The small cracks in the labor market

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Good morning. Yesterday we wrote about the motionless american stock market and, frankly, feared the letter would be followed by an embarrassing outburst of volatility. So far, however, our luck has held: the S&P 500 rose a meager 0.9% yesterday. Email us: robert.armstrong@ft.com And ethan.wu@ft.com.

The curious case of Massachusetts

Economic data can be unstable for many reasons, including strange weather conditions, low response rates, or changing laws. But here’s a source of noise you don’t hear as often:

[The Massachusetts Department of Unemployment Assistance] is experiencing an increase in fraudulent claim activity where people attempt to access assets [unemployment insurance] accounts or file new unemployment insurance claims using stolen personal information to fraudulently obtain unemployment benefits.

Fraud in Massachusetts appears to be, at least in part, behind a sharp increase in initial unemployment insurance claims this year, an increase that has caused much consternation, including Not covered. Ignoring it makes the labor market more beautiful. Deutsche Bank recently simulated counterfactual unemployment insurance claims data by replacing Massachusetts with its rough statistical equivalent: two Connecticuts. This change alone reduces the year-to-date increase in initial inquiries from 17% to 7%. This chart from Ian Shepherdson of Pantheon Macroeconomics, showing ex-Mass seasonally adjusted. affirms, visualizes it well:

We detail this because the increase in initial claims was central to the argument that the job market is cracking. As Aichi Amemiya, the US economist at Nomura, pointed out to us, labor market data tends to deteriorate in a predictable order towards the end of a cycle. Complaints, resignations and job offers first, followed by wages and unemployment. But job postings (which some consider questionable data) have skyrocketed during the coronavirus pandemic and are still nearly 40% above pre-pandemic levels. The dropout rate has decreased further, but looks more like a normalization than a real crack:

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Unemployment, at 3.4%, has not budged, while wage growth is slowing very slowly:

I repeat, none of this says that the labor market is not cooling, but rather that it takes its sweet time. While initial claims have only increased by around 7% this year, this is consistent with the broader labor market situation, but contradicts expectations of an impending recession. As Stephen Stanley of Santander wrote yesterday, the consensus economic gloom hinges on the next deterioration in the labor market:

The April Bloomberg Survey of Economists reported a contracting payroll in the third quarter and an average unemployment rate of 4.4%, a full percentage point above the current level, in the fourth quarter. . In short, the consensus call is for an impending labor market collapse. It is therefore not enough that claims are higher than they were six months ago. They must increase to justify the current consensus call. And the data clearly indicates that this is not happening.

The Fed would be feel divided on whether to raise rates again in June. Doves cite the risk of an overshoot and hawks point to a labor market that, in the words of a central banker, has only risen from “hot red hot”. Who can blame them?

Retail Week Part 2: Target and Walmart

Earlier this week, we looked at Home Depot’s first quarter results, and saw a fairly consistent pattern with what we know and don’t know about the American consumer.

The company’s same-store sales fall to an average figure in nominal terms. In inflation-adjusted terms, the picture is of course uglier: the paying customer pays a little less and receives a little less. And management notes that customers are avoiding big-ticket items and taking on less ambitious home improvement projects. Management’s outlook for the rest of the year was wide ranging. The source of the uncertainty is that Home Depot management does not know how much of the exceptional growth of the pandemic years was driven by demand driven forward. In inflation-adjusted terms, Home Depot has spent the pandemic years growing at a multiple of GDP, and well above its normal trend. What happens now? Back to normal or challenged?

On Wednesday, we got the first quarter numbers from Target, and they echoed those from Home Depot perfectly. Although sales were flat rather than down, the difference was Target’s big business in groceries and other non-discretionary items. Management noted that sales trends slowed during the quarter and were negative in May. Customers are looking for discounts. The targets for the rest of the year were again spread across a wide range.

Thursday came Walmart, and while the results appeared to break the pattern, the differences were only superficial. Same-store sales increased more than 7% and the company is targeting single-digit sales growth for the remainder of the year. But sales growth was driven by grocery and pharmacy; sales of clothing and electronics fell. And leaders noted that inflation in food is still in double digits. Walmart does not absorb these prices into its margin, suggesting stable sales in real terms. As a discounter, Walmart is doing better than large retailers, but a slowdown in consumption is nevertheless reflected in its results.

Unhedged’s mantra is that the US economy is slowing and would be well on its way to a recession without the resilient consumer. Tensions in the labor market, wage gains and excess savings are only gradually easing. What we’ve learned from the big retail reports is that even if the consumer isn’t backing down, exactly, they’re visibly cautious. She still has plenty of money to spend but, after splurging on big-ticket items during the pandemic, when she does shop now, it’s likely for groceries and other basics. Restaurants and businesses that cater to travelers are still doing well, but we’ll be watching them closely.

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