Dichotomy in US data refuses to go away

The dichotomy in US economic indicators will just not go away. Prior to today, the most recent data releases we had seen, namely the PCE deflator readings, Personal Spending numbers and ISM manufacturing figures, collectively painted a picture of easing inflationary pressures, faltering consumption and stalling economic activity. The clear conclusion to draw was that the impact of the fastest pace of Fed monetary tightening seen since the 1980s was finally starting to have an impact, bearing down on demand and reaching into all corners of the economy and suggesting that, even if the FOMC ultimately decided that a further 25bps hike was justified this month, it would certainly be the last hike in this tightening cycle. Today’s employment data has ridden roughshod over that conclusion.

Suggesting instead that the Fed still has plenty of work to do, today’s jobless claims numbers, Challenger survey and ADP report, have all printed more strongly than expected, painting a melded picture of a still resilient labour market and one that is almost certain to stoke concerns among FOMC members that the potential for elevated wages growth stoking inflationary pressures is a problem that has not yet gone away. However, the key difference between today’s numbers and those above is that none of today’s prints are particularly reliable indicators in the short term, and therefore the story they are telling today should be read with a pinch of salt.

Looking first at the jobless claims numbers, the unexpected fall seen in last week’s numbers to 236k, and which was blamed on the US Federal Holiday that week, appears not to have been a one-off event, given that no significant bounce back has printed today. However, the jobless claims numbers are always more open to interpretation over the summer period as they struggle to capture fully changes in summer working patterns and seasonal events such as the retooling shutdowns in the motor industry, which can vary in their timing, duration and extent. A better idea of the true underlying picture will become clearer from end-August onwards; until then the jobless claims numbers need to be taken with a dose of scepticism.

The Challenger job survey report for June has suggested a similarly robust labour market, the number of announced job cuts falling 49% from the 80,089 job losses announced in May to just 32,517 in June, bringing the year-on-year rate in June down to 25%, from 287% in May. However, this series can also be volatile on a monthly basis, and the underlying picture is that monthly job cuts announced so far this year have exceeded those announced in 2022. In addition to this, it is also not unusual to see the scale of job losses diminish over the summer months before picking up again from August onwards. It is therefore much too soon to suggest that today’s report shows a strengthening labour market, and especially so given that it is inconsistent with an economy that is running under a real rate of interest of some 200bps - and likely to rise further.

Finally, today’s ADP jobs report printed at 497k, comfortably above the expected reading of 225k and the strongest print since February last year (551k). However, it is important to remember that the methodology used in the report was comprehensively reconstructed last summer and the reports we have had since then have proven to be an even more unreliable guide to the official BLS payrolls report than under the old regime. Since those changes, the errors have ranged from a 337k undershoot to a 66k overshot, with the average error an under-reporting of 67k each month. Whether today’s number is a signal that tomorrow’s payrolls report will be a strong number, or whether it is simply catching up on some of this under-reporting, is unknown. But what is known is that one month’s numbers are not enough to draw any strong conclusions from.

Of course, one possible explanation for the strength in today’s numbers – and indeed for the resilience we have been seeing to date in the labour market - could be that the US corporate sector, just like US households, emerged from the covid pandemic with balance sheets in a much more healthy position than usual, allowing them to largely endure the increased cost of credit that the Fed’s monetary tightening has engineered. But whatever the real story, what really matters is tomorrow’s payrolls number, where a reading of 225k is forecast – although judging from the data we have seen over the past couple of weeks, a reading of anything from 50k to 450k cannot be fully ruled out either.