Commentary
The Bureau of Labor Statistics (BLS) announced robust jobs growth of 272,000 new jobs in May, according to the Establishment Survey, a collection of job creation data from businesses. The number is well above the 182,000 consensus estimate. March and April jobs creation revisions were down by 15,000 jobs, total.
The unemployment rate printed at 4 percent, the highest since December 2021.
The U6 measure—which is the percentage of the population that is unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, plus all persons marginally attached to the labor force—printed at 7.4 percent, up one whole percentage point since this time last year. An increasing U6 number is generally considered a leading indicator of a slowing economy.
The BLS’s Household Survey, which polls the number of people taking jobs, and is viewed as eliminating workers taking more than one job, showed 182,000 more people working in May than in April. But some 250,000 workers left the workforce.
Let’s look at our exclusive schedule of May and April Jobs Creation by Average Weekly Wages:
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6/7/2024
Jobs creation was, again, led by those positions that tend to have government support, like private education and health services, which added 86,000 new jobs, including 83,500 health care and social services jobs. (We do not include “official” government jobs payrolls in our chart. Such government payrolls added another 43,000 jobs, to the 272,000 jobs, reported today by the BLS.)
Higher-paying jobs creation was, again, virtually moribund, save for professional business services and financial activities. Lower-wage jobs, such as in leisure and hospitality, retail, and other services, together with the aforementioned, education, health, and social services. were the majority of the new jobs creation in the Establishment Survey.
Throwing Shade on the Government’s Numbers
While today’s numbers were certainly robust relative to expectations, three recent stories have throw shade on the narrative that the BLS jobs data shows robust economic growth:• First, Bloomberg reported yesterday that new data published by the BLS on Wednesday infers an overstatement of an average 60,000 jobs throughout 2023, beyond some of the extremely high jobs revisions that came in with the monthly jobs revisions. That would mean that the 2.7 million new jobs originally reported for 2023 was actually just 2 million jobs.
• Second, Axios reported that, according to an analysis by Standard Chartered Bank, “[a]bout half of the non-farm payroll job growth since October 2023 has come from asylum-seekers, refugees and other migrants who have been authorized to work in the U.S.” The Standard Chartered Bank analysis, which is only available to its clients, was summarized by Right-leaning investor blog Zero Hedge as saying,
“The ability to track EAD [employment authorization document] issuance to undocumented workers is an advantage in estimating how much they have contributed to employment growth. NFP [non-farm payrolls] counts workers with an EAD just like any other. Using that data, it is easy to estimate that undocumented workers have added 109,000 jobs per month to NFP out of the average 231,000 increase so far in fiscal year 2024.”
We join the late Jack Welch, the legendary chair of General Electric, in always being circumspect about election-year jobs data, especially in the turn coming into the home stretch of a presidential election year with an incumbent seeking re-election.
Economy Generally
Gross domestic product growth printed at 1.3 percent in the second quarter, according to the second estimate. As can be seen in this chart, in April, disposable personal income and zero = outlays both dropped precipitously in April. We won’t see May numbers until the end of this month, but the decline is troubling. As we have noted before, U.S. growth is arguably just “the tallest pygmy,” especially compared with other developed economies, and particularly some developing economies.(See the chart from the International Monetary Fund (IMF), below and its interactive counterpart, linked here. Note, too, that the economies of Poland and Ukraine are doing almost 50 basis points—0.5 percent—better than the United States or the rest of Europe due, in part, to the funds the United States is sending them for defense.)
Particularly troubling, though, is that so much of the U.S. GDP growth, as well as job growth, is fueled, directly and indirectly, by enormous government spending, including the aforementioned funding for the Ukraine war. This other interactive chart, from the IMF, shows how excessive our debt-to-GDP ratio, at over 123 percent, is relative to other G7 economies. Only Japan and Italy are worse off.
So much of the purported U.S. “growth” is from the government; around one-third of our total GDP, among federal, state, and local government expenditures.
Federal Reserve Policy
The Federal Reserve’s Summary of Economic Projections (informally, its “dot plots”) show a central tendency of 1.8–2.4 percent growth through 2026. The less than robust growth projections will considerably affect the well-being of Americans and profits. A new “dot plot” matrix will be released next week, at the Fed meeting that concludes June 12.
This sentence, from the Fed minutes was disconcerting:
“On balance, the staff continued to characterize the system’s financial vulnerabilities as notable, but raised the assessment of vulnerabilities in asset valuations to elevated, as valuations across a range of markets appeared high relative to risk-adjusted cash flows. House prices remained elevated relative to fundamentals such as rents and Treasury yields, though the fraction of mortgage borrowers with small equity positions remained low.”
In other words, the Fed thinks that asset values are inflated, relative to the income those assets produce. The Fed also said in the minutes:
“Participants generally noted that high interest rates could contribute to vulnerabilities in the financial system. In that context, a number of participants emphasized that monetary policy should be guided by the outlook for employment and inflation and that other tools should be the primary means to address financial stability risks.”
We have said for quite some time that the Federal Reserve balance sheet is too large, much larger than it should be, given how far we are from the pandemic. As of May 27, the Fed’s balance sheet was still at $7.284 trillion, roughly where it was in December 2020, still in the height of the pandemic and just $100 billion less than it was in January 2021. Before the pandemic, the Fed’s balance sheet was just $4.1 trillion.
We believe the Fed is loosening its rate of quantitative tightening because of the enormous risk to the banking sector as commercial real estate loans originated in the aftermath of the financial crisis of 2008–09 come to maturity and require refinancing. Many of those loans will have to be refinanced at rates that are already 300 or more basis points higher than they were when the loan originated. Those financing costs, together with the enormous cost increases in commercial insurance costs, will hinder cash flows and cause many owners of commercial real estate to simply default and “hand over the keys” to the lender. The Fed minutes mentioned valuations of commercial real estate (CRE) being overstated and, today. We note that Moody’s reportedly put six regional banks on review for potential downgrade because of their exposure to commercial real estate.
Nevertheless, we believe, as we have said for months now, that monetary policy, and the Fed’s effort to assure a “soft landing” ahead of the 2024 elections, continues to be far too accommodating, and has been a longer-term mistake. We see it in the continuing trimmed mean inflation rate at 2.7 percent, which had ballooned throughout the past three years. Continuing inflation bears out the obvious effect of the excess money supply and bloated Federal Reserve balance sheet.
Monetary Policy
My readers should regularly look at the schedules of “Household Debt and Credit,” prepared quarterly by the Federal Reserve Bank of New York for some troubling debt and delinquency figures, particularly among Generation Z aged 18—29, who are the principal drivers of family formation that drives so much of GDP.) The administration’s fiscal policy is adding an additional trillion dollars to the national debt every 100 days. All that cash sloshing around—from fiscal and monetary policy—has, we think, artificially boosted the asset prices that the Fed finally noticed in its minutes, including home prices and securities values, above where they would otherwise be. We believe it sets up a reckoning in the future: either continued inflation (as the spending continues and deficits increase) or a sharp and perhaps lengthy recession; the kind of lengthy economic malaise we saw after the 2008 financial crisis.Failing to arrest this fiscal and monetary policy—and soon—will, we believe, result in a Hobson’s choice of policy making, where future prosperity is at substantial risk.
Looming ‘Gray Swans’
There are at least four looming “gray swans” facing the economy. “Gray swans,” as opposed to “black swans,” are events that can be foreseen, but are unlikely. Black swans are totally unpredictable. (A gray swan is comparable to a hurricane in hurricane season, whereas a black swan would be something like a devastating earthquake.) Virtually all of the looming gray swans we can foresee are attributable to bad national policy choices. They include: 1) De-dollarization. The choice to try to weaponize the dollar against Russia for its invasion of Ukraine has led several nations to do direct settlements in their own currencies. We discussed the prospect of this happening here in February 2022. It has now come to be with the passage of the 21st Century Peace Through Strength Act (H.R.8038), which I discussed further here. 2) Oil shock.The Biden administration tapped America’s Strategic Petroleum Reserve to artificially lower oil and gasoline prices shortly after a 2021 election loss by prominent Democrat Terry McAuliffe for his governor’s race in blue/purple state Virginia. New Jersey’s incumbent Democrat, Governor Phil Murphy, barely squeezed out a win over his GOP opponent in that same election cycle in that deep blue state. At the time, the Washington Post said the results showed the “wind was at the back” of the GOP. The Biden White House did the same in October 2022, shortly before the midterm federal elections.3) Municipal bankruptcy. The stress and costs of migrants could force a technical default on municipal general obligation bonds of some “sanctuary cities.”
4) Russian retaliation for U.S.-supplied missile strikes. Russia is planning naval exercises in the Caribbean. As the war in Ukraine continues, and is further escalated by the Biden administration’s decision to allow Ukraine to use missiles supplied by the United States to strike inside Russia, there is growing risk of escalation and perhaps Russian retaliation against U.S. interests.
5) Troubled clearings of Treasury auctions. With no discernible plans by the White House or Congress to address spending or taxes, it may occur that the bid/ask on U.S. Treasurys mismatch as demand fails meet the supply, thereby causing a substantial rate increase.This happened in November 2023, when a lack of demand caused an auction of 10-year Treasurys failed to clear, causing rates to increase.
GDP Prognostication
We expect GDP for the second quarter to print later this month to print at 1.75 percent, +/- 25 basis points and the economy to slow and unemployment to rise. We think we’re on the cusp of a “stagflation” cycle, with tepid growth, higher unemployment, and continued inflation.April Other Data Points
The Institute for Supply Management’s Manufactuer’s Purchasing Managers Index (PMI) at 48.7, for May, shows the industrial economy contracting, faster after a brief period of expansion two months ago. The months of contraction that had been interrupted by a brief March growth number of 50.3. (A reading below 50 signals contraction.) Despite the decline, prices continued to increase, though more slowly, from 60.9 to 57. The May ISM Services Index, showed the service economy growing, but more slowly, at 53.8 versus 49.4 in May,The Job Openings and Labor Turnover Survey (JOLTS) for April, released Tuesday, printed slightly worse again, with 296,000 fewer job openings in May than in April, but there were also 42,000 more job separations in May than in April.
Privately owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,440,000. This is 3.0 percent below the revised March rate of 1,485,000 and is 2.0 percent below the April 2023.
For March, personal income and outlays, for April, released May 31, showed disposable personal income up 0.2 percent in current dollars and it declined -0.1 percent in chained 2017 dollars. (“Chained dollars” is a measure of inflation that takes into account changes in consumer behavior in response to changes in prices.) Personal income in current dollars was also up 0.3 percent.
The February Personal Consumption Expenditures (PCE) Index from a year ago, excluding food and energy, released the same day, and reported to be the Federal Reserve’s preferred measure of inflation, printed at 2.8 percent. PCE inflation, also called “headline inflation,” printed at an annualized 2.7 percent. Annualized inflation rates have barely budged for months.
The RCP/TIPP Economic Optimism Index (previously the IBD/TIPP Economic Optimism Index) for June, released Tuesday, dropped by 3.1 percent in June, to 40.5. The index has printed in negative territory for 34 consecutive months.
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The views expressed, including the outcome of future events, are the opinions of this firm and its management only as of June 7, 2024, and will not be revised for events after this document was submitted to The Epoch Times editors for publication. Statements herein do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. This article includes forward-looking statements as to future events that may or may not develop as the writer opines. Before making any investment decision you should consult your own investment, business, legal, tax, and financial advisers. We associate with principals of Technometrica, co-publishers of the TIPP Economic Optimism Index, on survey work in some elements of our business.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
