Recession Now... Or Stagflation Forever
The State of the Labor Market
The labor market is showing signs of weakening, which is a necessary step to reconcile the imbalances created by decades of free money. The alternative is persistent inflation that could potentially impoverish the middle class.
The recent ADP employment report indicated that job growth in August was just 99k, significantly below the projected 140k net new jobs. This is the smallest number of net new jobs created in over three and a half years.
Employment Trends
The August Institute for Supply Management (ISM) services index was as expected at 51.5 vs. 51.4 in the prior month. However, the employment subcomponent dropped to 50.2 from 51.1 in July. This data supports the figure from the ADP print, suggesting that while companies are not yet conducting mass layoffs, they are also not hiring either.
Initial unemployment claims were 5.1% higher compared to the same week last year. U.S.-based employers announced 75,891 cuts in August, a 193% increase from the 25,885 cuts announced one month prior.
Job Cuts and Hiring Plans
Excluding the 115,762 job cuts announced in the pandemic year of 2020, last month was the highest August total since 2009, when 76,456 layoffs were recorded. US employers announced 79,697 hiring plans so far this year, down 41% from the 135,980 plans recorded through August of last year.
The August Nonfarm Payroll (NFP) Report showed 142k net new jobs created, less than the 161k predicted for the month. The unemployment rate fell to 4.2% from 4.3%. However, the downward revisions were significant, with employment in June and July combined being 86,000 jobs lower than previously reported.
Economic Expectations vs. Reality
Regardless of whether a recession occurs or not, the economy and earnings growth are unlikely to meet Wall Street’s expectations. EPS for the S&P 500 is projected to grow by 15% next year, and the forward multiple on those earnings is 21.0x, while the 10-year average is just 17.9.
There is credible evidence that GDP and earnings growth will end up being much lower in 2025. This is due to a variety of factors, including record non-financial debt to GDP, tightening bank lending standards, slowing loan demand, and the prediction of just 1% growth for Q4 by the Index of Leading Economic Indicators.
The Fed's Response
In response to the recent jobs report, Fed Governor Chris Waller stated that "the time has come to lower the target range for the federal funds rate at our meeting." He also said he is open to a series of rate cuts larger than 25bps if the data weakens further.
However, there are two issues with this approach. Firstly, jobs are not yet being lost. We still have positive net new job creation that is commensurate with labor force growth. So, there is no need to rush into a rate-cutting cycle. Secondly, inflation has already wiped out most Americans' standard of living. Therefore, the aggregate level of prices needs to decline, not just go up more slowly.
Bottom Line
Instead of taking necessary measures to ensure the long-term health of the economy, the Fed is exacerbating the inflation issue, which could further widen the gap between the rich and the poor. This could potentially destroy the real incomes of those who manage to remain employed while further impoverishing the middle class in the foreseeable future.
What are your thoughts on this situation? Do you agree with the analysis presented in this article? Please share this article with your friends and let us know your thoughts. Remember, you can sign up for the Daily Briefing which is everyday at 6pm.
