Saturday, September 16, 2023

Here's What Employment Means for the Market

By Enrique Abeyta (View Archive)

In today's essay, let's discuss what's happening in one of the major factors in our financial lives...

I'm talking about jobs.

We'll probably be hearing a lot about the jobs market in the coming months – in particular because the jobs market in the U.S. has seen a period like it has never seen before in the past few years.

The main report provided by the federal government on the jobs market is the "Employment Situation Summary – Establishment Survey." Most people just call it the "jobs report," and it shows how many jobs were added month over month in the U.S., excluding the farming sector (farming is taken out because it has a lot of seasonality and other factors that muddy the data).

First, let's take a look at a couple charts of the data...

Here it is going back to 1938...

And here's the data for the past 20 years...

Looking at the past few years, we saw one of the steepest drops ever with the pandemic shutdown back in the first quarter of 2020. That makes sense, as people literally couldn't go to work!

What's even more interesting is that after that period, we saw the sharpest increase ever... and it stayed at an elevated level of job increases all through 2022.

One logical question is why the increase was so much larger than the decrease... and for this, it's because no data is perfect.

The fall in jobs was so dramatic with the pandemic shutdown that it likely wasn't accurately measured in the data. There's also some "noise" in the numbers around part-time versus full-time jobs, and exactly what was involved in the pandemic layoffs.

However, the overall magnitude and direction are certainly correct, and we saw historic decreases and increases in a very short time frame...

Imagine you took a perfectly functioning, high-performance engine and dropped it into ice-cold water, thus freezing it in a block of ice. Then, you thawed it out the next day.

Will that engine still work? Probably. It might need a few tweaks here or there – oil and gas and such – but it likely still functions. Will it work as well as it did previously? Most likely, if it wasn't frozen for long.

However, some "weird" stuff is likely to happen...

While that engine would probably get back to where it was, there are very likely to be some things that go wrong that couldn't exactly be anticipated.

That is kind of what's happening with the current economy in both inflation and employment.

Let's get back to the charts of the jobs report numbers...

If you now look back at the long-term history of it (dating back to 1938), you can see that the only period we ever came close to something like this was back around World War II.

The fascinating thing about what's happening right now is that the market really has no idea what to do with the current data.

If I told you that monthly job additions were down 50% from where they were a year or two ago, you would think we were in the depths of a recession. However, when you look at the chart, you can see that they are still around the levels where they had been for several years.

This has really been just a return to normal. We had just lived in the abnormal (with our engine analogy, in a block of ice!) for so long that it feels kind of "weird."

We're also still see that there are many more job openings than there are people out there looking for jobs. The ratio is about 1.5 to 1. This is down from a crazy 3 to 1 when we were coming off the pandemic stimulus, and "no one wanted to work" because they were getting big government checks.

We're closer to normal levels now... but still well above the levels of a weak economy. In a weak economy, we see many more people looking for jobs than there are available positions. This is not that.

Again, I suspect we're going to be hearing a lot more about the jobs report in the coming months...

Mostly, we're probably going to hear more about the concept of a "soft" landing versus a "hard" landing. These terms roughly mean whether – off the back of extremely high growth – we return to a normal economy or we go into an economic decline.

The use of the word "normal" is important here...

It's popular for critics to say "soft" landings are difficult to achieve. They argue that it's hard to go from boom times to slower growth without something breaking. But remember, we're only talking about going back to where the economy has normally been – not something unusual.

What was unusual, though, was this boom time off the back of the "frozen engine."

We are truly in uncharted territory with these data reports, and it's likely making it very difficult for the old economic models to apply.

Going back to normal is a good bet – particularly because of the unique situation with the pandemic shutdown.

With all the crosscurrents, it's obviously hard to predict...

But in both a "hard" and "soft" landing, we will always be able find trading opportunities in my Empire Elite Trader service.

In fact, we've already achieved a 94% win rate in Empire Elite Trader so far in 2023.

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Enrique Abeyta