There are many people far better qualified than I am to analyze and comment upon labor market dynamics. One of the concepts I introduced within this Substack last summer was my Circle of Trust. The circle is populated by people who have analytical frameworks in which I have found significant value. A common attribute is that they have the talent and courage to form and share variant perceptions.
‘Variant perception’ is a phrase I first came across from something legendary hedge fund manager Michael Steinhardt said or wrote many years ago - I honestly cannot remember. The concept was something he embraced and attributed to being central to his long-term success.
A long-standing member of the Circle of Trust has been Economic Cycle Research Institute (ECRI). They posted the following on their Twitter account following Friday morning’s huge non-farm payroll report:
Despite the big headline jobs number and it being well above consensus expectations (establishment survey), ECRI’s chart shows that year-over-year growth has been falling for a while. The Federal Reserve has made it clear that labor market strength is a key policy concern and that it may result in a wage-price spiral- hence anchoring a more protracted inflation problem such as occurred during the 1970s. Of course, we here at Kayfabe Capital Towers do not subscribe to that theory - we are in another Circle member’s camp.
Today we officially welcome a new Circle member, who had become an informal member months ago: Neely Tamminga. I’ve gotten to know Neely virtually over the past year once she joined the community of lunatics on Fintwit, and knew quickly she was a person to whom I should be listening. Neely is a founding partner at Distill Advisory and is an expert on ‘the consumer’ amongst other topics. I’ve learned a ton listening to and reading Neely, and Friday’s jobs report was for me a ‘Neely singularity.’
Two big issues and themes she has been public about since early this year is the impact on some consumers of the sunsetting of two major pandemic-era subsidy programs, and the potential for student loan debt to go back into repayment. A vital lesson I have learned from Neely is the importance of being specific about ‘what consumer’ to which one is referencing.
The SNAP (food assistance) and Medicaid health insurance subsidies that sunset earlier this spring have already been manifesting in things like lower sales at grocery stores, and as Neely forecasted, it appears people are re-entering the labor market in search of health insurance benefits.
Friday’s employment report was confusing to some, as the headline unemployment rate went up from 3.4% to 3.7% (3.5% consensus estimate) despite the jobs growth number coming in at 339,000 (190,000 consensus estimate), with the prior two months’ data being revised higher. People who do not have Neely amongst their Circle of Trust could reasonably see the data and take it as a signal that the US economy is strong, or even getting stronger.
Given the severe issues companies have had over the past two years in filling jobs, an influx of people looking for jobs within a relatively short period of time could reasonably be expected to have a degree of success. One anecdote came this week via S&P Global’s US PMI report:
The entire report is worth a read, but I’ve highlighted a section on the jobs market. This trend was also reported within this week’s ISM Manufacturing report, where manufacturing firms are hiring employees despite significantly weakening demand.
I have referenced the concept of ‘money illusion’ in prior Substacks, with the extended period of high inflation boosting business revenues via price increases, even as unit volumes decelerate or even begin to contract. This illusion can leave operators with a sort of false sense of security as the business cycle rolls over into a recession.
Add that potential phenomenon to the recency bias displayed courtesy of the dire labor shortages of the last couple of years, and is it any wonder that business operators are desperate to hire and retain people and hope that demand picks up?
Another clip from the PMI report:
Is that optimism well-placed? A section from the Young Powell piece from last December which I keep revisiting:
Returning to the second of Neely’s insightful themes; the potential for student debt payments, which have been in forbearance for tens of millions of consumers for several years, to go back into repayment. The SCOTUS is likely to rule on a related case this month, and the recent debt ceiling legislation included the acceleration of what was an August timeline to bring it forward a month to July. Neely has stated that she believes this could result in around a 1% decline in retail sales.
That may not sound like a lot, but real retail sales have already been negative in six of the last seven months. Last week’s big income data report from the federal government was revised down significantly for Q4 2022, and another report showed big revisions down for Q1 2023. This is all occurring BEFORE the teeth of job losses typically associated with recession unfold. Jobless claims have bottomed and begun to move higher, but not yet in a material way.
Thanks to the Circle of Trust, the Fog of Cycles are not debilitating here at Kayfabe Capital Towers. Where others find confusion and doubt, we have relative clarity as events unfold. With leading indicators having warned of a recession occurring over the first half of 2023, the labor market has been a persistent thorn in the side for many from an analytical perspective.
With income, sales, and production all now in varying states of contraction, it is the last of the four main elements to relent. Leading indicators have yet to turn back up, and major central banks are still tightening despite those three elements contracting.
Optimism fueled by reason is a valuable trait for business operators. Hope in denial of reality can be dangerous. Thanks to Neely, we have a good idea that the recent employment data is likely to be potential fuel for the latter. Unfortunately for the people impacted, job losses are likely to be Unchained at scale in the coming months as that hope turns to resignation.
How do I even deserve you, Kayfabe?! Thank you for spotlighting our firm’s insights in your work. You are truly a gentleman and a scholar. I’ve learned so much from you and you’ve always been gracious and patient in teaching us all. Thank you.
As a Hall of Fame Wrestler [and an fantastic personality] Ric Flair would be proud of this piece! Every week I appreciate your guidance through the ambiguity and noise of this fog of cycles. Thanks.