The American jobs machine cranked out another 223,000 jobs to finish 2022. More than half of last month’s hiring activity took place in two sectors: leisure and hospitality (67,000) and healthcare (55,000). Government payrolls expanded by a mere 3,000 in December as private employers snapped up 220,000 workers. The official unemployment rate fell to 3.5% as U6 dropped in similar fashion to 6.5%. Meanwhile, American workers averaged 34.3 hours/ week on the clock with wages rising 0.3% MoM; this moderation in hourly earnings is certainly a welcome sign for markets. As the battle against inflation drags into the New Year, the wage picture is critically important to the outlook for domestic inflation in 2023. Tightness in the labor market has become somewhat of a forgone conclusion, so the willingness of American employers to ratchet up wages in the face of slowing economic conditions will take cente stage. Somewhat paradoxically this kind of economic slowing is likely what is necessary to bring about the transition from what has been an “inferno” of sorts for all assets. Having opened that can of Dantean worms, let’s dig in…
2022 was the financial equivalent of Inferno. Geopolitical chaos and inflation were the catalysts that drove cross-asset correlations to historical highs—it is never a good sign when the US dollar is the only place to preserve value in the financial universe. Global currency volatility shot through the proverbial roof as Mr. Powell embarked on his odyssey (I am feeling very classical today). Taming inflation would be a very different task than dealing with the Covid induced twin-shock recession of 2020. Of course, Mr. Powell’s actions had consequences—and markets the world over suffered remarkably. However, the domestic economy weathered the storm quite well buttressed by the strong labor market, a resilient consumer, and more than $7T in real M2 money supply. In 2022 US GDP registered two consecutive quarters of negative growth, which is also known as a “technical recession.” In contrast to our prior two recessions (2008-2009 and 2020), a financial crisis did not materialize last year. Moreover, earnings growth for US stocks remained positive YoY! This was essentially the perfect storm for ALL assets—not simply risk assets, but ALL assets… the fire and ice combo of Dante’s Inferno. US treasuries (considered the world’s risk free asset) tanked, commodities entered a bear market, and stocks had their worst year since… the financial crisis of 2008. There were some twists and turns over the past year that prolonged and exaggerated some of the difficulties in the marketplace, but we are beginning to see some green shoots in the data. Perhaps this year will be the year of transition, so let’s pivot over to the Fed for a minute.
Is the tail wagging the dog? On the surface that certainly appears to be the case for the Powell Fed. Labor demand continues to influence both the rhetoric and actions of the Federal Reserve. With job openings well above 10MM the American workplace is still out of balance, and the Fed (as we have mentioned time and time again) can do little to impact the supply side of the equation. Mr. Powell suggested in his comments at the Brookings Institute that part of the trouble in the labor market stems from early retirement. For its part the Fed has been digging into the stubborn labor force participation numbers lately; they seem to have concluded that the runup in asset prices during the Covid crisis in tandem with fear of the virus itself helped trigger a surge in early exits from the workplace. When or if these vacancies will be filled is an open question for Fed researchers at this time. Of course, the ramifications for this quandary are quite significant. Is this issue structural or “transitory” in nature? Should labor force participation remain anchored below pre-pandemic levels, then the Fed would have to change its base case for normal unemployment, inflation, and R-star (the rate of interest that neither stimulates nor stagnates the economy). Changes to any or all of these variables would carry enormous repercussions for monetary policy on a domestic and global scale. Nevertheless, Mr. Powell’s most recent comments suggest the FOMC has no desire to adjust the Fed’s 2% target for inflation. So, the waiting game for equilibrium continues in Laborland.
Is it really that good (or bad) in Biden’s America? Well, it seems to be a tale of two economic realities—assets vs income. The Presidential Twitter account suggests the outlook for America has never been brighter, yet every major asset class finds itself in the throes of a bear market… stocks, bonds, and commodities TOGETHER. This is extremely rare. Modern portfolio theory suggests this should not happen, BUT it can happen. In fact, this has been the case for the past twelve months! The policies inherent to President Biden’s economic agenda are somewhat out of sync with the dynamics underpinning the global economy at this time. Perhaps given a different set of variables the results of such an agenda would be more tangible and benign. Regardless, there is no doubt that inflation is an issue; it needs to be addressed via productivity gains rather than relying solely on draconian monetary policy. Giving capable people better tools to solve problems tends to be a sustainable long-term solution—it also happens to be “disinflationary” in the short-run. While it is nice to see the unemployment rate hovering at a multi-decade low (after 425 bps of rate hikes in ~9 months), the US economy is still missing workers from 2019. This is a problem that must be addressed; we do not believe time is on our side in this case. While we are glad to see December’s uptick in labor force participation, the gap between supply and demand on the labor front remains too wide to give us much comfort at this time, and productivity remains a trouble spot for the domestic economy. Progress in these critical areas will likely signal the beginning of the transition and that progress will need to be measured in quarters (not months). So, we will be keeping a close eye on the incoming data and earnings results as the final tallies for 2022 hit the wires. The journey continues…
News Release: Bureau of Labor Statistics (The Employment Situation- December 2022)