“I’m just a vibe, man … that you can’t find anywhere else”
I like that quote. It’s a case study in verbal economy and connotive efficiency.
It perfectly conveys everything it’s meant to without having to say anything specific. And it’s equally well applicable to any facet of life.
There’s no right recipe for Vibe creation but everyone knows it when they see it.
If you can birth and sustain a vibe that can’t be found elsewhere, I’m pretty sure you will end up on the right side of life.
Yesterday, our Chief Vibe Officer and your favorite risk manager’s favorite risk manager (Keith) delivered the wood on our 3Q16 Macro Themes call.
It was another quarter of record participation and we thank you for that.
Back to the Global Macro Grind ….
Our 2nd Theme – and one where the vibe has begun to sour - was #ConsumerCredit.
One can’t talk about consumer debt without also discussing labor as employment and income trends define both the consumer’s capacity for incremental debt and the ability to service it.
One relationship we re-highlighted on the call – and one worth highlighting again here since it’s Jobs day – is the relationship between Temp hiring and peak Employment.
The temporal procession looks like this: Temp Hiring Peaks => Jobs Openings Peak => Total Employment Peaks
Specifically, Temp hiring has lead the peak in Job Openings by 9 and 8 months, respectively, over the last two cycles and Job Openings peak shortly ahead of the peak in Total NFP.
The intuition is fairly straightforward:
Early in the cycle employers are hesitant to onboard full-time workers because of uncertainty around the durability of the expansion.
This psychology persists as the expansion matures and is augmented by the flexibility to transition temps to full-time employment and by the progressive rise in demand for output that accompanies the upslope of the cycle which, in turn, drives incremental labor demand.
Slowing demand for output quells demand for temp workers (which are a primary source pool to fill available positions) with the number of advertised available positions adjusting and reflecting that decline on a short lag. As job openings stall and retreat in response to macro conditions so too does actual hiring.
Given the rising prevalence of freelance and contract work, the signal flowing from the current stagnation in temp hiring may be higher fidelity than in cycles past.
Further, in addition to serving as a lead indicator for hiring activity, the trend in temp employment influences the separation side of the labor market.
Individually and collectively, temp and part-time employment have been at their highest level ever as a share of the labor force (relative to similar points in prior cycles).
This acts as a depressive force on reported initial jobless claims as these workers carry the highest probability of not qualifying for unemployment benefits. If their collective share of employment is elevated relative to the historical experience, it should serve to suppress the level of separations implied by the initial claims figures.
So, watch the temp hiring component in the employment release this morning and the Job Openings figures in next week’s JOLTS release.
Where else to focus attention?
As we annoyingly harp on every month, from a Trend perspective, the low intensity way to monitor the progression of the cycle is to watch the rate of change in payroll growth.
We discuss the rate of change in payroll growth a lot because:
- 2nd derivative inflections naturally lead the trend in the primary series (i.e. negative rate-of-change in payroll growth eventually leads to declining absolute employment), particularly if the series is autocorrelated and ….
- Payroll growth is autocorrelated in the sense that it looks very much like a sine curve or periodic function that smoothly and fully plays itself out in both directions.
We don’t get a lot of pushback on that. Mostly because it’s not really an “opinion” on the cycle, it’s simply the empirical reality and the chart is almost impossible to argue with.
When we get pushback, it’s usually because:
- While the rate-of-change is slowing, the absolute #’s are still “good”. Progressively less good but still ‘okay’. Absolutism becomes unprofitable slowly, then (very) quickly.
- The cycle takes time to play out. When we say the labor cycle is past peak and will continue to slow there’s a tendency to translate that directly to a call for imminent recession. That’s not how it works – big developed market economies don’t just whimsically oscillate from +3% to 0% in rate-of-change terms on big macro metrics like employment and consumption growth.
Is headline NFP likely to be better in June than in May on an absolute basis? Yes.
From a rate of change perspective, the magic numbers are:
- 232K: Anything >232K will = a sequential acceleration in YoY growth
- 1,068K (as in >1 million net adds): That’s what it would take to re-breach the peak rate-of-change in NFP growth observed in February of last year. Not happening.
In short, the trending slowdown in employment will remain ongoing. And, from here, unless wage growth consistently rises more than employment growth slows then aggregate income and consumption growth will continue to traverse their downslopes as well.
As it relates to wage growth and the effervescent hope for acceleration in that fulcrum policy factor - wage growth has seen some modest mojo recently but it’s important to contextualize the implications.
If we get the wage inflation every Phillips Curve policy maker is looking for, what does that mean:
- Late-cycle confirmation: Wage inflation is one of the latest of late cycle indicators. To the extent it actually manifests, its more writing on the late-cycle wall.
- Labor Compensation ↑, Profits ↓: Payroll growth, while slowing, continues to grow at a premium to productivity growth and unit labor costs continue to rise as a premium to output prices. That’s the technical way of saying corporate margins are contracting and with the sales/profit recession still ongoing higher labor costs only = ↓ margins. And with corporate margins still very much elevated on a historical basis the path of least mean reversion resistance remains to the downside.
- Rates ↑, Dollar ↑ = Reflation ↓: As we’ve seen recurrently, hawkish policy and strong dollar deflation serve to deflate global activity and equity prices/multiples. It also deflates forward growth and inflation expectations – further inflating the #growthslowing trade that continues to get bond bulls paid.
As Keith highlighted this morning, the open-the-envelope risk on the 10Y this morning is significant: “Bad jobs report should get you 1.30% UST 10yr; “good” one maybe 1.57% 10yr (1.30-1.57 risk range)”
Whatever the print this morning, the trend conclusion will remain unchanged and elevated volatility and wider risk ranges will continue to characterize the breakdown in the belief system.
Trades vs Trends, Trees vs Forests, VIX reflecting the Vibe.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.30-1.57%
Best of luck today,
Christian B. Drake
U.S. Macro Analyst