The Repeating Tides of Payroll And Inflation

There were all kinds of good news in the August payroll report. The Bureau of Labor Statistics would publish an acceleration in headline numbers, just about every one of them. The Establishment Survey “surged”, wage growth registered its largest annual increase in nearly a decade, while one broad measure of slack, U-6, tumbled to its lowest point since the start of the 21st Century.

The US economy, it might have seemed, was on an unstoppable roll.

US job growth accelerated in August, with wages notching their largest annual increase in nine years, strengthening views the economy was so far weathering the Trump administration’s escalating trade war with China…Strengthening wage growth underscores tightening labor market conditions and cements expectations for a third interest rate increase from the Federal Reserve this year when policymakers meet on Sept 25-26.

That was the thing, though, actually two things: on the one hand, worrisome signs in various places around the world as well as certain markets sending signals everyone was quick to dismiss because it was at odds with the inflation, overheated economy narrative; on the other, the Federal Reserve taking this labor data and others to bolster its predetermined inflationary bias which it would continue to use to justify continued if not even more hawkish policies.

In fact, even the admitted weakness was casually set aside, attributed as nothing more than nervousness about “trade wars.”

How quickly it all just fell apart.

This particular payroll Friday I am referring to the one on September 7, 2018, with data that day unveiled for the prior month of August. The dollar had been rising since mid-April, on May 29 the collateral system buckled, and then June 13 the eurodollar futures curve inverted even if only by the smallest amount(s) at first.

To state it bluntly, the August labor market numbers just wouldn’t matter. They’d already been superseded long before August even happened. The eurodollar curve, in particular, had made our economic fate plain, and it wasn’t before too much longer it would be spelled out in the data, too.

Jay Powell would continue to hike rates for the rest of the year…and then no more despite an unemployment rate falling to absurd lows.

There’s a lesson here, somewhere. And it is one the current FOMC is determined not to learn. In fact, the body’s dissent-proof majority “hawkish” membership is once again doing its best to justify the already unjustifiable.

One of those, Atlanta branch President Raphael Bostic, well, this is just blatant at this point. In a speech given early last month, Bostic called “transitory” a dirty word with respect to its use with inflation.

No way is this transitory, in his thinking:

Inflation is front and center as an issue and will be for the next six to 12 months, easily, but that alone is not going to dictate Fed action. Economic growth, the labor market and even geopolitical concerns could very likely come into play.

Insofar as the labor market may be concerned, Atlanta’s boss was rather incoherent, or, most charitably, reaching. In a speech this week, a crashing (flat) yield curve, screaming dollar, and now a eurodollar futures curve inverting itself 2018-style, he said, “Understanding what maximum employment is in the current environment will take some time,” and that when they do figure out max employment, if ever, it seems likely, in his view, to total substantially fewer jobs than before 2020.

Yep, hidden slack that’s “hiding” right out in the open. Cue up 2014’s common sense Yellen, the Yellen from before 2015’s unemployment rate got the better of her (and others) sanity:

The latest payroll report for the month of November 2021 was more of a mix than it had been for August 2018. Yet, like the previous one, the current set of numbers are likely to not make much difference. They’ll be spun however in the media (see: above), and FOMC officials like Bostic and Chairman Jay Powell will wield them in speeches and news appearances however it suits the immediately circumstance of selling more “hawkishness” to a confused public (let alone politicians).

For November, there was both good and bad, so take your pick. The good (and it was pretty darn good): Household Survey rebounded big, up by more than 1.1mm just last month, nearly all reporting as employed doing so at full-time gigs. The labor force jumped, too, rising almost 600,000, pushing the participation rate to 61.8%, the highest since March 2020.

Net of those results, the unemployment rate sank by another 0.4 pts, down to 4.2% from 5.9% just five months ago.

Thus, don’t you dare use the word “transitory” around Mr. Bostic.

However, though the labor force did rise, six hundred thousand is hardly much in this context (again, slack remains huge) and 61.8% participation isn’t much changed from the lackluster last 12 now 13 months. And the Household Survey overall tends to come in bunches anyway.

The main reason the unemployment rate has fallen so low is the same reason – on steroids – why it had gone down so far in 2018: no one is joining the labor market, not in the sustained way they would be if the labor market was truly booming. 

Then there was the number most people focus exclusively upon: the Establishment Survey. The headline of headlines, monthly payroll gains were unexpectedly minimal, up just 210,000 for an economy that requires triple that amount continuously one after another after another after another if it is ever to get back to its pre-2020 state (which, remembering ’14 Yellen, actually wasn’t very good to begin with).

Suddenly, Raphael Bostic’s semantics make a whole lot of sense.

In other words, given this data along with labor market numbers for months beforehand, we can’t really say that the economy is doing much more than the last bits of reopening. And because the data isn’t unambiguous to that effect, and it really should be by now, there’s this sinking feeling we’ve restarted all over in another “new normal” which is just a fancier way of saying shrunk.

L-shaped recovery. A max employment that “somehow” adds up to way less than prior way-less “maximums.”

Maybe I was wrong when I wrote above that the payroll report has been overtaken by events, made irrelevant already by especially the eurodollar futures curve (chart below is from yesterday; I haven’t yet updated for today which is little more inverted still). On the contrary, the inversion in it may actually be quite consistent with this mixed mix of labor data.

Like 2018, markets have rebalanced perceptions of rising risks while running out of patience for the boom to actually boom beyond the same confused inflation narrative.

The Repeating Tides of Payroll And Inflation