The U.S. unemployment rate dropped to 3.4% in April, down from 3.5% in March. I did not expect to see a dip.
The Fed wants to cool inflation. A declining unemployment rate tends to lead to increased wages, which can lead to higher prices, which appears to be inflation. (Inflation is an increase in the money supply, but the public thinks inflation is higher prices, and ultimately the Fed has to keep the politicians and the public happy, so they focus on prices).
So, while the Fed may pause, they will not pivot soon.
Of course, you can dissect the numbers and find the flaws in this argument.
The “birth-death” model assumed 176,000 net new jobs in April, so the reported number of 253,000 new jobs was only 77,000.
More importantly, and not widely reported by the media: the average workweek, which was 34.1 hours last year, is now 33.8 hours, the lowest point of the year, and down or flat most months for the last year.
Here’s the thing: unemployment is a lagging indicator. It tells you what has happened, not what will happen.
It’s difficult and costly to find, hire and train employees, so employers do not lay employees off at the first sign of trouble. They wait, to see if things will pick up. They eliminate overtime, and reduce hours first, before any layoffs occur. That’s why the “hours worked” number is falling. It’s a sign that all is not as rosy as it may appear.
I believe the signs of a recession are there to see, but we aren’t there yet.
So we wait.
I am holding bonds, because when the Fed pauses, and then pivots, bonds will go up. So, for now, I clip my coupons and wait.
See you next week.
The Fed will Pivot (But Not Soon)
by JDH on May 6, 2023
The U.S. unemployment rate dropped to 3.4% in April, down from 3.5% in March. I did not expect to see a dip.
The Fed wants to cool inflation. A declining unemployment rate tends to lead to increased wages, which can lead to higher prices, which appears to be inflation. (Inflation is an increase in the money supply, but the public thinks inflation is higher prices, and ultimately the Fed has to keep the politicians and the public happy, so they focus on prices).
So, while the Fed may pause, they will not pivot soon.
Of course, you can dissect the numbers and find the flaws in this argument.
The “birth-death” model assumed 176,000 net new jobs in April, so the reported number of 253,000 new jobs was only 77,000.
More importantly, and not widely reported by the media: the average workweek, which was 34.1 hours last year, is now 33.8 hours, the lowest point of the year, and down or flat most months for the last year.
Here’s the thing: unemployment is a lagging indicator. It tells you what has happened, not what will happen.
It’s difficult and costly to find, hire and train employees, so employers do not lay employees off at the first sign of trouble. They wait, to see if things will pick up. They eliminate overtime, and reduce hours first, before any layoffs occur. That’s why the “hours worked” number is falling. It’s a sign that all is not as rosy as it may appear.
I believe the signs of a recession are there to see, but we aren’t there yet.
So we wait.
I am holding bonds, because when the Fed pauses, and then pivots, bonds will go up. So, for now, I clip my coupons and wait.
See you next week.