The month the labor market broke? More scenes from the alt-data
A few more tidbits on the non-breaking of the broken employment scene
credit card data says: no one is hiring, basically no one is firing, and wages are . . . rising?
fed researchers confirm: the new breakeven is lower than you think
a thought experiment from the supply chain snagglepuss fiasco that wasn’t and/or never reason from a price-change
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The month the labor market broke (reprise)
Some more charts on the current state of the ‘yes job-growth is slowing, but that’s what you’d expect when people-growth is slowing.”
Slower job growth, higher wages?
First, from BofA, where internal data suggests that payroll growth is slowing further, while unemployment claims tick higher:
BofA’s data shows ~0.5% growth of net-new payroll additions.
So yeah, not a lot of hiring going on, and a worrying increase in unemployment.
But BofA data also shows that wage growth is accelerating for everyone:
Wage growth ticked up for all income tiers.
In what universe do wages grow, while hiring ebbs to a crawl?
I’ll tell you: a tight-but-not-strong universe where there just aren’t that many people to add to the payroll.
ICYMI
Lower the breakeven
And yes, immigration is playing a big role here.
Right on cue, the Dallas Fed has estimated a dramatically lower breakeven, now that immigration (and participation rates) has slowed:
The [breakeven] rose from less than 100,000 new jobs to keep employment in balance in late 2020 to a peak of roughly 250,000 in mid-2023. Since then, it has collapsed, falling to the current estimate of approximately 30,000.
A 30K monthly breakeven is basically in-line with the best estimates of payroll adds for September.
To be fair, the Dallas Fed researchers attribute only half of the decline to immigration flows, and the other half to people (mysteriously) leaving the workforce.
But, given that a good chunk of the “leavers” appear to be “foreign born” workers, there’s reason to think that declines in LFPR and net-new supply are related to the new regime.
Learning from the supply-chain snagglepusses that weren’t
Finally, just to round out the point, the always entertaining Jason Thomas of Carlyle has gone full Random Walk, not once, but twice.
He begins with the hindsight-observation that actually there was no supply-chain snagglepuss, but rather a massive demand-side impulse that overwhelmed the very best supply chains had every achieved.
The mistake that policymakers made (but not Random Walk) was too infer “transitory” inflation from supply chain backlogs that would soon “go back to normal” when things re-opened (when, in fact, the backlogs had nothing to do with lockdowns and everything to do with the massive fiscal and monetary stimuli):
Harvard’s Jason Furman posed a thought experiment: What would happen if the federal government directed the Fed to deposit $1 million in every household’s bank account? We’d likely see an increase in spending that so far outstrips the economy’s productive and logistics capacity that product shortages, price spikes, and significant order and shipping backlogs would result.
In other words, this policy’s visible effects would be largely indistinguishable from what was actually observed during the “supply chain crisis” of 2021-22.
The Fed diagnosed inflation’s 2021 outbreak as “transitory” because it seemed to originate from pandemic-related supply disruptions that would resolve over time. Looking back on the data, it doesn’t appear that the “pipes” of the global economy were clogged so much as we were trying to jam too much “stuff” through them
Exactly right: not all shortages are equal.1
Sometimes it’s because there’s not enough stuff, and sometimes it’s because there’s too much money.
If you see “shortage” and infer a supply-side problem every time, you are not smart. Just like if you saw food inflation during a famine and inferred a demand-side “overheating” problem, you would also be not-smart.
Anyways, the applicable lesson for today’s labor market conundrum is as-follows:
Yes, it’s true that payroll growth appears to be decelerating rapidly:
a deceleration of this magnitude has nearly always been associated with an economy on the brink of recession (or already having succumbed to one). But that doesn’t seem to jibe with other data . . .
Consider another thought experiment: What if the U.S. government were to implement a net zero immigration policy?
With native-born U.S. population growth of just 0.14% in 2025, we’d expect to see monthly payroll growth of less than 20,000, on average, with employment in leisure and hospitality, construction, home care, and manufacturing especially hard hit.
In other words, this policy’s visible effects would be largely indistinguishable from what’s been observed over the past several months.
Ah ha.
A “net-zero” immigration policy would lead to something like ~20K/m payroll adds “indistinguishable from what’s been observed over the past few decades.”
Anyways, I continue to find confidence in my expectation for an ongoing middling outcome by finding people that agree with me. Not only is my take borderline consensus, at this point, but clearly I’m following a tried and true recipe for analytic rigor.
(Very) cautious optimism
Reality is that we’re awfully close to the line, and “it’s probably fine because it’s been fine” are famous last words.
For example, it was pointed out to me that 2.5% nominal income tax growth is actually a contraction, so make of that what you will.
Consumer spending is also barely above water:
Total card spending is just a hair ahead of where it was last year, with a big holiday shop (potentially) on-tap.
I’m less worried about the government shutdown, or tariff pass-throughs, and much more worried about the potential sticker-shocks of rising energy costs and the huge can of ‘healthcare’ costs that Obamacare tried kicking down the road (making them bigger and bigger), but will reveal themselves if/when subsidies disappear.
We shall see. I’m still generally long my longs, but I’m holding some cash for a rainy day (to go shopping).
Previously, on Random Walk
Private Credit and Insurance, two peas in a pod (reprise), and a chart dump on default rates
five charts on the rise of private credit in life insurance
Energy in 1776
It’s July 4th, so Happy Birthday America, and we’re going to keep it light and only semi-topical.
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Blaming supply chains is like blaming the bartender for slow service when a spontaneous off-hours wedding party stumbles into the bar.
The Fed was right to say inflation would be temporary (and it was) because it knew it was going to rein it in. Jiggles apart, inflation in is what the Fed for better or worse makes it.