Today we have received a trove of economic reports that indicate that companies are still hiring and growing while it appears the economy is in a mild slow-down cycle. This seems contradictory and begs the question:
Why is the economy slowing (less consumer spending) while more people are working in the history of this country?
Why are there so many job openings yet the unemployment rate remains at the lowest level since 1954?
What is prompting investors to drive the stock market to all-time highs?
Unfortunately, just as the US businesses are trying to meet customer demands with their slowly expanding employee base, dockworkers today went on strike at 36 ports that may cripple the world’s supply chains and cause another seismic shock wave through the US economy.
To address the proposed questions above, let’s first look at jobs and payroll. Today’s Jobs Opening and Turnover Report (JOLTS) released by the US Bureau of Labor Statistics indicated that employers are still struggling to fill job openings. The bureau summarized the August report as follows:
“The number of job openings was little changed at 8.0 million on the last business day of August, the U.S. Bureau of Labor Statistics reported today. Over the month, hires changed a little at 5.3 million. Total separations changed little at 5.0 million. Within separations, quits (3.1 million) continued to trend down and layoffs and discharges (1.6 million) changed little. This release includes estimates of the number and rate of job openings, hires, and separations for the total nonfarm sector, by industry, and by establishment size class.”
Job openings have steadily declined since its peak in March 2022 at 12.2 million openings. However, the decline in new job openings has slowed in 2024. In January 2024, there were 8.75 million job openings which has declined to 8 million in August. Although the number of job openings has declined since its peak in March 2022, in no time this century has there been so many job openings that is currently 40% more than there were in January 2000.
The monthly increase of farm payrolls has also slowed but the number of new payrolls (hires) has increased every month since January 2021. This would be logical that the pace of new payrolls would slow due to the difficulty for employers to fill job openings.
Employers are still struggling after the seismic catastrophe of the pandemic and subsequent government interventions that resulted in 20.5 million layoffs in April 2020. Then employers within 90 days had to scramble to re-hire back to fill nearly all the positions. Meanwhile, people were reluctant to return to work following the pandemic as many were receiving almost equal to their former pay in government subsidies. Even after the taxes from the employed, the US debt grew by trillions distributing “emergency subsidies” to nearly everyone. As the subsidies ran out people started to look for jobs. After four years, new hires and payrolls are still increasing but at too slow of a pace as indicated by recent reports hiring is still a key issue for employers.
One explanation as to why there remain so many job openings is the current national employment participation rate is very high. Prior to the strong growth years of 1985 to 2007 where the national labor participation rate was well above 61%, the prior 35 years participation rate ranged from 53% to 58%. In other words, in 2024 the nation is at the higher historic range of the number of eligible workers working with the typical balance of those either self-employed or providing for themselves by other means. The number of qualified and trained workers has declined significantly and employers have fewer candidates to choose.
As mentioned, the economy is slowing down. Today, the S&P Global US Manufacturing Purchasers Manager’s Index declined again in September. The index was revised to 47.3 for September (a reading below 50 indicates the sector is contracting) which is the lowest since June 2023, third consecutive month of contraction, and well below the average during the period 2012 to 2020. S&P Global had this commentary:
“Output and new orders both fell at sharper rates in September amid dem and weakness and political uncertainty. Meanwhile, employment decreased at the strongest pace since the start of 2010 if the COVID-19 pandemic period is excluded. More positively, business confidence ticked higher amid optimism that new business will pick up following the Presidential Election.”
Construction spending has also declined since the Federal Reserve began its interest rate hike campaign in March 2022. Less buyer demand prompted by higher mortgage interest rates has pushed up the cost of homeownership and reduced the number of qualified buyers.
With this information, let's address the three questions at the top of this UPdate.
Why is the economy apparently slowing down (less consumer spending) while more people are working in the history of this country?
Consumers are spending the same amount in dollars but due to inflation buying less. Household budgets are being squeezed and consumers are getting conservative with their spending.
Consumers are changing what they are buying from discretionary items (travel, jewelry, entertainment, etc) to staples (food, clothing, household goods, etc)
Below is a chart comparing Consumer Discretionary ETF (XLY) to Consumer Staples ETF (XLP). When consumers buy discretionary items it is in addition to their household necessities (staples). As consumers reduce their discretionary spending it is a direct reduction in overall consumption. XLP has outperformed XLY by nearly 25% YTD. Note: we added XLP to our growth model portfolios in June 2024.
Why are there so many job openings yet the unemployment rate remains at lowest level since 1954?
1. I would suspect this is a case of quality over quantity. As reported in NFIB’s August monthly jobs report, a seasonally adjusted 40% of all small business owners reported job openings they could not fill in their current period, up two points from July. Of the 62% of owners hiring or trying to hire in August, 90% reported few or no qualified applicants for the positions they were trying to fill.
2. The labor participation rate is around the historic average since 1950. Therefore, I would proposed that since employers appear to have hired the vast majority of qualified and trained applicants, the lack of more qualified applicants is due to the educational system. Our high schools, colleges and universities, and trade schools are not producing enough trained people. I would also add that government subsidies (typically tax-free) and the ease to apply on-line disincentivizes people to work or learn new skills. There are significant opportunities and programs for those that want to pursue new career opportunities and learn new skills. Last week I had a conversation with a friend who was formally a dental hygienist and realized her earning abilities were limited and below what she wanted to achieve. She took classes in computer programing and engineering and was hired by a technology company when she graduated. She now earns significantly more than she did before and can work remotely which is something she could not do in her former career.
What is prompting investors to drive up the stock market to all-time highs?
1. Institutional investors only add stocks to their portfolios when they project rising corporate earnings and increase corporate values. We may not always know their reasoning behind bullish (positive) or bearish (negative) projections, but we can determine their views by their actions. The major indices YTD have increased significantly in 2024 prompt by aggressive buying by institutional investors expecting higher stock values in the future. Keep in mind that large institutional investment companies spend millions on research obtaining the most accurate and time sensitive information and their current bullish stance is based consensus on of several teams and committees. This is good news for all investors until they start to sell at which time we would do the same.
Although the economic growth trend seems to be slowing, institutional investors are not fazed. The announcement of the dockworker's strike initiated a short-lived selloff that slowly recovered from the day’s low as buyers returned to the market. If institutional investors perceived this strike would have a material impact on future corporate earnings and values the selling would have been more extensive. I do anticipate more stock market weakness until the dockworker's strike is resolved.
The major indices all are positive YTD and have recovered from the summer selloff. You may recall we projected the stock market would enter a third-quarter mild selloff and recover by year-end. Our expectations were exceeded as most of the indices are now near or above the previous year’s high reached in July.
The S&P 500 and NASDAQ continue to lead the major indices and are significantly ahead of the S&P 400 (mid-cap), S&P 600 (small-cap), and MSCI Ex-USA (international) indices.
We maintain our favorable rating on the US economy and stock market.
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