The June Jobs Report Does Not Show The Big Picture

The June Jobs Report Does Not Show The Big Picture

July 13, 2022

The big news that came out since the last note I wrote was the employment number that was released last Friday. On the surface, it looked strong. As a result, rates rose (due to economic strength), the US Dollar rallied to another all-time high (due to strength in the US economy and higher yields for yield investors), and Big-Cap tech sold off a bit- only at the open and then recovered. The reason why I start with this is that this is Fed Chairman Powell’s most important regulator in his interpretation of the economy.

Fed Chair Powell stated that an orderly economic environment is what he is shooting for. So labor is what he uses to measure the heat of the business sector in their: hiring, amount of wage rate, and ultimately the number of workers that are participating (looking for jobs). Currently, there seems to be a shortage of labor that has been stubbornly the case since COVID. Many attribute this to still an abundance of free money, and the desire to work from home (with all the cost savings associated with it). So, labor participation is still 3% below where it was in the Great Financial Crisis of 2008-09.

The other component that the Fed is sensitive to is the price of “stuff.” When I say stuff, I am primarily focused on Food and Oil (fuel for drivers). What is having the greatest impact on the oil portion is the steep falloff in production that happened at the onset of Biden’s election due to his immediate shutdown of many domestic drilling efforts. See the chart below that illustrates what has been seen up to June 24, 2022:

If demand ramps back up and we are still in a challenging environment for drilling, it is clear that the prices will continue to be high, and this acts as a tax to consumers and businesses as it cuts directly into what they can spend elsewhere. Food prices continue to remain stubbornly high as the supply issue continues to be compromised due to the breadbasket of Europe (Russia Ukraine war) still being cut off.

So where does this leave us? The Fed wants prices to stop going up (stifle inflation), yet they don’t want to slow the economy into a recession. This is a really hard thing to do as the economic indicators are showing signs of softening, yet prices continue to climb due to challenged supplies. THIS IS THE MOST IMPORTANT POINT RIGHT NOW!!! This brings me back to the “Bullwhip Effect” that I brought up last week. I don’t mean to be redundant, but this is really the problem that we are faced with.

I think that the benefits of technology and the media influence are really making this a slippery slope for forecasting prices, consumption, and, as a result, ordering. Please refer to my bullet points from last week for the progression of how hard this has been on the consumer, the retailer, and the manufacturer. The reason why is that like to reference pregnancy. It doesn’t matter how good medical technology is so that an expecting mother can accurately measure the progression and health of her growing baby, it still takes 9 months!

One last point that I am paying attention to is what is going on with the consumer in general. If they are buying, are they paying? If they are not paying, then the sugar high of the $9 Trillion that was thrown at the economy, which is really the culprit of the inflation, could be abating. The way I look at this is delinquencies on credit cards, auto loans, and rent payments. I am now reading reports of auto loan delinquencies rising. Auto prices are historically insanely high. A friend recently looked at the biggest Lexus SUV and it had a sticker of $100,000 and the dealer wanted $180,000. This isn’t a typo! Just totally unrealistic, unless all the free government money is still floating around out there.

Many households are finding that the auto payment has rivaled their rent payments, and without the enhanced unemployment from pandemic times, households are really starting to feel the pinch. A Google search for “voluntary repossession of car” search reveals a number that is at the highest level since 2008- when the economy and markets were diving lower. As far as rents are concerned, it was reported that 8 million US citizens are delinquent in their rent payments and the spike in rental rates has turned on a dime.

In closing, the Fed probably goes to the sidelines for much of the second half, steering clear of the Elections in November. IF inflation ticks back up they can tighten the screws again. But if the economic indicators are beginning to see a trend to lower inflation readings, we could be close to the end of the Fed’s tightening cycle and as historical precedent has indicated (as I’ve referenced in past notes), the second half of the year after a tough first half and in a Mid-Term year cycle could actually pave the way to an S&P 500 moving up to 5,000 (as mentioned by Saut Strategy last Friday). Time will tell, but the first half of earnings that begin this week along with the forecasts being given into the end of the year should give us a first look at the impact of the work of the Fed in the first half.

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