Moneybeat: The labor market continues to shrink

JENNY ROUGH, HOST: Next up on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: All right time now to talk business markets and the economy with financial analyst and advisor David Bahnsen. David is head of the wealth management firm, the Bahnsen group. And he is here now. David, good morning.

DAVID BAHNSEN: Good morning, Nick. Good to be with you.

EICHER: All right. Well, new jobs report out 150,000 jobs added in the month that just went by the previous months that were a lot higher have been revised down. Headline unemployment rate 3.9%. Very close to four. Do you see any warning signs?

BAHNSEN: Well, it was the softest unemployment report we've had in a couple of years. That's a far cry from it being a disaster, but you didn't have net job losses. But still, the unemployment rate ticking up to 3.9. The biggest issue to me by far is 200,000 people leaving the labor participation force. The labor participation force is the key metric: the amount of people in the society that have a job or are looking for a job – that want a job. That's the key metric. That number is still quite weak. Bothers me on a number of levels, both economically and culturally. 

The unemployment number at 3.9, the 150 when 180 were expected, they all speak to some weakening, but they all still are in the context of a pretty good labor market. It came in a week where the JOLTS data showed the number of job openings that are unfilled ticked up 100,000 when it was supposed to tick down 300,000. So you still supposedly have 9.6 million unfilled jobs, all the while you have about half of that, that are looking for a job and not finding one. So it's a confusing metric in the labor market.

EICHER: Now, how do you factor that you had a major strike going on? That number was baked into the unemployment report. So now that the strike has settled, those jobs come back, does that soften it at all?

BAHNSEN: No, I don't believe that there's clarity as to how the BLS actually processes striking workers. And you're still talking about 10 to 20,000, not 100 to 200,000. So it's still a pretty small number. The primary movers were not in auto workers, so I'm skeptical that that was a big needle mover in this month's data. Whether or not you had a strike over the last month, it's always a good idea to have that three months of data roll. Because if it isn't a strike, it could be something else, Data is inherently lumpy. And three month rolling data tends to smooth out a lot of lumpiness.

EICHER: So speaking of the strike, what do you make of the settlement? Seemed like a really big win for the UAW and the loss for the carmakers?

BAHNSEN: Oh, I think that there were wins and losses for both parties. I mean, they wanted a 40% raise, and they got a 25% raise. So if anything, they were offered 20 to avoid a strike, they settled at 25. It didn't move a whole lot off of what the auto makers originally offered. But I think that public sentiment did more go with the auto workers than the automakers, which I would not have expected. And I think it speaks to the utter shock of both the leading Democrat and leading Republican candidate for president taking the auto workers side.

EICHER: Okay, let's talk about what the Fed did on Wednesday, last week, holding rates steady, which was highly expected. So we're still sitting at 5.25 to 5.5%, the target rate. But maybe this was the interesting quote from Jerome Powell, the Fed Chair saying that the full effects of our tightening have yet to be felt. What do you say about the Fed action last week?

BAHNSEN: Yeah, I don't think any of this has anything to do with inflation at all. And I don't think it has had anything to do with inflation for a long time. The inflation number continues to go lower. And if anyone were looking at the actual number, not the lag effect to shelter, they would see they're already at the Fed target. So it has to go to the Fed trying to keep it as long as they can to take out some of the excesses, particularly around things like housing, and try to time their exit with the so-called soft landing where they get out before any real damage is done. And I'm very skeptical that they're going to do that. I'm very, I'm skeptical that it's already happened. I think in other words, they're already past the point of damage being done. But you are correct that he has more or less said not only are they not raising rates this year. They're not raising rates next year, either. They're done raising rates. 

Futures have pretty much now priced in virtually 100% chance of that being the case that they're done raising, and all of the debate has shifted to when they will begin cutting. And so he had a chance in this press conference to finally talk a little bit hawkishly, even in the face of pausing interest rates for the last three meetings, and he didn't do it. He acknowledged all the things that I've been talking about to WORLD listeners for months and months: that the financial conditions are much tighter than the Fed funds rate. That they, in other words, have financial markets doing some of the tightening for them, high bond yields, high mortgage rates, etc. And he acknowledged that the market indicators of shelter price inflation are somewhere around 0%. And that the CPI has it somewhere between seven and 8%. So they know that there's an artificially high number in the three to 4% inflation reading they're getting, that if it were really normalized would be indicating about 2% inflation. And that's with core goods being basically a deflation, certainly at severe disinflation. 

So I think that they're done. And I think the question now will move to quantitative tightening, how long they can get away with that, because the long bond yield had been a problem. Now, look, it came down almost 50 basis points this week. That's why stocks were up 1200 points in one week. This was the biggest week for the stock market all year. And that was directly related to bond yields coming down. If the long bond, the 10 year, can get closer to 4%, maybe the Fed can keep doing quantitative tightening. But I don't know that it can. And I think as it gets, when it was around 5%, it was indicating to me that the Fed was going to have to accommodate even moreso. So we're going into an election year. It's going to be very interesting to watch the Fed, Nick.

EICHER: Now we've been talking about the headline generating data points, jobs, and the Fed meeting on interest rates. Is there anything that you're seeing in your data that we're not seeing in the big papers?

BAHNSEN: Well, the manufacturing numbers have contracted 12 months in a row. And so while the GDP number, as we talked about last week, came in much better than expected, the unemployment number worsened a little this month, but it's still not all that bad. Bond yields for the better part of this year had been pricing in the reality that we weren't going into a recession when they had previously been pricing in that we were going to have a recession. So you have a lot of mixed data about where the economy is going to go. 

Meanwhile, I think Nick, what I'd be looking to for a metric of the real economy, there's so many things we could talk about. We talked about housing. We've talked about the stock market, and we've talked about jobs and wages. But when it comes to things, or whatever people like to use the term the “real economy.” Even the real economy is not monolithic. There's multiple categories. There's no houses trading. There's no houses getting built. There's no houses being bought or sold. And prices have not come down much. But that's because everything's sort of frozen in place. So there's a lot about the “real economy” that I don't know how to measure or look at until we get on the other side of this Fed tightening, and get a chance to kind of see price discovery. Where do bond yields go? What are growth expectations going to be? This is not a time to be taking overly confident positions in the economy getting really bad, or overconfident positions in the economy getting really good. It's a very nuanced and complicated time. And I know that doesn't always go well in a news cycle. It doesn't always go well in a headline. And it doesn't really go well in human nature – our desire to have a simple bottom line explanation. But I want to be very honest with people right now. We have a very complicated set of realities in the economy. And I expect that to stay for months to come.

EICHER: David Bahnsen, founder, managing partner and chief investment officer of the Bahnsen group. You can keep up with David at his personal website that is bahnsen.com. His weekly dividend cafe you can find at dividend cafe.com. David, It's always great to talk, and we will catch you next time. Thanks so much.

BAHNSEN: Thanks so much, Nick.

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