TLT - September Employment Report: Might Be The Last Strong Economic Data You See

2023-10-06 13:00:29 ET

Summary

• The Employment Situation Report for September 2023 showed significant growth in Nonfarm Payrolls, exceeding expectations.
• However, the rest of the Employment Report was not consistent with the strength in the payroll numbers.
• The market will soon transition from fretting about excessive strength in the economy to worrying about an economic slowdown and a potential recession.

The Employment Situation Report ((ESR)), corresponding to the month of September 2023, was published by the BLS on Friday, October 6, 2023, at 8:30 AM EST. This report makes available an extraordinary amount of important data derived from two separate surveys: The Establishment Survey and the Household Survey.

In this article, we will walk readers through a detailed breakdown of the most important statistics published in this report. We will also discuss the likely implications of the report for bond and equity markets.

Summary Data and Analysis

We begin our examination with summary data and analysis which we highlight in Figure 1. We recommend that readers pay particular attention to the percent rank of Month-on-Month (MoM) growth, MoM acceleration, and the surprises relative to forecasts.

Figure 1: Change, Acceleration, Expectations, and Surprise

In September, the change in Nonfarm Payrolls both accelerated and surprised significantly to the upside. The median forecast for the Nonfarm Payrolls anticipated growth to slow from 187,000 (0.12%) to 170,000 (0.11%), however, actual growth was 336,000 (.21%) representing a 0.07% acceleration and a 0.10% surprise.

There were no other upside surprises in the report. In fact, virtually none of the other data in the Employment Situation Report confirmed the strength in the nonfarm payroll figures.

Establishment Survey

This section of this report will be devoted to examining the Establishment Survey. We will begin with an in-depth analysis of the industry components in the Nonfarm Payrolls and then follow that up with a brief look at the changes in Average Hourly Earnings and Weekly Hours Worked.

Contributions to Change and Acceleration of NFP: Components Analysis

In this section, our analysis is focused on the component contributions to the MoM Change and MoM Acceleration that are attributable to select major components of NFP.

Figure 2: Contributions to Change and Acceleration Attributable to Major Components of NFP

We can glean from this table that Private service-providing industries have contributed almost all the acceleration of Nonfarm Payrolls. Specifically, Trade, transportation, and utilities and Leisure and hospitality are notable stand-outs.

Economically sensitive goods producing industries, such as construction, grew at a modest pace and actually decelerated.

Average Hourly Earnings and Weekly Hours Worked

Average weekly hours, widely considered a leading indicator of labor market conditions, were unchanged from last month's figure of 34.4. Furthermore, this level is not particularly high from a historical perspective.

Average Hourly earnings rose by 0.21% MoM, which was slightly below expectations. Perhaps more importantly, this rate of wage growth is lower than the current rate of inflation. This suggests further struggles for the US consumer, and potential slowdowns in real consumer spending, going forward.

It is notable that the "hot" labor conditions suggested by the nonfarm payroll numbers were not confirmed by the data for hours worked nor average hourly earnings.

Household Survey

This section of this report will be devoted to examining the Household Survey. We will begin by analyzing the annualized growth rates of each unemployment rate (U-1 to U-6) and then we follow this up with an attribution analysis that will identify the primary drivers of the change in unemployment rate.

Alternative Measures of Unemployment

In Figure 3, we scrutinize the annualized growth rates of each unemployment rate measure over various time frames (1m, 3m, 6m, and 12m). The purpose of this analysis is two-fold. Our first purpose is to identify which, if any, alternative measures of unemployment are growing at a faster or slower rate than the principal unemployment rate (U-3). Our second purpose is to determine whether, and to what extent, growth rates are accelerating or decelerating over various time frames.

Figure 3: Measures of Unemployment Rate (U-1 to U-6)

Over the past year, there were no major divergences in the change in U-3 unemployment rate and the other alternative measures.

Attribution of the Major Components of Unemployment Rate

In Figure 4, we present an attribution analysis of the primary components that cause a change in the Unemployment Rate: Unemployment Level and Participation Rate. We further breakdown the participation rate into changes caused due to population growth and changes caused due to the growth of people that voluntarily participate.

Figure 4: Contribution of the Primary Components of the Unemployment Rate

*Contributions to the change in the Unemployment Rate are a mathematical approximation.

Implications for the U.S. Economy

U.S. labor market conditions have been extraordinarily tight during the past year. The U.S. Fed does not believe that current levels of labor market tightness are compatible with a deceleration in the rate of inflation down to their target level of 2.0%. The Fed has indicated that monetary policy will remain tight, or may even be made tighter, unless labor market conditions weaken somewhat.

The extraordinary strength in the headline number for nonfarm payrolls growth suggests that the Fed will need to maintain hawkishness in its communications and forward guidance. It also increases the probability that they will raise the Fed Funds rate once again before the end of 2023.

Looking deeper into the details of the Establishment Survey, the report was not extraordinarily strong. Hours worked were unchanged and average hourly earnings were lower than expected and below the rate of inflation.

The Household Survey actually hints at some slight easing in labor market conditions. First, growth in total employment decelerated sharply. Second, the number of multiple-jobholders was up by an unusually large +123K -- potentially accounting for most of the increase in nonfarm payrolls. Third, most of the modest increase in jobs was mostly due to increases in part-time work rather than full-time work.

The immediate reaction in financial markets has been for the estimated probability of Fed rate hikes to rise substantially and for yields on bonds to spike to new yearly highs. Such a reaction, if maintained, will have a seriously detrimental impact on the US economy.

As a result of the rapid rise in interest rates in recent months, a major economic slowdown is very likely in store for the US economy, during the months ahead. Furthermore, the risk of an outright recession is rising with every week that interest rates remain high.

Implications for Financial Markets

Financial markets were caught leaning in the wrong direction coming into this Employment Report, as sentiment was reflecting hope of a deceleration in nonfarm payrolls. This hopeful sentiment was due to the declaration in payrolls reported by ADP on Wednesday. The hoped-for declaration turned out to be an acceleration in today's nonfarm payroll numbers, producing a shock in interest rate markets.

Given the recent overstatement of payroll data in the Establishment Survey (leading to major downside revisions) and the weaker numbers in the Household Survey, we suspect that yields may settle back somewhat after the initial shock.

With today's spike in yields after the Employment Report, we think that it is fairly likely that we have seen the top in yields - or very close to the top in yields - for this cycle. Other economic data are indicating the start of a significant economic slowdown, and even a potential recession moving forward.

In terms of equities, prospects are more dim. In the short term, we do think that the S&P 500 (SP500) may rally somewhere around the 4200 level, where there are both strong horizontal supports as well as the 200-day moving average. However, from a multi-week perspective, we anticipate further downside as bond yields stay high, recession risk rises and forward earnings estimates start to erode.

Concluding Thoughts

We think that, for most investors, a significant repositioning of portfolios is warranted in light of events during the past few weeks. The U.S. economy is heading toward a frightening slowdown, recession probabilities are rising. We have been gradually preparing for a significant downside in the equity markets that we foresee in the coming months.

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