Recession is Here! Hire More Workers!

The recession consensus grows by the week, yet employers continue to search the bottom layer of  the labor pool to address massive shortages. With most economists expecting a Recession and half the public feeling that an economic recession has already begun; it seems that pundits eagerly search for tea leaves that may augur poorly to feed the historic pessimism pervading the country. With the 40-year inflation data extreme, shrinking real wages, record gasoline prices, surging crime and the never-ending waves of Covid variants, there are plenty of reasons for concern. Using their economic microscopes, some analysts have jumped on the modest rise of Initial Claims for unemployment and Challenger job cut surveys. However, these are noisy numbers that remain historically low and are prone to frequent false alarm spikes. A better measure is the Continuing claims for unemployment we often display that is still quite low with no discernable uptrend. Below we note the 384,000 jobs added to the economy last month as yet another healthy surprise vs consensus. When shown alongside the more than 11 million unfilled jobs, these are strong signs that labor is extremely tight, despite the frequent assertions of analysts that it’s rolling over.  We believe much of the persistent labor shortage is in the low skilled segment and bodes well for entry level worker incomes. Job openings need to plunge below 11 million for a couple of months before we may prognosticate about rising unemployment potential down the road. 

The June worker Layoff numbers will likely show a rising trend, but the unusually low level provides room for labor weakness without signaling an imminent labor alarm. Like most, we expect labor demand to slow and the data to worsen, but extrapolating an elusive potential for up trending terminations does not mean we should expect surging unemployment. If layoffs rise into our warning zone above 2.2 million, we will be more concerned, but given demographic weakness, it will take a Lehman panic, as in 2008, to raise the red flag on labor and the economy, in our opinion.  JPMorgan’s Jamie Diamond is expecting a Hurricane, so perhpas there is some panic potential before the equity Bear market storm passes.

Another way to examine the current unique economic cycle is the comparison of past economic contractions to today along with past levels of unemployment. When the first half of 2022 quarter over quarter GDP numbers are reported on July 28th, it’s widely expected to show a second straight quarterly contraction in the overall economy. In the past seven occurrences, excluding 2020’s Government mandated contraction, by the time the economy turned down for 6 months, the unemployment rates had already been rising for almost 13 months. There has been NO rise yet today despite two down quarters. When correlating this with Continuing Unemployment Claims with GDP instead, of unemployment, the worsening labor trends had been in place for 15 months on average when GDP had been shrinking for two quarters. Even using a looser standard of two consecutive quarters with a “net” GDP contraction, there is still a 12-month unemployment uptrend already in place by this point in the cycle.  So Continuing Claims filing for unemployment and the actual unemployment rate have always risen for many months by this juncture, yet they both remain near record lows with no hint of worsening.                                               

As we have shown, this overstimulated economic cycle during a demographic slowing of our labor force, illustrates the unique nature of current conditions. This is important because, if we avoid a sharp rise in unemployment above 5% during this slowdown, we can recover quickly without monetary and fiscal stimulus in 2023. The proxy for the economy we use favors a slowing economy into mid 2023 with a stock market that bottoms roughly 6 months earlier. Using the 5% or higher unemployment threshold to declare a recession, we expect a rather soft-landing next year without a recession from our current perspective. However, the stock market bottom in late 2022 or early 2023 may be discounting a normal to severe recession at its nadir. This will present significant upside opportunities for investors as we move into the October to February time period ahead. Currently, we remain very defensive with above normal cash positions, expecting new Bear market lows within the next few months once the palty summer rally fails.                              

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