Employment and Inflationary Trends

Q: The consensus economic forecast on Wall Street has switched from “The Economy is Strong” to perhaps we are in for a “Mild Recession.”  The Labor market appears to be pretty strong.  What’s your view?

A: In today’s world, the media, including the financial media, report with a point of view.  They don’t lie, but their point of view makes them selective about what they report.  One never gets the whole story.  The last two recent employment reports are cases on point. 
• Explain what the payroll survey is
• Explain Birth-Death model
• Explain using ADP for small business (ADP is America’s largest payroll processor)

Which do you believe, the automatic add from an analysis that is insensitive to current economic conditions, or from a report that has its finger on the pulse of small businesses? 
The net numbers are significantly different from the reported numbers.  In addition, in April, the second survey, the Household Survey, reported -353k as the change in employment.  Worse, full-time positions were reduced by -651k.  There is no way to characterize April’s employment reports as “strong”.  

Q: That was April’s Report – was the May report any better?
A: The May employment reports were slightly better than April’s, but in no way “strong”.  The Payroll Report was +390, again with an assist of about 100k from the B/D model, so +290 were actually counted.  If we use ADP for small business, then, on net, the number was about half of the headline.  Nowhere was it mentioned that the Retail sector laid off -61k, that the factory workweek and overtime hours declined.  In fact, the overtime hours are down 3 months in a row – the first time this has happened in 7 years.  .  In addition, those working part-time “for economic reasons” (i.e., business is slow), rose by +349k and is now up in 3 of the last 4 months.

Q: Wow – is there a trend here? 
A: Looking at ADP’s data for large, medium and small businesses, the trend is clearly down:
December January March May
+780k +512k +249k +128k

(Slide – ADP Small Business Empl Chgs) For small businesses, which are much more sensitive to changes in the economic environment than are large businesses, ADP’s employment report showed:
April -123k, May -92k, and YTD -278k
Q: As I indicated earlier, the narrative on Wall Street now seems to be that we are in for a “Mild Recession”  - what are your thoughts there?
A: The incoming data are showing a marked slowdown in the economy, so the narrative couldn’t still be a “strong” economy.  But,” not to worry” the new narrative says, the recession, when it does come sometime next year, will be “mild”.  The data that I see says something much much different.  
(slide – Corporate Disappointments #1) Let’s start with corporations.  A couple weeks ago, WMT and TGT reported sales, earnings, and guidance that disappointed Wall Street analysts.  Both said that consumers purchased fewer “discretionary” items; WMT said they spent more on food and less on discretionary items.  That’s what one would expect since the price of food has skyrocketed.

Q: Any other Wall Street disappointments?
A: Yes – HD, Kohl’s and most recently MSFT and TSLA.  Of note here is that TSLA has announced a 10% workforce reduction.  So, it appears that corporate America is already feeling pinched.

Q: Did anything else come out of the recent quarterly Wall Street earnings reports?
A: Yes – inventories are too high.  One could have gleaned that from TGT and WMT initial reports that consumers purchased fewer discretionary items.  In fact, wholesale inventories have risen +24% Y/Y and retail inventories are up +15% Y/y to a 38-year high.