Thoughts of the Week
Eugenio J. Aleman, PhD, Chief Economist
Giampiero Fuentes, CFP, Economist
August 23, 2024
As a businessman and ex-business owner, the idea of firms ‘hoarding’ workers never made sense. As an economist, the idea of firms hoarding workers never made sense either. And since I am a business economist, the idea of firms hoarding workers is ludicrous. So why was it that so many pundits, economists, analysts, and everybody else looking at employment data during 2022 and 2023 argued that the reason for employment to be so strong during those years was because firms were hoarding workers?
Some argued that workers were so scarce that firms were reluctant to get rid of workers. Not only firms were not willing to get rid of workers, but the argument was that they wanted to continue to hire at very high rates because they didn’t know if they were going to be able to hire workers in the future.
We started writing about this issue back in October of 2022 when everybody was talking about firms ‘hoarding workers’ (See our Weekly Economics Thoughts of the Week for October 14, 2022, titled ‘Businesses Hoarding Workers? Say What?’). At that time, we argued that what firms were doing was just trying to go back to pre-pandemic levels of employment and that they were struggling to find workers, not hoarding workers. And because they were struggling to get workers, wages and salaries were going up.
But even after firms were able to catch up to pre-pandemic levels of employment in early 2023 and employment growth continued to remain strong, we argued that we needed to see an important slowdown in employment growth during the second half of 2023 because growth in employment was outpacing growth in economic activity. In our ‘Weekly Economics Thoughts of the Week’ for June 9, June 30, and July 07, 2023, we beat the drum that employment growth numbers were making no sense.
However, almost everybody else was trying to adjust their narratives to the numbers being reported rather than analyzing what was happening in the economy and concluding that job numbers coming out from the establishment survey were too good to be true. Of course, we never joined the bandwagon of conspiracy theories regarding the reason why we believed the numbers were wrong. The reason is because we have previous experience with the damage severe crises have on statistical calculations and we knew that nobody was trying to use these numbers for political purposes.
On Wednesday of this week, the Bureau of Labor Statistics (BLS) provided a preliminary estimate of the establishment benchmark revision, which indicated, preliminarily, that from April 2022 until March of 2023, the number of jobs created in the US economy was revised down from an original 2.9 million to 2.1 million. That is, the BLS indicated that their preliminary revision was lower by 818 thousand than originally estimated, or about 68 thousand less per month during those 12 months.
Again, we want to put an emphasis on the preliminary nature of this number because this is not going to be the last number. The final numbers will be released when the January 2025 establishment numbers are reported, which is going to be on February 6, 2025.
If we take a look at the chart below, we see that Wednesday’s revision was second in absolute numbers to 2009’s revision, which was -902 thousand. Thus, it is clear that after a severe recession, which was the case for the Great Recession as well as the pandemic recession, these estimates tend to produce very large negative errors in nonfarm payrolls estimates.
Again, this number may come down or move higher once we get the final numbers in February of 2025, but there is nothing mysterious or nebulous about it. It is just the nature of the beast. And as our RJ CIO Larry Adam argued during the Summer Development Conference in Orlando in July of this year, this is the reason why we use a combination of sources and our experience analyzing the economy to guide our research and our view on the economy and the markets. And that is why we wrote so many reports over the last two years providing our interpretation of what was happening to the US labor market.
Having said this, the large revision by the BLS still puts US employment growing at a strong clip during those 12 months, with growth in nonfarm payrolls ‘slowing down’ to an average of 173 thousand from an original pace of 242 thousand, which is still extremely strong compared to a historical average of 124 thousand per month before April of 2023 and going back to 1939. Therefore, the labor market remains in good condition despite recent increases in the unemployment rate as well as our belief that it has continued to weaken. Being that ‘to maintain full employment’ is one of the Fed’s two mandates, the slowdown in employment growth is an additional reason to support our view that the Fed will ease rates starting in September.
Economic Releases:
Existing Home Sales: The increase in existing homes during July brought down the months’ supply of homes for the first time in five months. The year-over-year increase in home prices will continue to be the most important risk for the Federal Reserve because lower interest rates will add to the current pressure on home prices due to the still limited availability of homes for sale despite the improvements we have seen over the last several months. Existing-home sales increased by 1.3% during July on a seasonally adjusted basis and compared to June, according to the National Association of Realtors (NAR). According to the release, existing-home sales were down by 2.5% on a year-earlier basis. By region, the Northeast saw a month-over-month increase of 4.3% in existing-home sales (also up 2.1% compared to July of last year) while existing-home sales remained flat in the Midwest, month-over-month, while declining by 5.2% compared to a year earlier. The largest region of the country, the South, saw existing-home sales increasing 1.1% compared to June while declining by 3.8% compared to the same month a year earlier. Finally, the West saw existing-home sales up by 1.4% both on a month-over-month as well as year-earlier basis. The sales price of existing homes increased by 4.2% on a year-earlier basis. The inventory of existing homes for sale increased to 1.333 million in July while months’ supply dropped slightly, from 4.1 months in June to 4.0 months in July. This was the first increase in existing home sales in five months while it was the first time months’ supply declined this year. Months’ supply was down 2.4% in July compared to the previous month but up 21.2% compared to July of last year.
Leading Economic Indicators: The worse than expected Leading Economic Index (LEI) continued to point to a weakening US economy during the third and fourth quarters of the year, which is consistent with our view on the US economy. The Conference Board’s Leading Economic Index (LEI) declined by 0.6% in July, the institution reported today. This decline was twice as large as FactSet expectations for a 0.3% decline. The Conference Board also indicated that while the LEI indicates weakness in real GDP, it still doesn’t expect a recession, just a weakening in economic activity during Q3 and Q4 2024. The Conference Board’s Coincident Economic Index (CEI) stayed unchanged in July of this year after a 0.2% increase in June. The Conference Board’s Lagging Economic Index (LAG) declined 0.1% during July after increasing 0.2% in the previous month. According to The Conference Board’s Senior Manager, Justyna Zabinska-La Monica, “In July, weakness was widespread among non-financial components. A sharp deterioration in new orders, persistently weak consumer expectations of business conditions, and softer building permits and hours worked in manufacturing drove the decline, together with the still-negative yield spread.”
New Home Sales: The strong increase in new home sales has pushed down the median price of new homes in July by 1.4% compared to a year earlier. Furthermore, the strong increase in new home sales brought down the months’ supply of homes to 7.5 months from 8.4 months at the end of June of this year. The decline in prices of new home sales will help put downward pressure on the price of existing homes. However, the decline in months’ supply of new homes has the potential to make the year-over-year decline in new home prices short lived. New home sales of single-family homes surged by 10.6% in July to a seasonally adjusted annual rate of 739,000 compared to an upwardly revised June rate of 668,000, according to the US Census Bureau and the US Department of Housing and Urban Development. Compared to last year, new home sales were up by 5.6%. By region, new home sales in the Northeast were up 6.9% while the Midwest saw a 9.9% increase. The South experienced an increase of 2.9% while in the West, sales surged by 33.8%. All of the regions experienced an increase in new home sales on a year-over-year basis according to the release. The median sales price of new home sales in July of this year was $429,800 compared to a median price of $435,800 in July of last year. The average price was $514,800 in July of this year compared to an average price of $507,600 in July of last year. The months’ supply of homes in July was down to 7.5 months compared to 8.4 months in June of this year and 7.3 months’ supply in July of last year. Clearly, the recent surge in new home construction completions has put a lot of pressure on sales of new homes, so much that the effort has meant that home sellers have had to reduce the price of new homes.
DISCLOSURES
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Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. Current Situation Index (CSI) and Future Expectations Index (FEI) are the end-results of CCI, covering economic conditions, employment, price, income, and expense. The reading is 100 plus the average of said five factors.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.
The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.
The Pending Home Sales Index (PHSI) tracks home sales in which a contract has been signed but the sale has not yet closed.
Supplier Deliveries Index: The suppliers' delivery times index from IHS Markit's PMI business surveys captures the extent of supply chain delays in an economy, which in turn acts as a useful barometer of capacity constraints.
Backlog of Orders Index: The Backlog of Orders Index represents the share of orders that businesses have received but have yet to start or finish. An increasing index value usually indicates growth in business but shows that output is below its maximum potential.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output. Industrial production:
Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interestrates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI new export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Durable Goods: Durable goods orders reflect new orders placed with domestic manufacturers for delivery of long-lasting manufactured goods (durable goods) in the near term or future.
Source: FactSet, data as of 8/23/2024