QUOTE OF THE WEEK
“Try to be a rainbow in someone’s cloud.” – Maya Angelou
TECH CORNER
The employment report that came out on Friday of the prior week showed a healthy increase of just over 200,000 jobs added in June. Looks like another solid month of new jobs added. However downward revisions to the prior two months reduced the net gain in total payrolls to just 95,000, with a net gain of only 50,000 for the private sector.
It is important to understand the signal that indicates we are in a recession is the net decline in the job market and the widening of credit spreads.
This was a strange report with many competing factors. Nonfarm payrolls are up 2.6 million versus a year ago. But civilian employment, an alternate measure of jobs that includes small business start-ups, is up only 195,000 over the past year. Seems strange, weird, right?
It’s entirely possible that one of the major reasons for this gap is the recent surge in immigration. Immigrants who get jobs at one of the companies included in the payroll survey should be counted because it is filled out by employers. But the civilian employment figures (the weak one) are based on a survey of individual households and it’s hard to survey households in the US that are brand new or that are skittish about filling out a survey sent by the government, particularly if they are here illegally.
It’s also important to point out the a gap between the two surveys this large may be highly unusual, but it has happened before.
Another oddity is the consistent negative revisions for the past few years. Back in 2022, the third report for payrolls for a particular month averaged -6,000 less than the initial report for that month. For 2023, the revisions averaged -30,000. So far this year they’ve averaged -49,000. In the past few decades, negative revisions are more likely to happen around recessions than when growth is strong. This looks like a precursor of weakness to come. This factor to us is a strong indicator of a recession to come. This happens every time preceding a recession.
Adding to that is the gap between full-time and part-time jobs. The civilian employment report shows full-time jobs down -1.6 million in the past year while par-time jobs are up +1.8 million. That kind of loss of full-time jobs is normally linked to a recession and declining payrolls, not continued strong economic growth.
What does all this mean? The data is clearly going in the wrong direction and if it continues in the same direction it should lead to a coming recession.
Why is the stock market still going up? In past stock market crashes the stock market usually has had a blow off rally before the decline. Economically it doesn’t make any sense. This stock market is more than two standard deviations over valued.
In anticipation of the economy following the data, we have moderately increased duration on US Government backed bonds. So far so good. If we enter a recession we will increase the duration (longer term bonds) in US Government backed bonds. Remember, when in a recession, interest rates fall and when interest rates fall bond values go up.
