News & Insights

Stable Employment Supports Economic Growth

Following some weak monthly numbers, the economy added 254,000 jobs — more than 100,000 above the consensus forecast — and the unemployment rate slipped to 4.1% from 4.2% in August. Perhaps in hindsight, the Federal Reserve may have overreacted to its perception of slack in the labor market by cutting rates 50 basis points in September. The report also revealed that average hourly earnings were up, now 4% year-over-year, an increase from prior months. The recent increase in long rates illustrates the risk the Fed faces as it begins cutting interest rates, raising the risk of a reacceleration in inflation.

On the bear side, a group of economists and market strategists continue to point to a softening labor market as evidence of the next recession’s onset. Much concern has been raised over the recent triggering of the Sahm Rule, which posits that a 0.50% rise in the unemployment rate on a three-month moving average over a year indicates an imminent recession. While this has been a reliable indicator, rising labor force participation and not a layoff cycle is nudging up unemployment this time around. MRB has also shown that the unemployment rate would be much lower if not for the large influx of immigrants. This creates a very different economic outcome, as an analysis from Oxford Economics shows. Consumer spending is turbulent by cohort, with laid-off employees pulling back, while new entrants into the labor force raise consumption.

Prime Age Labor Force Participation Rate vs. Unemployment Rate

Source: Bloomberg

Goldman has also done a great analysis of the Sahm Rule, demonstrating that the metric has been a good indicator in the U.S. but reflects much lower accuracy on a global application. Goldman also emphasizes that a list of indicators that contribute to the rule’s coincidence with recession — including consumption, GDP, and employment — are nowhere near the levels typically seen during a recession.

The high proportion of prime age workers has recently hit multidecade highs. Despite disruptions from the recent storms, initial claims haven’t budged. Corporations are experiencing healthy profit growth, and their expressed concern of a “recession” or “slowdown” have waned. With the recent upward revisions to GDP, income and personal spending, consumers have the resources to sustain consumption, making a layoff cycle unlikely. With the Fed cutting rates, this is a developing tailwind for the economy. The employment data does not support the evidence for an imminent recession.

US Employment to Population Ratio (age 25 to 54)

Source: Bloomberg

China’s Stimulus High Wears Off

China’s lackluster recovery from the draconian policies enacted during the pandemic have been weighing on the global economy over the past several years. Beijing has announced a raft of stimulus policies in a bid to breathe some life into China’s economy and troubled financial markets by lowering key interest rates, reducing down payments for mortgages, and unveiling facilities intended to stimulate the stock market. The government is also issuing the equivalent of nearly $300 billion in special sovereign bonds, half allocated to boost consumption.

These moves lit a fire under the MSCI China index, which shot up 22% in the three days after the announced changes. This period includes the biggest single day jump since September 2008, when the world was in the depths of the global financial crisis. Volume on Sept. 30 was more than triple the norm. Following the initial surge, the equity index has quickly faded, retracing half the initial pop.

While the policy changes are moving in the right direction, showing that the government is at least somewhat aware of the gravity of the issues China faces, they are far from a scale to resolve the deep structural issues that belie the economy. The number of loss-making companies is twice as high as it was prior to the pandemic. The question is whether China can breathe new life into an ailing economy, with deteriorating demographics, a leveraged property market, excessive infrastructure and capital spending, too little private sector consumption, and the poor financial condition of local governments that are dependent on land sales for revenues (see here for a deeper analysis of these issues). The recent policies adopted by Xi Jinping’s government have succeeded in lighting a temporary fire under the stock market, but they don’t appear to be enough to conquer these deep-seated economic challenges. The pressure is rising for the Chinese Communist Party, including labor protests on the rise and a 20% unemployment rate for college graduates.

China Youth Jobless Rate Continues to Rise in August

Source: Bloomberg

More Firms Making Losses in China

Source: Bloomberg

China Unveils Stimulus Blitz

Source: Bloomberg

S&P 500 Quarterly Bottom-Up EPS Actuals & Estimates

Source: FactSet

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