The unhealthy jobs report, in context | USAEMALL.com

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Good morning. It brings joy to Unhedged’s cold and cynical heart when markets, however briefly, work as they are supposed to. A few days ago the prediction markets’ odds on the presidential election had gotten absurdly wide, heavily favouring Trump. With polls looking about even, this made no sense. But, in the last few days, greed prevailed and the odds have closed — Kalshi, for example, is favouring Trump at 53-47 per cent as we write this, not far from the polls-of-polls models. Uncertainty may be exasperating, but in this case it’s rational. Email us with strategies for winning a coin flip: [email protected] and [email protected].

Jobs

Unhedged’s motto is “calm down,” and our practice is to avoid overreading any single piece of economic data. But October’s jobs report, which features only 12,000 jobs added, really was pretty bad. Yes, as everyone knew beforehand, hurricanes and the Boeing strike dragged the numbers down to some degree (33,000 Boeing workers hit the picket lines in September, and there was a 35,000 spike in initial jobless claims in the first week of October, roughly coinciding with Hurricane Milton). But 112,000 in downward revisions for the prior two months make the downbeat message hard to ignore. A Fed rate cut next week is a lock, and the critics of the 50bp cut at the last Fed meeting will all be very quiet now.

The report puts Unhedged in the slightly unexpected position of being less sanguine than Wall Street. Responses to the report overwhelmingly took the tone of “slowdown continues, we knew that, not much to see here.” Pimco described the report as showing a labour market that is “still slowing but not yet crashing”; Nomura: “Most of the weakness appears driven by temporary factors, which should reverse”; BlackRock: “a trend of modest softening of demand, which really looks to us as more of a normalisation versus any sort of real labour demand deterioration.” And so on. 

All this may well be correct. But that chart is pretty spooky. Let’s put it into historical context. 

One important thing to note is that the current 4.1 per cent unemployment rate (which comes from a survey of households, as opposed to the job gains numbers, which come from a survey of businesses) is really very low. Going back to 1948, the rate is at 4.1 per cent or lower only 20 per cent of the time. Many of those instances came in the postwar boom. Going back just 50 years, it’s only 13 per cent of the time, and all of those instances are from a brief period in 1999-2000 and 2017-2024 (whether the recent low levels represent two distinct economic periods, or one long period interrupted by the pandemic, is an interesting question). 

Here is the pattern of job gains from the 1999-2000 period of very low unemployment:

There were three months during that prosperous patch when, as in this October, there were few or no jobs added. Middle-aged readers will remember that the Dotcom bust was right around the corner, though. A year after the above chart ends, the unemployment rate was 5.7 per cent and rising. Were the weak months in 2000 a warning that a hot-seeming economy was, in fact, running on fumes? Or were they normal variations within a boom that only ended because of an exogenous event, namely a Wall Street collapse? 

If you look at the pre-pandemic employment boom, there are also several very weak months for job gains, notably July of 2018, and February and May of 2019:

It is harder to argue that those weak months portended bad things to come, given that no one had then heard of Covid-19. But it is not impossible: it could be argued that 2019 was a late-cycle period, and things would have gone south without the pandemic. The yield curve was inverted most for that year, for example.  

It has been a weird five years, economically, and one month is just one month. But the combination of a very low but rising unemployment rate and faltering job gains does look a bit late-cycle to us. Add in peaky-looking corporate earnings and a background of high deficit spending and the impression grows stronger. Are we jumping at shadows? 

Oil will probably stay cheap

Since we last wrote about oil in September, oil prices jumped on fears of wider war in the Middle East after Israel’s incursion into Lebanon, and on the tepid hopes for China’s fiscal stimulus. Neither move had legs. WTI and Brent have been trading back at around $70 a barrel again for much of the past two weeks:

The era of cheap oil seems set to continue. A near-term economic recovery looks more and more unlikely in China, as the government continues to be coy about fiscal stimulus plans. While the US economy has averted recession, the employment picture suggests that the economy is not gaining speed. 

This is good news for the Fed. Cheap oil is helping to keep a lid on inflation — in last week’s PCE reading, inflation was only barely down when oil and food prices were stripped out. It is less good news for the oil companies and oil producers, Saudi Arabia in particular. As reported in The FT, ExxonMobil, BP, and Chevron had poor quarters due to low oil prices. Wall Street’s expectations for the next quarter have been sliding, and fell further last week:

Saudi Arabia had been flirting with abandoning Opec+ production cuts when they expire in December. The Saudis would like to grab back market share from Opec+ producers such as Iraq, which have not abided by the cartel’s limits, and from the US and other non-Opec producers. But with demand from China remaining weak, Opec+ announced yesterday that it would extend December’s production cuts by a month. And, with the IMF’s recent announcement that current oil prices will be a drag on Saudi’s growth and budget, Saudi Arabia might be more hesitant to increase production after cuts expire, as cheaper oil prices could wreak more damage on their future fiscal situation if they cannot edge out other suppliers.

The one thing that could turn things around is war in the Middle East. Oil prices rose last Friday after Iran threatened further retaliation against Israel’s October strikes. We’ve said that the US election may not be that consequential for oil prices, but we need to revise our view. The US election may not be that consequential for demand. But the next administration’s actions to prevent a broader regional conflict may be the determining factor in oil prices for the months to come.

(Reiter)

Two good reads

Two views of the direction of causality in trade deficits.

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