Morning Report: Employers are still holding on to workers

Vital Statistics:

Stocks are higher this morning after a decent jobs report. Bonds and MBS are flat.

The economy added 187,000 jobs in July, which was a tad below Street expectations. The unemployment rate slipped from 3.6% to 3.5%. Average hourly earnings increased 0.4% MOM and 4.4% YOY. Average weekly hours fell to 34.3 from 34.4.

The average hourly earnings were higher than expected, which will probably grab the attention of the business press. Average hourly earnings aren’t the whole story however since average weekly hours fell. This means that average weekly earnings rose only 0.1% month-over-month, and 3.5% year-over-year. Those are not alarming numbers. Average weekly earnings growth is back at 2018 levels, which triggered a Fed tightening response, but the growth rate is rapidly approaching normalcy.

Richmond Fed President Tom Barkin addressed the question about why we haven’t had a recession yet.

So, why haven’t we seen a recession? I think it’s because the pandemic is still with us — not the public health crisis, thankfully, but the economic dislocation it unleashed.

Businesses experienced severe shortages over the last few years. So, they tell me they are holding on to workers and investing in safety stock. More fundamentally, they are still seeing healthy demand from their customers, and working through order backlogs. And manufacturing and construction are seeing a boost from coming government investments in infrastructure and the like. If your business is healthy, why cut back?

At the same time, consumers continue to spend, funded by excess savings accrued during the pandemic, elevated equity and housing wealth, and a robust jobs market. This year, the drop in gasoline prices has freed up additional spending capacity.

Further slowing is almost surely on the horizon. A number of pandemic-era fiscal support programs are ending. Rate increases work with a lag; many models estimate their impact should start to really hit around now. In addition, as banks preserve liquidity and protect earnings by stepping back from marginal lending, credit conditions have tightened, reducing consumer and business spending capacity.

I personally think the reason why the economy has taken so long to respond to higher interest rates is because real (i.e. inflation-adjusted) interest rates were negative for most of 2022. In other words, the Fed took us from ludicrous speed to ridiculous speed, which was still highly stimulative. It is like going from giving the patient a 0.5 ml dose of adrenaline to a 0.3 ml dose of adrenaline. Yes it is lower, but you are still pumping the patient with adrenaline. Interest rates have only recently become restrictive, and that IMO is why the recession keeps getting deferred. The resumption of student loan payments in September will almost certainly be a drag on consumption.