"Well, I've been lookin' real hard,
And I'm tryin' to find a job,
But it just keeps gettin' tougher every day."
-Steve Miller Band
As I was driving into work today, one of my favorite songs from the Steve Miller Band was on the radio: Rock'n Me. I found it to be apropos for a couple of reasons. First and foremost, the song hit home as it was my birthday yesterday and birthdays are always a time to reflect. And, also to get ready to rock for another year!
Secondly, the excerpt from the song above made me think about the economic cycle. Specifically, where we are now in the U.S. labor market and where we are likely to go before this all ends. At the moment, the U.S. unemployment rate is 3.5%. For context, this is right near a 50-year low in the unemployment rate.
At face value, that's not bad. The caveat to this of course is that the labor force participation rate of 62.3% remains about a full percentage point below pre-pandemic levels. Overall, the size of the labor force is finally back to pre-pandemic levels of 165MM ... some three years later. But, again for context, you would be hard pressed to find another three-year period in U.S. history in which there is literally no growth in the labor force.
My point here is that some of the overall employment statistics are skewed by the stagnation in the size of the labor force. This tightness in labor due to fewer workers has an inflationary effect in that workers and potential workers have more bargaining power to demand higher wages. We can see this in average hourly earnings from December 2019 to December 2022, which are up some 16% . . . while the labor force itself is roughly flat.
So, while there are some structural reasons why unemployment is low (a smaller work force), a tight labor force leads to accelerating wages, which accelerates the demand side of the inflation cycle. Ultimately for inflation to reset sustainably lower, we will likely need to see, as Steve Miller sings, finding jobs to keep "gettin' tougher every day".
Obviously, we aren't there yet, though employment is a classic late cycle indicator. Yes, tech layoffs have been accelerating and now number more than 220,000 in 2022 / 2023 according to Layoffs. FYI. But we likely still have a long ways to go ... especially when considering the technology job additions that occurred in the prior years. As an example, Amazon has only laid off -2.2% of the employees it added in the prior three years.
Ultimately, when growth slows, joblessness rises. Then ultimately the economic cycle bottoms, though that is unlikely to occur at 3.5% unemployment . . . regardless of the denominator.
Back to the Global Macro Grind…
Having been on the road for the last few days in beautiful Miami, Florida, I thought it would be worth taking a minute to highlight some of the key global economic data from the start of the week.
- Global PMIs – To be fair, we did get a bit of a bounce in global PMIs for January. The Eurozone Flash Manufacturing PMI in January ticked up to 48.8 from 47.8 in January. Germany saw both Manufacturing and Services Flash PMIs also accelerate to 47.0 and 50.4, respectively. Finally, the Flash U.S. Composite PMIs accelerated to a three-month high of 46.6. So yes, on one hand we did get some nominal sequential acceleration, but generally global PMIs remain contractionary (below 50).
- Global Confidence Surveys – Similar to global PMIs, the confidence and business climate surveys also saw some marginal acceleration into January. Germany’s Consumer Confidence accelerated to -33.9 from -37.6, Eurozone Flash Consumer Confidence ticked up to -20.9 from -22.0, and Italian Business Confidence accelerated (though Italian Consumer Confidence slowed to 100.9 from 102.5). So, on the confidence side, we are getting an ever so slight acceleration to start the year (likely in part due to the massive fall in energy costs in Europe), but these surveys generally remain at low absolute levels and well below year ago levels.
- Global Inflation – Finally, in terms of global inflation data, this week the theme of higher for longer inflation continues to prevail. Sweden’s December PPI slowed to +18.7% Y/Y, Spain PPI slowed to +14.7% Y/Y, and finally U.K. Output PPI slowed to 14.7% Y/Y. Now, obviously slowing inflation is good, but we are also coming from generational highs to a little less than generational highs. Ultimately, whether inflation is running at 20% or 14% may not matter as much as the fact that it remains unsustainably high. In the Chart of the Day, we’ve highlighted U.K. pricing environment in which you can see where we are versus the historical trend.
At the end of the day, none of the incoming data has shifted our models meaningfully. We continue to model global #Quad4s for Q1 and Q2 of 2023. This means that both growth and inflation will be decelerating in the first and second quarters of this year. Currently, by Q3 20223, we have most of the world shifting to #Quad1 (growth accelerating and inflation slowing) . . . but, and this is an important but, there is a lot of time and space between now and then.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 3.51-3.73% (bearish)
UST 10yr Yield 3.35-3.61% (bearish)
UST 2yr Yield 4.05-4.30% (bullish)
High Yield (HYG) 74.77-76.78 (bearish)
SPX 3 (bearish)
NASDAQ 10,687-11,460 (bearish)
RUT 1 (bearish)
Tech (XLK) 124-136 (bearish)
Utilities (XLU) 67.70-72.10 (bullish)
Shanghai Comp 3142-3287 (bullish)
VIX 18.13-22.89 (bullish)
USD 101.25-105.17 (bullish)
EUR/USD 1.058-1.091 (bearish)
USD/YEN 126.95-131.90 (bearish)
CAD/USD 0.739-0.752 (bearish)
Oil (WTI) 76.40-82.25 (bearish)
Nat Gas 2.79-3.75 (bearish)
Gold 1 (bullish)
Copper 3.98-4.31 (bullish)
Silver 23.24-24.47 (bullish)
Bitcoin 17,094-24,290 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
