary policy at the Kansas City Fed’s annual meeting in Jackson Hole, WY last week. The global financial community had been on pins and needles leading up to his remarks; last year’s message unnerved markets in record time and precipitated an ugly set of fall months that most would like to forget. As an aside, I considered wearing a Grim Reaper costume with a Jay Powell mask for Halloween last year—I didn’t want to frighten the kids, so I opted to go as an Astros fan! Anway, we would posit that this year’s speech had some similarities to last year’s albeit in a “watered down” sort of way. Parallels included but were not limited to: noteworthy imbalances in the labor market, below trend economic growth as a prerequisite to achieve target inflation, commitment to said 2% target, etc… However, Powell’s language was more in line with recent comments from his lieutenants (i.e. Fed governors)… the Fed is fully aware of the impact that higher rates can have on the economy (interest rates are blunt tools), but the need to keep rates higher/ restrictive in order to subdue entrenched inflationary pressures is paramount. Basically, it is an implicit commitment to a “soft landing” scenario for the US economy, BUT this process may very well take a LONG time—to those of us looking at the numbers, that part has been very much explicit.

The resilience of inflation and American consumer spending was on full display in last month’s data. While sub-4% unemployment, healthy wage gains, and the sheer volume of M2 money supply suggest there is still plenty of runway for the US from an economic perspective, business spending has been dialed back considerably. Of course, the proof is in the pudding—relatively soft 2Q GDP and a flattish MoM July PCE reading serve as reminders of the dynamics underpinning this thesis. From a corporate perspective we have moved from the days of low rates and ample liquidity to higher rates and LESS liquidity. When rates are low and liquidity is high, the natural tendency is to reach for assets and expand balance sheets. After an asset has been acquired, it must be serviced— labor is one of the primary inputs here. Then, as rates move higher and the availability of funds becomes relatively scarce, the focus returns to “efficiencies” at the operating level. This goes back to the yield over growth mindset underpinning many decisions in board rooms across the country. The days of rampant balance sheet expansion came to an abrupt close in 2022; 2023 has been a story of transition from growth to yield (in a financial sense) or as we would say, “optimization.” Optimization is a bit broader conceptually and can take many forms across sectors (or nations) as economic dynamics shift. Zooming out a bit, one area of particular interest at this time is geopolitics: the realignment of interests amongst West, East, and the emerging Global South.  
Powell is certainly under pressure to deliver with elections roughly one year out. Of course, raising rates too much could cripple the labor market (and economy—domestically and perhaps globally given China’s struggles). Rising unemployment in conjunction with stubbornly above target inflation in the US isn’t something the Biden ticket would want as the economic backdrop for a strong showing in November 2024. So, the “fine tuning” we have discussed recently is likely very much in the offing, which simultaneously takes rate cuts off the table through at least 2Q 2024 in our view. Bonds should be able to stabilize under such circumstances and stock performance will be heavily predicated upon good old-fashioned earnings growth—please note we are looking for earnings to reaccelerate in 2024 after a flattish 2023 (guidance will be key). With the global economic transition underway do we dare reveal a first look at our 2024 S&P 500 earnings scribbles? Sure, why not… $242/ share at the operating level in ’24 is our base case. Of course, there is plenty of time for revisions (upward OR downward) between now and then as new data become available. So, this estimate is by no means etched in stone! Let’s hope Powell threads the needle and finds neutral (r-star) somewhere around 4% sooner rather than later. After all, we must be mindful that 5- 6% fed funds for an overextended period of time risks overcooking this economy.       

News Release: Bureau of Labor Statistics (The Employment Situation- August 2023)

Originally posted on Total Wealth Partners blog.

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