October 6, 2023
Divergences resumed between private data (ADP) and government data (BLS) in September. ADP reported roughly 89,000 new jobs in September whereas the DC-based Bureau of Labor Statistics saw an increase of 336,000. According to BLS, leisure and hospitality and government jobs accounted for roughly half of September’s payroll expansion. We noted last month that BLS is already pre-positioning for a larger than usual downward adjustment to its jobs figures—we won’t know the final tally until next year. So, if we took the midpoint between the two reports, we find that headline jobs increased by 212,500 in September. This puts us roughly in line with pre-pandemic norms and helps explain moderating wages pressures. Hourly earnings increased by a meager 0.2% MoM as the official unemployment rate ticked marginally higher to 3.8%. Perhaps the most relevant datapoint for the labor market emerged on Tuesday (BLS’s JOLT’s report). Job openings surged back toward 10M at the end of August. Labor demand is a key component in the Fed’s calculus—another 25 bps from Powell and Co seems very likely between now and yearend.
The great economic debate over the next year or so in the US will be: are we on a “stagflationary” or “disinflationary” trajectory? The truth is there is an “eye of the beholder” component to both sides of the argument. The US economy is chugging along despite substantially higher interest rates, and we expect companies to resume profit growth in 2024. The labor market is still tight (sub-4% unemployment) and higher interest rates are impacting financial decisions at both the household and business level. The long and the short of it is that people are trying to conserve where they can, while simultaneously spending more of their budgets on what they need. The fact of the matter: everything is more expensive—few have benefitted, many have struggled, and the vast majority are growing tired of merely treading water. Under these circumstances the wheels of the economy can continue to turn until domestic momentum slows enough to warrant another jolt from the Fed. Meanwhile, the US dollar (on a trade weighted basis) is marching back toward levels last seen roughly a year ago, which is very important.
Currencies are a big deal, folks. The fiscal and monetary responses to the Covid crisis and war in Ukraine are perhaps the biggest reminders that we have had as a country since the Great Financial Crisis (GFC). The dollar affects virtually everything locally, domestically, and internationally in some shape or form. Of course, the power of the almighty “buck” is not absolute, and there are many detractors that have aired their grievances against the US dollar (citing political dysfunction, culture wars, inequality, etc…). Regardless of the imperfections inherent to the global financial system as we know it, the reality remains that the dollar is very much a “going concern” (as the accountant in me would say). It along with the likes of the euro, yen, Swiss franc, and pound will continue to play an outsized role in global economics for the foreseeable future. However, the powers that be cannot operate under the assumption that wielding a fiat currency’s influence can cure all “wrongs” and/ or achieve various political agendas. The cumulative response to the aforementioned crises has impacted the lives of every American and every global citizen whether we know it or not AND whether we like it or not. This is just reality. Consequently, we think a significantly higher neutral rate from the Federal Reserve is highly likely— we have hinted at this in the past and Jay Powell came within a whisker of admitting as much in his last FOMC press conference. Markets are beginning to deal with this reality for what it is, not based on what we hope it could be or how we think it should be. The dollar will be around but so will the detractors, the Russians, the Chinese, the Saudis, etc...
Brandishing the financial might of the US dollar (like others do with say… nuclear weapons, AHEM!) and simultaneously layering on an elaborate “shaming” campaign will not have any material impact on the policies or ideologies of our adversaries. The age of outrage has been running its course for some time now—its real impact: minimal. More importantly, we cannot expect that such “strategies” will produce meaningfully better outcomes for already stretched American households. The 21st century world is full of alternatives, substitutes, etc… Huawei’s new phone and the price of Russian crude are good examples. Slowly policymakers are becoming aware of the impotence of various sanctions regimes, price caps, soundbites, and (to a certain extent) rate hikes in a world fraught with binary thinking and escalating risks; it is foolish to believe that American viewpoints and/ or “values” will be revered by those whose interests are not aligned with our own. Last spring a political leader from a developing country had a short conversation with former Secretary of Treasury, Larry Summers. The foreign leader lamented that when his country needs money from America, it gets a “lecture,” but when the same request is submitted to the Chinese, his country receives an “airport.” Sadly, the ramifications of this sort of exchange reverberate far from the halls of Congress and impact the day to day lives of average Americans. The lyrics, “You’re out of touch, I’m out of time” come to mind… How is it easier for “pariahs” to cooperate and form a coalition, than it is for the liberal democracies of the West to rally behind a cause or shared objective? Perhaps the US has been more than a little out of step with respect to its policies over the years and has grown “out of touch” (as Daryl Hall and John Oates would say) with the realities facing the rest of the world? To be clear, it does not appear that we are anywhere near a “Versailles moment” so to speak—there is still plenty of time on the clock. However, one thing is certain: our collective response cannot be, “Let them eat cake.”
News Release: Bureau of Labor Statistics (The Employment Situation- September 2023)