Labor Market
While the headline number of 275k jobs created easily topped the estimate of 198k and sparked concerns the labor market remained too hot, the details of the report showed a much softer labor market. To begin, the prior two months saw a downward revision of 167k jobs, which more than offsets the beat we saw in the month of February. Also, while I generally am a little more skeptical of the household survey, it did show a decline of 184k in those that were counted...
Labor Market
While the headline number of 275k jobs created easily topped the estimate of 198k and sparked concerns the labor market remained too hot, the details of the report showed a much softer labor market. To begin, the prior two months saw a downward revision of 167k jobs, which more than offsets the beat we saw in the month of February. Also, while I generally am a little more skeptical of the household survey, it did show a decline of 184k in those that were counted as employed, which led to an uptick in the unemployment rate to 3.9%. This was above the estimate of 3.7%. I was also disappointed to see that government remained a large contributor in the establishment survey as the sector added 52k jobs. Outside of government, other areas that were strong included health care & social assistance (+90.7k), leisure & hospitality (+58k), and construction (+23k). Wage gains were also a bright spot in the report as average hourly earnings increased 4.3% compared to last year. This was below the estimate of 4.4% and below last month’s reading of 4.5%. I believe this report continues to put us on track for 3-4 rate cuts in the back part of the year.
JOLTs Report
The January Job Openings and Labor Turnover Survey (JOLTs) was right in line with expectations and the previous month as job openings totaled about 8.9 million. This remains well below the high of 12.2 million in March 2022, but is still well above historical norms as prepandemic we had not seen a reading above 8 million. I continue to believe job openings will continue to trend lower to come back in line with historic levels. This does not mean we believe we are seeing a weak labor market, but I would call it a normalizing labor market. We have also seen a normalization in quits which should be a positive for wage pressure. Quits in the month were 3.4 million. This compares to annual quits of 44.4 million or 3.7 million per month in 2023. Total quits in 2023 fell by 6.1 million when compared to 2022. Looking at prepandemic levels, quits totaled 42.1 million in 2019 which would have been an average of 3.5 million. Layoffs were also strong in the month as they totaled just 1.6 million. This is right in line with 2023 levels as for the full year they totaled 19.8 million and averaged 1.65 million per month. In 2019, layoffs totaled 21.7 million and averaged 1.8 million per month. I wanted to provide all this data to show the labor market may be softening from strong levels, but I believe there is still some room to have numbers normalize without tilting us into a weak labor market.
China
What happened to China? The country had such a robust economy just a few short years ago, but the writing was on the wall. Here are the problems that caused the economic downfall. A real estate boom which accounted for 25% of China’s annual economic output. The debt and inventory continued to rise in houses and condos but many remained empty with no one able to buy them. The government cutoff the debt to developers, which ended the real estate boom. Consumers who did buy into the expensive housing market in China leveraged beyond their means with the expectation that the growth would continue and they could sell out with a profit. Unfortunately, they are now sitting under water in much of their real estate, but still have to pay the debt and don’t have much discretionary income to spend in other parts of the economy. China is now experiencing deflation, which will give them negative growth in parts of their economy for perhaps years to come. China’s overall debts have now surpassed 300% of GDP with very little chance of the economy growing to pay down that debt. Many years ago, they put a cap on how many babies people could have and now that is hurting them with an aging workforce and a shrinking workforce. It will take years to reverse this. In the meantime, the economy remains underwater. Since 1998 foreign investment in China has always been on the upswing, but that run came to an end in the third quarter of 2023 as foreign companies sold out and left or just stopped investing in China. There is nothing left to build in China when looking at their infrastructure. They have built many roads, railroads and airports so there’ll be no future investment in infrastructure. China has always been a communist country and I don’t think they really understood capitalism very well. An economy will always go through the ups and downs, but the United States has been around for 200 years and we have learned some valuable lessons like 1929 and 2008. While we can’t avoid the down turns, we have learned how to minimize the depths of the down turns.
Personal Consumption Expenditures
The Personal Consumption Expenditures Price Index, known as the PCE and is the main inflation gauge that the Federal Reserve looks at came in with a good inflation number. Excluding food and energy the change from one year ago for January was 2.8%, which shows a nice downward trend from December 2023 of 2.9%, November 2023 at 3.2%, and then October 2023 at 3.4%. The numbers are going in the right direction, but they are now falling a little more slowly than the big jumps we had. I still believe by the end of the year we should be at 2%, which is the Fed’s target and they should start reducing rates by midyear. Even though they won’t be at their target of 2% by June or July they need to start reducing rates a little bit to prevent a recession in 2025. At Wilsey Asset Management, we do believe the Federal Reserve came to the rescue to reduce inflation a little bit late but have now done a good job on managing the economy. We continue to believe that the Federal Reserve will do a good job in 2024, but stay tuned as we will be on top of it each month as the data is released.
Social Security Changes Coming?
The State of the Union was this week and one of President Biden’s talking points was Social Security. He stated, “Working people who built this country pay more into Social Security than millionaires and billionaires do” so he vowed to “make the wealthy pay their fair share”. It is true that millionaires and billionaires whose incomes do not come in the form of wages or self-employment do not pay into Social Security, but they are also not entitled to Social Security benefits in retirement. Working class people do in fact pay more into Social Security, but they are also the only ones who receive it. However, for people who do pay into Social Security, benefits are subsidized by high-wage earners and business owners for the benefit of low-income earners. As an employee, 6.2% of wages are withheld for Social Security up to a cap of $168,600. The Social Security benefit amount is based on 35 years of earnings which is used to determine the average monthly earnings. The full retirement amount will be the sum of 90% of the first $1,174 of average monthly earnings, 32% of the next $5,904, and 15% of any monthly earnings above that. For example someone who made $50,000 per year would receive $2,014 per month at their full retirement age which is 48% of their earnings. For someone who made $150,000 per year, their Social Security would be $3,759 per month which is 30% of their earnings. Even though both paid the same 6.2% of their income into Social Security, the lower-earner received a much larger percentage of their income in the form of benefits. In the case of business owners, they have to pay double the tax for a total of 12.4% because they are considered both an employee and employer, and they have to pay 6.2% for all their employees. So a business owner is really paying more into Social Security than all their employees combined. In regards to making the wealthy pay their fair share, there have been proposed bills that would tax earnings over $250,000, over $400,000, or possibly tax investment income. However, it is unclear if these additional taxes would change the potential benefit amount of those paying them, or if they would just benefit lower wage earners. There is no doubt that the Social Security system needs some adjustments, but we must understand the facts before implementing change.
