Friday, the Bureau of Labor Statistics reported that 261,000 jobs were created and we had 29,000 positive reviews of previous reports. This means that the badger labor market will keep the Federal Reserve to pivot anytime soon.
This has been one of my themes lately. Since all six of my recession red flags are up, the only lines of data I focus on regarding the cycle from economic expansion to recession are job postings and health insurance claims data. unemployment. Both of these lines of data were strong this month, so the jobs data will not become damaging enough for the Fed to pivot.
The labor market actually runs into a big theme of my economics work over the years. I recently talked about it on this podcast because I wanted to remind people that at the start of the recovery cycle in the United States, job openings reaching 10 million were part of my forecast. No country has a Dorian Gray labor market and the labor market faces different dynamics as baby boomers leave the workforce every year.
Of BLS: Total nonfarm payroll employment rose by 261,000 in October and the unemployment rate rose to 3.7%, the U.S. Bureau of Labor Statistics reported today. Notable employment gains were recorded in health care, professional and technical services, and manufacturing.
The unemployment rate fell from 3.5% to 3.7%; it happened once before this year when we saw the unemployment rate increase among people who had never finished high school. The following month, it was back at 3.5%.
Below is a breakdown of the unemployment rate and educational attainment for people aged 25 and over.
- Less than a high school diploma: 6.3%. (previous 5.6%)
- High school graduate and no university: 3.9%
- Some college or associate degrees: 3.0%
- Baccalaureate and higher: 1.9%
The unemployment rate can increase if the labor pool increases while creating jobs. I advise you not to read too much of a month’s data until it becomes a trend. Of course, when it comes to the Fed’s pivot, UI claims need to hit 323,000 on a four-week moving average for me to believe the Fed will take notice of an economy entering a recession.
Since I now have the six red flags of recession, I watch the UI claims data first because once they go up the job loss recession has started, this that we have seen in every boom-to-bust cycle.
Below is a list of jobs created this month. As you can see, the construction sector was barely positive; this is a sector of the market that is expected to lose jobs next year. Builders are now keeping their jobs due to the backlog of houses under construction. When this ends, they will join the ranks of others in the housing industry who are laying people off.
Remember, housing went into recession in June of this year and we haven’t had 12 months of recessionary layoffs in the system yet.
My six recession red flags are up, so these are lines of data people should follow:
Jobs
The Fed would like to see this line of data go down. Before COVID-19, job openings were over 7 million and we didn’t have to deal with inflation. The Fed thinks higher unemployment means people get paid less, which is why they want to fight inflation. The latest job vacancies report showed an increase to 10,717,000.
Unemployment benefit claims
This line of data is critical for the broader economy as the Fed may continue to discuss higher rates or keep rates high until the labor market breaks down. Once the unemployment insurance claims erupt, the discussion changes. This level is 323,000 on the 4-week moving average. We are not there yet and unemployment insurance claims have fallen this week to 217,000.
At this point, is there any way to prevent a recession? Once the six red flags of recession are lifted, history is not on our side. However, due to the wild swings this COVID-19 recovery has given us with the wild whiplash effect on the data, I’ve come up with a few plausible theories. Here are the two ways to avoid this recession:
1. Rates go down to put the housing sector back in order. The fall in mortgage rates towards 5%, as we saw earlier in the year, can be a stabilizing factor for housing if it can last. Traditionally, mortgage rates below 4% stimulate housing demand. However, first the bleeding must stop.
2. Inflation growth rate falls and the Fed stops raising rates and backtracks, as it did in 2018. Some of the inflation data is already cooling and will end up in the data lines. However, rent inflation will not decline in the data until 2023, although we are already seeing some coolness in this sector.
Is there any hope that any of these things will happen and we will avoid this recession? If we no longer have supply shocks like the ones we experienced after the Russian invasion of Ukraine or other variables that are not related to the economy, the growth rate of inflation should decline next year due to lower rental inflation. I talked about it recently on CNBC. If that happens, if the Fed starts pivoting and then cuts rates like it did in 2018, we might have a chance here.
Sure, it’s very late in the year now, so it’s more or less a 2023 scenario, but I’m outlining my best case for mortgage rates falling next year in this article.
However, history was never on our side once the six red recession flags went up. There is a first time for everything, but most people are now employed and household balance sheets are much better today than in 2005-2008. At this point, it’s all about timing. However, the longer we continue with higher rates, the less chance there is of a soft landing.
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