Four Score and Zero Months ago the current expansion commenced. 0.5 Score months ago growth in the labor market peaked.
Inclusive of the solid monthly gain in December hiring, the trend towards deceleration remains ongoing. The net of a solid NFP print in December is likely more deflation risk.
There’s no dearth in NFP data reporting so we’ll keep it to a quick quadfecta of key takeaways. There’s a visual tour of the employment data below:
- Between a RoC and a Hard Gray Bar: From a rate-of-change perspective the employment cycle cycles rather cleanly (see 1st chart below). Once employment growth peaks, it''s effectively a one way street towards contraction. The RoC peak-to-recession timeline is cycle specific but roughly consistent (has averaged ~23 months in the last 3 cycles) and February 2015 (+2.34% YoY) marked peak growth in the current cycle. Employment growth in December was +1.88% YoY.
- Good is Probably Bad: The macro factor flow stemming from a good domestic jobs report is basically this: Solid NFP --> hawkish policy expectations ↑ --> $USD ↑ --> Deflation Risk ↑ = continuation of the market price and macro data trends that characterized 2H15. With the $USD up, 10Y Yields flat-to-down and equities quickly fading early (lack of china crashing, not NFP) optimism, the market looks to be pricing in some measure of a similar conclusion.
- Income: Sequential Acceleration, Trend Deceleration: Income growth drives the capacity for consumption growth (and anchors the pro-cyclical trend in credit growth) and the net of the decline in aggregate hours growth and the acceleration in hourly earnings growth in December will result in a modest acceleration in salary and wage income growth when the December data is released later this month. Like the employment data, aggregate income growth peaked in 4Q14/1Q15 and should continue to decelerate against tough comps. The silver lining is that so long as employment/income growth can hold in (albeit slowing), the probability of an outright recession declines or, at least, gets pushed out.
- Labor Income ↑ = Profitability ↓: With labor rising, topline (GDP & Corporate Profit estimates) decelerating and inventories spiking (see this mornings wholesale inventory data), the probability that positive hiring perpetuates continued margin contraction is more likely than not.
Christian B. Drake