That Internally Contradictory May Jobs Report

Here are two things you would think can’t be true simultaneously: The US economy added a net 339,000 jobs in May, and the US economy lost a net 440,000 jobs in May.^[i] Yet according to the Employment Situation Report, this is what happened. The Establishment Survey—which polls businesses—showed a 339,000 rise in non-farm payrolls, while the Household Survey showed the unemployment rate jumping from 3.4% to 3.7% as the number of people reporting being unemployed due to termination or the completion of a temporary gig rose by 440,000.^[ii] This article won’t be about which measure is “right,” and we will spare you nerdy jokes about Schrödinger’s job market. The methodologies and survey sample sizes are just too different. But we think the divide shows why trying to use the jobs report to predict the Fed’s next move and economic trends is fruitless for investors.

In our view, the jobs report has always had numerous caveats. One, being survey-based and ultra-timely, it is often subject to big revisions both in the short and long term. Two, economic growth creates jobs—not the other way around—so employment trends are late-lagging indicators. In our view, a new job stems from the economic growth that preceded it, while a layoff typically follows tough times. Hiring is too expensive and too great an investment of time and resources for it to be any other way. Meanwhile, stocks precede economic trends. They signal the economic developments that will eventually foster employment changes.

None of this stops people from trying to glean something about the future from the official jobs report. The cottage industry of forecasting the Fed is a prime example. Solid job growth and wage growth while inflation remains elevated? Rate hike city, allegedly. A bad employment report? Time to cut, supposedly, to salve the economy after yanking the punch bowl too hard. Some argued the May report’s mixed signals meant the Fed will have to pause next week to wait for clarity. No other logical approach when the report simultaneously showed stonking job growth and the largest jump in the jobless population since COVID lockdowns. Perhaps, although we think it strains credulity to imply dealing with mixed signals is novel for the Fed. These folks eye a couple dozen indicators, and conflicting results is the norm, not the exception. They parse all this stuff for a living, applying their personal opinions and biases. It is always messy and unpredictable even if the Household and Establishment Surveys are in lockstep.

A weekend Wall Street Journal piece on productivity also falls into this trap, in our view. Titled “Get Ready for the Full-Employment Recession,” it married the Establishment Survey’s nonfarm payroll jump with the Q4 2022 and Q1 2023 drops in real gross domestic income (GDI) to argue an increasingly bloated and unproductive workforce is producing less.^[iii] Seemingly underscoring this was the Labor Department’s official productivity metric, released last Thursday, which showed productivity falling -2.1% annualized and -0.8% y/y in Q1, the fifth straight year-over-year drop.^[iv] If productivity fell that much using GDP—which grew in Q4 and Q1—then imagine the implications if you plug in GDI instead.

Ok but what if you calculate it using the Household Survey’s employment figures? By our back-of-the-envelope math, pairing that with GDP would show productivity rising in Q1 and Q4. It would show the US doing more with less. We aren’t saying this is the correct way to do it, and we know it isn’t the norm. But we think it reinforces how squishy a lot of this is.

Then, too, even if productivity is waning, does that really provide new and earth shattering information for stocks? The industries that flew high on COVID-era trends, getting drunk on a massive capital influx, have been cutting back for about a year now. We are seeing layoffs and cost cuts and all of a recession’s typical fruits, including GDI falling and undershooting GDP—a figment of statistical noise that gets a lot louder during recessions.^[v] Layoffs, curtailed investment, cost cuts—all combat weak productivity.

These developments are all very well known. They are a big reason economists keep projecting recession—and pushing their forecasts out repeatedly when economic indicators continue showing growth. Stocks’ 2022 bear market preceded all of it, which is typical of stocks pre-pricing a recession. Maybe one finally arrives, in which case it would probably be the most widely expected recession in history. Or maybe businesses are pre-emptively going through all of the belt-tightening that recession usually inspires, negating its purpose and mitigating the effects.

Happily, there is a brilliant antidote to all of this confusion, in our view: remembering markets look forward—not to the immediate future, but to the next 3 – 30 months. They size up expectations for that window and move on the probability that reality will be better than, as good as or worse than everyone projects. The more people are disappointed by economic reports and trying to manufacture stats that look even worse than the official measures, the worse expectations generally are. These days, people seem stuck in some sort of stagflationary sentiment, beaten down by high inflation and seemingly sluggish economic growth. It reminds us of the “jobless recovery” and “L-shaped recovery” themes that dominated financial commentary throughout 2009, 2010 and 2011 (until the eurozone debt crisis came along to steal all the headlines). That sentiment didn’t match reality, and with businesses taking a lot of underappreciated steps to get lean today, we suspect expectations are similarly too low now.

The great thing about weak economic sentiment is that it doesn’t take much to deliver positive surprise. Just ok and not as bad as it could have been will usually suffice. Heck, after last year’s bear market, even getting a recession—making it official—could enable people to get over the will we or won’t we uncertainty and move on. Regardless, we think the right approach is to look forward, beyond the gloom—in other words, think like markets.