The March Labor Report Preview: The Cracks Are Deepening (SP500)

The Consensus Expectations

The BLS is set to report the labor market data for March on April 5th. These are the current consensus market expectations:

Essentially, the market expects a slowdown in non-farm job creation to 200K from 275K in February, and the unemployment rate to stay unchanged at 3.9%.

On the surface, this would still be a solid job market, with healthy job creation, and still a low unemployment rate – consistent with a gradual labor slowing towards the soft landing. However, underneath the surface, the cracks in the labor market are deepening suggesting that a recession might be closer than many expect.

First, it’s important to understand that the BLS labor market report is composed of two different surveys (reports), and these two surveys are not consistent in describing the current state of the labor market.

The household survey is warning of a rapidly slowing labor market, while the establishment survey still indicates a strong labor market. Which one is correct?

The Household Survey

The Household survey for February showed that:

• The number of employed people decreased by 184K.
• The number of unemployed people increased by 334K – rising since April 2023 and the highest level since January 2022.
• The unemployment rate increased from 3.7% to 3.9%, which is now 0.5% above the 3.4% low level for the cycle reached on April 2023.

The increase in the unemployment rate by 0.5% triggers the Sahm Rule and increases the probability that the U.S. economy is entering a recession. This is supported by the decrease in the number of employed people – signaling job losses.

But the report also shows a significant increase in the number of unemployed people – that explains the increase in the unemployment rate.

The household survey reports the total labor force, which is a measure of labor supply. The Fed Chair Powell has referenced the increase in the labor supply as a positive for inflation expectations at the post-FOMC meeting on March 20th.

Strong job creation has been accompanied by an increase in the supply of workers, reflecting increases in participation among individuals aged 25 to 54 years and a continued strong pace of immigration.

In fact, the increase in the number of unemployed people could be due to the increase in the labor force, according to the Fed – which does not signal a recession.

But the data shows that the civilian labor force increased by only 150K in February, and it has been decreasing since the peak in November 2023 – now only 0.7% higher YoY.

The February survey does show that there were 1.3M new foreign-born people entering the labor force. This means that there were over 1M people exiting the workforce.

This is a disturbing fact, the U.S. labor force is shrinking massively due to demographics, while the attempt is to replace it with massive immigration – and it’s still not enough to maintain the healthy growth in the labor force. Will the March 2024 household survey confirm these trends?

Here is the chart that shows a significant slowing in the U.S. labor force growth YoY since November 2023.

Here is the chart that shows a rising trend in the number of unemployed people since April 2023.

The Establishment Survey

The establishment survey reports the number of new jobs created, in total and by sector.

The job creation accelerated during the Dec-Feb period from a cooler job creation during the summer, as the chart below shows. The consensus is that the job creation will slow to 200K in March.

However, the analysis of where these jobs were created in February shows that:

• The Health Care & Social Assistance created the most of new jobs at 90.7K.
• The combined Leisure & Hospitality and Retail Trade added 76.7K new jobs.
• The Government added 52K new jobs.

The jobs creation in the Health Care & Social Assistance has been growing strongly recently at nearly 5% MoM rate, likely due to demographic factors. These jobs are non-cyclical, as the chart below shows, and given the demographic trends, it is likely that this sector will continue to create new jobs – irrespective of the economy and the Fed.

The combined leisure/hospitality and retail jobs are cyclical and indicate a still strong consumption – unaffected by the higher interest rates. However, there are warning signs that consumption is likely to slow given the rising credit card use as well as delinquencies – which suggests that these sectors could start to see a lower job creation, and eventually the job losses.

The government jobs creation is a function of a pro-cyclical deficit spending, and it’s clearly not sustainable given the debt levels.

On the negative side, there are now significant losses in the Temporary Help Services, -15.4K in February. The Temporary Help Services job creation is the leading indicator for the overall job market, and the loss of the Temporary Help Services jobs generally precedes a recession. The chart below shows that the recent losses in Temporary Help Services jobs are signaling a recession.

Implications

The job market appears to be strong, but underneath, the cracks are deepening:

• The labor force is shrinking, despite the attempt to increase immigration (which is a policy that might not be practical and sustainable).
• The unemployment rate has been increasing, triggering the Sahm Rule.
• New jobs creation has been heavily concentrated in the Health area, which is not indicative of an economic strength, rather it reflects the demographic trends.
• Government jobs are significantly contributing to new jobs being created, which is also not indicative of a strong economy, rather it reflects government deficit spending.
• The consumer-centric jobs show that the consumer is still spending, which is also not sustainable due to: 1) high interest rates; 2) low savings and mostly exhausted stimulus balances; 3) resumption of student loan payments; and 4) increased use of credit cards and rising delinquencies.

Thus, we might be closer to a recession that many expect, as indicated by the losses in the Temporary jobs. These points possibly explain the Fed’s “dovishness” – as the Fed will be forced to cut aggressively when the recession hits.

However, the market thinks that the Fed will cut soon and engineer a soft-landing – which means the labor market stays solid, while inflation falls to 2% over time.

Based on the analysis of the trends in labor market it is more likely that a recession is approaching – and with it the recessionary bear market for S&P 500 Index (SP500).

There are massive revisions to the labor market data, and: 1) it is important to see how the February and January numbers are revised; and 2) what the March data shows.

My expectation is that we will continue to see a weakening labor market – which could initially inflate the stock market bubble due to rate cut expectations, before the eventual 20+% bear market correction as the reality sets in. Thus, my rating for S&P 500 is still a Hold.

Note on Inflation (Stagflation):

The February wage growth significantly dropped from the January 0.5% MoM spike. The fear here is that rising wages could cause the price-wage inflationary spiral. Thus, it is important to see what 1) the January/February revisions are and 2) what the March data shows.

The Fed could be facing a slowing labor market, but still unable to cut interest rates due to lagging inflation data.

Thus, the next stage could be stagflationary – weakening labor market and sticky inflation well above the 2% target, before the eventual recession. This could be the worst scenario for the S&P 500, where the likelihood of a deep selloff (1987-like) is very high.