If you just watch the headlines, last Friday’s Non-Farm Payroll report was perfect. The US economy added a few more jobs than expected, 227,000 vs expectations of 214,000. Wages rose a bit more than expected – 0.4% month over month, vs 0.3%. And how can that be bad, right?
And even though the unemployment rate moved from 4.1% to 4.2%, that doesn’t sound terrible, just ignore the fact that the actual number was 4.246, just a hair from being rounded up to 4.3%, the level that put a little panic in the Fed back in September.
The market is celebrating, because the numbers all seem benign enough for the Fed to drop another stimulative 0.25 point rate cut on an overvalued stock market next week.
But as Hammer wrote on Friday:
In the last year, nonfarm payrolls are up by 2.3 million while employment is down by 725,000 and full-time employment is down by over 1.3 million.
The biggest gains were in health care services and government which were needed to handle immigration.
These numbers make little sense of course. But these are the numbers we have and the low number is what matters to the algorithms. What should matter to you is that the bottom for unemployment is in and you can expect unemployment to head higher for the remainder of this cycle.
Here’s what that bottom looks like:
The unemployment rate has been zig-zagging higher for 18 months.
Business Don’t Want to Hire
You look at business sentiment surveys in the wake of Trump’s presidential victory, they are overwhelmingly bullish. But ask companies about their hiring plans, and you get a different answer.
There are reportedly 7.7 million job openings. And people are quitting their jobs at the highest rate in over a year. It sounds like it should be pretty easy to find work, if you want it. But the reality on the ground seems to be different…
Long-term unemployment is very high.
Last week, Bloomberg wrote:
Of the roughly 7 million unemployed people in the US, more than 40% have been searching unsuccessfully for 15 weeks or longer, a share rarely seen until the global financial crisis of 2008.
And the share of people unemployed for more than a half-year, at almost 23%, has been rising, too. Companies aren’t firing many people but they aren’t hiring either.
Something about all this doesn’t make sense. It’s pretty easy to imagine that surveys don’t reflect economic realities, that constant revisions make employment data unreliable and that a lot of those job postings are bogus.
As Goes California…
It used to be said that “as goes California, so goes the country.” This saying explains why fads and fashions seem to start in California and spread east. California has the biggest state population in the country – 38 million – so this is somewhat reasonable…
But let’s hope that doesn’t apply to unemployment. At 5.3%, California has the third highest unemployment rate in the country, after DC and Nevada, where unemployment sits at 5.7%.
As the seat of a bloated federal government, it’s pretty surprising that DC would lead the nation in unemployment. With regard to California, there was a wave of layoffs in the tech sector to start 2024, but more recently it is the 3-year low for tech sector hiring that stands out.
Tech companies aren’t hiring, even as AI applications get more powerful. I think I know where this is going…
A few months down the road, we’re going to start hearing that that long-term unemployment and unemployment rate in California are related to AI. That’s a trend that is likely to spread.
Fed interest rate cuts will be powerless against this kind of structural shift in the economy. But more rate cuts could sure push inflation higher…
That’s the formula for stagflation. And it’s one of the big threats ahead in 2025.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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