The Breakdown - Is the Jobs Report Hiding Economic Weakness?

Starting point is 00:00:00 I'm not bringing up what seems to be clearly more structural weaknesses in the jobs numbers for the fashion of it. It's because the story when you look at it is a lot more nuance than the average headline was suggesting. When it comes to policy decisions, we need to be making them on the basis of real data. Now, the good news is, whatever one thinks of the Fed, they're certainly sophisticated enough to not just blithely look at the headline numbers. And I think even more than that, inflation is in the driver's seat. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, chain aliasis, and FtX, and produced and distributed by CoinDesk.

Starting point is 00:00:43 What's going on, guys? It is Tuesday, August 9th, and today we are discussing the jobs report from last week, but specifically how I think it might have actually been hiding economic weakness, despite it seeming on the surface to suggest a very strong labor market. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us in the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. And finally, this week I am thrilled to have NIR as an additional sponsor. NIR is a revolutionary yet simple Web3 platform for building decentralized apps.

Starting point is 00:01:28 designed by developers for developers, over 700 projects are now building on NIR's fast, secure, and scalable protocol. Whether you are a crypto-native launching defy apps or NFT marketplaces or play and earn games or looking to migrate your project from Web 2, NIR makes it easy to build Web3 for the masses. NIR offers developers a variety of tools, resources, and support for building apps, empowering communities, and creating a more fair, inclusive, and equitable future. Start your Web 3 developer journey now by visiting near at neer.org. So today we are back in the macro realm, and I think a little bit of setup is appropriate. At the last FOMC meeting, one of the most notable features was the lack of, in fact, the end of forward guidance.

Starting point is 00:02:12 Forward guidance was the system by which the Federal Reserve conveyed where they thought rates were heading in the months and quarters to come. They did this in very specific detail, having a little dot plot that showed where different Fed officials thought rates were going to go. This was kind of a way for them to try to nudge the economy toward where they wanted it to end up without actually having to make any monetary policy change. At this meeting, they threw out forward guidance, and what they said instead is that from here on out, they were going to be relying on data. First and foremost, it's clear is going to be inflation data. We have the first of two official inflation prints before the next FOMC meeting coming in tomorrow.

Starting point is 00:02:54 These numbers are for July. At the beginning of September, we'll get August's inflation numbers. These are likely to be the biggest factor shaping what the Fed decides to do at their September meeting. A second important piece of data, however, is jobs in the labor market. Up until very recently, the Fed was extremely focused on the jobs number. In the wake of the pandemic, they really wanted to make sure that the recovery got all the way to the bottom rungs of the economy.

Starting point is 00:03:19 This was explicitly one, if not the main reason that they said that they said that. they were willing to let inflation run hot. It's only been in the last six months or so that the priority has shifted, and getting inflation down has become the overwhelming focus, so much so that the Fed is intimated that they're willing to see unemployment go up if that's what it takes to head off inflation before it becomes entrenched. So that's the setup for why people are following the jobs number even more closely than usual. If jobs start to decline, it will be a signal that the economy is really cooling off. While it won't necessarily mean an immediate change in the Fed's policy of tightening, it will be one big indicator that their tightening is having its intended

Starting point is 00:03:54 purpose, which would reinforce the idea that we may be past a peak of hawkishness. If, on the other hand, jobs continue to grow, that will signal to the Fed that they have more room to be even more aggressive with their policy. Now, there's one more important detail about how these numbers are calculated. There are actually a few different surveys the Bureau of Labor Statistics uses. The household survey looks at 60,000 American households during the week of the 12th each month. The establishment survey, on the other hand, incorporates payroll records of 144,000 non-farm establishments and government agencies, covering workers at about 555,000 individual work sites. A few differences that this leads to. The household survey includes agricultural workers, self-employed, unpaid family workers, and private household workers that don't come up in the establishment survey. It also includes people on unpaid leave. The household survey also doesn't double count people because they're only counted once even if they hold more than one job.

Starting point is 00:04:49 Another important difference is that cyclical factors can shape a difference between the household and the establishment survey. During recessions, for example, the establishment survey tends to show job losses, as those recessionary conditions come to pass and workers are let go, while the household survey might even show gains because those displaced workers can start to get into the sort of, quote-unquote, marginal employment that is captured by the household survey. So with all of that said, what did we actually see on Friday? The headline figures were extremely strong. 528,000 jobs were added, which was more than double consensus estimates. The unemployment rate fell to 3.5%, which matches a five-decade low. Wage growth also showed minor gains with the average hourly earnings ticking up by 15 cents for the month, and overall, wages were up 5.2% from July last year.

Starting point is 00:05:38 The White House immediately took to the press pulpit to celebrate the report as proof that the economy is not heading into a recession. President Biden said more people are working than at any point in American history. That's millions of families with the dignity and peace of mind that a paycheck provides. And it's the result of my economic plan to build the economy from the bottom up and middle out. This was not what people expected. Economists and White House officials had forecast a slowdown in this report due to consumer sentiment hitting a record low in June and negative GDP prints over the last two quarters indicating a contracting economy. Now, as you you might expect, the layer one analysis was that this was going to give Fed tons of ammunition

Starting point is 00:06:18 to tighten further. Daniel Zhao, the chief economist for Glassdoor, says it gives the Fed more confidence that it can tighten monetary policy without leading to a widespread rise in unemployment. It also shows that the labor market isn't cooling or at least wasn't cooling as fast as anticipated. A panel of economists at Bloomberg said the jobs report settles it. We are not in a recession. More importantly, it means that the Fed will also likely have to hike by another 75 basis points in September. Hiring was broad-based across. cross sectors and there was no evidence of widespread layoffs. Joe Wisenthal from Bloomberg wrote 52 straight days of falling gasoline prices while the economy is adding over a half million

Starting point is 00:06:52 jobs doesn't seem like stagflation, but is there more to this data than meets the eye? Some analysts think yes. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, Chainalysis is here to help.

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Starting point is 00:08:15 with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. The household survey estimates that in July, 239,000 people left the labor force, either through retirement or no longer looking for work. 303,000 people moved to part-time work due to economic reasons, essentially that there wasn't enough work for them to stay in full-time employment at their job.

Starting point is 00:09:00 So what we have here is a gain in the number of employed people, but a significant contraction in the overall size of the workforce, meaning that the low unemployment rate, at least in part, reflects tightness in a shrinking labor market rather than a strong and growing labor market. Don Johnson, an analyst at Paradise Research Group, also tweeted more numbers behind the headlines. part-time jobs were up 384,000. Multiple jobs were up 92,000. Full-time employment was down 71,000. So what you have here is a situation where people are getting part-time and hourly jobs or having to take on a second job, and the number of people who are full-time employed is actually down fairly significantly. Some are also pointing out that the establishment survey has a significant amount of data smoothing applied to smooth volatility based on previous trends.

Starting point is 00:09:46 Jeff Snyder pointed out that a similar data problem caused the 2019 slowdown not to be reflected in the data until it was revised later. Quote, what's wrong with the establishment survey? It is designed to go in a straight line, and last year's rebound is set the statistical range too high. Like 2019, that range can keep establishment survey elevated while household survey, which isn't smooth the same way, is allowed to pick up inflation. He goes on, we keep doing this. One set of data makes it seem like everything is great, only if you ignore deep structural problems that should not be swept under the statistics. statistical rug. There is no boom. There hasn't been one in so long no one remembers what it looks like. Tavi Costa said, given the overwhelming optimism on the jobs report today, a reminder that non-farm payrolls also surged by almost 500K right at the peak of the tech bubble in March 2000. A lot of folks were pointing out that when the data is pointing one direction but everyone's

Starting point is 00:10:36 sensibility is pointing in the other, it's usually worth an investigation. A small account on Twitter, David, writes, the more I dig into this jobs report, this is bad. Participation in full-time jobs are down. Unemployment rate is down with the workforce shrinking. Markets and most people are right. Adam Taggart, the CEO of Wealthian, says this Six Sigma blowout jobs report smells wrong. Two quarters of contracting GDP, Fed busy hiking, corporate margins contracting, major companies freezing hires are actively laying off workers. These in no way indicate strong job creation. Bill Peguian writes, hidden in the Good News July jobs report, after digging below the surface, reveals a different picture. Americans strapped for cash by inflation, taking on second jobs and part-time jobs as families

Starting point is 00:11:18 have less money to spend. From June to July, Labor Force saw full-time jobs drop by 71,000, while part-time jobs and multiple job holders increased by 384,000 and 92,000 respectively. Not so rosy after all. Macro-Alph writes, one, since June, the U.S. Household Job Market Survey shows that the U.S. has lost 141,000 full-time jobs, while the number of multiple job holders has increased by 260. 3,000 people. Two, credit card debt surged by 46 billion last quarter, up 13% year over year, the biggest increase in 20 years. On this credit card data point, CNN writes a piece, Americans are piling up credit card debt as they struggle to keep up with the high cost of living. In data released last Tuesday, the New York Fed said that credit card balances had increased by

Starting point is 00:12:03 $46 billion last quarter. Over the past year, credit card debt has increased by over $100 billion. Overall, U.S. household debt is now at an all-time high of more than $16. trillion. The concern, of course, is that this is where you're seeing inflation show up, people having to take on more debt to keep up with the cost of living. Markets and Mayam writes, there are nearly twice as many credit card accounts as there are people in the U.S. This is a nation of debt-driven consumerism, and it isn't sustainable with rising rates in a slowing economy. The Kobayisi letter writes, Americans have opened 233 million credit card accounts since April, the largest increase since 2008. credit card debt is up 13% since April, the largest increase since 2001. Total credit card debt is set to

Starting point is 00:12:43 cross $1 trillion for the first time ever. The bubble is expanding. Indeed, they go on to articulate that full bubble as they see it. Current situation. One, 8% of houses reduced asking price over last month, most since 2000. Two, credit card debt is up 20% in three months. Three most aggressive rate hikes in history into a recession. Four China-U.S. tensions escalating. Five, inflation at 40-year high. We're staring off a cliff. Ben Hunt writes, every U.S. company saw the jobs report today and licked their chops. Cart blanche to raise prices as much as they like. This is what an embedded wage price spiral looks like, and it's why the Fed must engineer a horrible recession to ring it out. Or they won't, which is worse. The worst part of today's job report

Starting point is 00:13:27 was the upward revision in last month's wage increases. There is no rolling over of wages, which means there is no rolling over of prices. Fed hikes to date have done nothing in the real economy, nothing. We are light years away from neutral. The Wall Street Journal wrote an article about this wage price spiral today, and it pointed to airlines as an example. Quote, some airlines have negotiated double-digit wage increases for pilots as carriers struggled to hire enough of them to meet fast-rising demand for flights. Meanwhile, jet fuel costs have shot up. Those factors have likely converged to drive up the price of plane tickets. In June, airfares were up 34.1% from a year earlier. Now, this wage price spiral is one of the things the Fed is most keen to avoid, and the Fed is nervous

Starting point is 00:14:08 about it right now. Wages keep going up, but they're still not keeping pace with inflation. Although the salaries for private sector's worker growing 5.7% in the second quarter year over year, which was the fastest pace on records back to 2001, private sector wages declined 3.1% if you take into account inflation. And this gets me to what I thought was one of the best little threads about this jobs report. L.J. Montello writes, folks keep posting about the Biden boom over job numbers as though most people aren't living paycheck to paycheck and racking up record credit card debt to make ends meet on wages not keeping up with inflation. Can you go to almost any retail store or restaurant and find a help wanted sign?

Starting point is 00:14:46 Sure, but those minimum wage and near minimum wage gigs aren't the foundation of a healthy economy, especially not one where the median national rent is about 2K a month. Celebrating gas being only $4 a gallon isn't helping someone who needs to commute to get a job paying $8 to $12 an hour and has seen their grocery bill and health insurance increase far more than inflation while they're lucky to see a 3% annual raise. So pardon me for being a little cynical as we repeat the all as well mantra of 2006 based on the ability for anyone to find a job that won't pay the bills as Megacorp's post record profits as GDP falls. So where does this leave us? Well, I've been clear on my feelings about the discourse on recession. Is it or isn't it a recession feels supremely irrelevant to me

Starting point is 00:15:25 relative to trying to understand what's actually happening in the economy. I also think that economic doomerism has at least two motivations that aren't simply the pursuit of truth. One is political. There is definitely a direct correspondence to how much a commentator dislikes Biden and how likely they are to rail that these numbers are BS and everything is terrible. I think even more pernicious than that, though, because that's at least fairly transparent. Economic doomerism is one of the most popular niches for people who want to build a career, or at least a following, doing economic commentary. They're not telling us the truth is always an extremely popular thing to argue on social media, and just moreover,

Starting point is 00:16:00 rage sells. The point of all this is that I'm not bringing up what seems to be clearly more structural weaknesses in the jobs numbers for the fashion of it. It's because the story when you look at it is a lot more nuance than the average headline was suggesting. When it comes to policy decisions, we need to be making them on the basis of real data. Now, the good news is, whatever one thinks of the Fed, they're certainly sophisticated enough to not just blithely look at the headline numbers. And I think even more than that, inflation is in the driver's seat. It is the captain now to reference the well-known meme. Sure, maybe this will help give the Fed more room to keep on tightening with less second guessing, but I think that it's all about the actual CPI number. And jobs right now are ultimately

Starting point is 00:16:38 a very, very secondary consideration. All right, guys, so there is my take on this. I want to say thanks again to my sponsors, nexus.com.com. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Is the Jobs Report Hiding Economic Weakness?

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