Weakening U.S. Employment Outlook

By: Chris Matlock, CPA, CFA | Chief Investment Officer

The past few months have seen a parade of disappointing employment data releases.  Consider the following:

• The U.S. unemployment rate has increased from a generational low in April 2023 of 3.4% to a recent level of 4.2%, the highest level since October 2021. If you exclude the extraordinary Covid-era, then you have to go all the way back to May 2017 to find a higher rate of unemployment.  In isolation, the absolute 4.2% rate of unemployment doesn’t seem so alarming, but it is the consistent grind higher in the rate that is of concern.
• The number of job openings has been in a constant decline since it peaked at a high of over 12.2 million in March 2022 to a most recent level of 7.7 million. At its peak, there were roughly two job openings for every unemployed person.  That has now fallen to a level of only 1.1 job openings per unemployed person.  Like the unemployment rate, the absolute number of job openings is not so bad, it is the consistent downward trend that is concerning.
• The monthly number of non-farm jobs created has also been trending lower over the past year, and some of the recent months were revised significantly lower than originally reported. Roughly 2.4 million new jobs were created in the past twelve months, which excluding the Covid era, is the lowest annual number since 2009 and is less than half the number of new jobs created in 2022 and 2023.

The cause of this glum employment outlook can be squarely laid at the feet of the Federal Reserve (Fed), which has now concluded the fastest and most aggressive Fed Funds rate hiking cycle since the August 1980 hiking cycle.  The Fed has been successful bringing the rate of inflation lower as those higher interest rates worked their way through the economy in order to cool it down…at the expense of a weaker job market.  As we have previously communicated with clients, the last remaining piece required to move the annualized CPI rate below what has been a sticky 3% level, was to adversely impact employment in order to bring down wage growth.  In fact, this now appears to be the case as recent CPI readings have come down to the mid 2% range.

By now, our clients know that we have been predicting a high likelihood that the U.S. would enter an economic recession this year.  While our prediction has not come to fruition yet, we still hold firm to the belief that one is imminent, acknowledging we were too early in that call.  The cooling employment data noted above certainly shows that the economy is slowing.  It is also important to note that employment data are considered a “lagging” economic indicator, i.e., they are not predictive but rather indicative of what has previously happened.  So, has the Fed engineered a so-called “soft landing” for the economy, thereby avoiding a recession?  Current employment data and trends would suggest that it is too early to make that call, and if the employment trends stay on their current downward path, then an economic recession seems all but certain.  It is also important to note that we rarely know when a recession begins until well after the fact.  For that reason, we continue to have a cautious and defensive investment posture in client portfolios.

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