Nonfarm Payrolls March 2024

April 5, 2024

The labor market concluded the first quarter with a bang! 303,000 new jobs were created in March. Naturally, the official unemployment rate held below 4% with U6 unchanged at 7.3% MoM. Wages increased by 0.3% last month, bringing them to 4.1% YoY. Job openings in February tallied more than 8.75M. With jobs aplenty and inflation stubbornly above target in the US policymakers find themselves in a uniquely challenging position. Has enough been done to tame inflation and how much time do they have to mull over the data before acting (one way or another)? The clock is ticking.

What if productivity AND inflation are skewed higher in the short-term? Ordinarily, productivity gains have a dampening effect on inflation, but the global economic contours of the present age are unique. We have a relatively new—some would say ongoing— era of warfare in the East and continued deficit spending in conjunction with the advent of an AI-induced productivity boom in the West. Economists tend to think productivity fosters competition, which is usually associated with increased efficiencies and disinflation, yet inflationary forces aren’t exactly cooperating thus far in ’24.

China is attempting to stabilize its economy— the Chinese industrial sector is picking up speed (finally). Higher than expected stateside inflation reports have prompted Janet Yellen, formerly of the Federal Reserve but now helming the US Treasury, to cast her worried eyes across the Pacific. Meanwhile, ISM’s measure of March manufacturing activity in the US ticked into expansion territory for the first time since the end of 2022! Europe (collectively) and Japan are mired in recessions, and the US is actively engaged with the Yemeni Houthis in an effort to secure safe passage of cargoes in the Red Sea—sailing around the Cape of Good Hope isn’t an ideal long-term solution. It’s worth noting China and Russia have already received assurances from the Houthis regarding their vessels, though errant missiles have been fired recently. Meanwhile, Ukraine and Gaza continue to burn. Despite the global turbulence, earnings at the largest and best run companies, as measured by the S&P 500, are on track for unprecedented profitability—operating earnings per share are expected to increase by double digits YoY. Moreover, even with domestic savings rates declining at a precipitous pace US consumers remain armed and ready to spend. Under such circumstances real rates and inflation could both be higher than what the Fed and other central banks in the developed world anticipate; the consequences could be significant for financial markets. As a quick reminder, nominal rates (the rates we see and pay) are the sum of the rate of inflation and real rates. Another way of looking at this phenomenon (rather than hypothesizing about the viability of monetary policy’s long and variable lags) would be to consider whether the real rate needs to be the equivalent of the rate of inflation in order for the economy to find its true neutral rate.
     
The eye of the storm is a term that meteorologists use to describe a small area of relative calm in the middle of a hurricane. Within the eye there is no wind, no rain, and sunlight is actually able to break through the enormous, looming clouds that form the storm itself. Incidentally, the eye is also narrowest at the bottom and widest at the top—something noteworthy in an election year, but I digress… Immediately outside of the eye is the “eye wall,” which is known to be the most acute and harmful part of the hurricane. As the storm moves, so does the eye. Metaphorically speaking we are currently living in an economic hurricane.

Policy (fiscal and monetary) are the tools governments deploy to manage the economic environment—factors foreign and domestic must be thoughtfully considered and weighed in the balance. We have described this many times over the years in different ways. Suffice it to say the environment in which we live, work, and play is undoubtedly “stormy” (the statistical term is “volatile”). Financial risks are evolving even as many of the economic pressures present in the world today are much the same as they have been for the past couple of years. Has the the storm passed? We aren’t so certain (and neither is the Fed); our piece from roughly a year ago might be worth another look. It seems policy has in effect navigated us to the eye of the storm. Under the current circumstances perhaps the most realistic objective for our leaders in Washington is to keep us in the “eye” for as long as possible. Vigilance is key.

News Release: Bureau of Labor Statistics (The Employment Situation- March 2024)

Originally posted on Total Wealth Partners.