Solid September Jobs Report, Contributing Factors To Inflation Show Signs Of Improving

Good news! The AP reports, US hiring stayed solid in September as employers add 263,000:

America’s employers slowed their hiring in September but still added a solid 263,000 jobs — potentially hopeful news that may mean the Federal Reserve’s drive to cool the job market and ease inflation is starting to make progress.

Friday’s government report showed that last month’s job growth was down from 315,000 in August and that the unemployment rate fell from 3.7% to 3.5%, matching a half-century low. Last month’s job gain was the smallest since April 2021.

Remember when the media would excitedly wet itself whenever Trump broke the 200,000 jobs mark in a month? Yeah, there’s no media bias.

September’s slightly more moderate pace of hiring may be welcomed by the Fed, which is trying to restrain the economy enough to tame the worst inflation in four decades without causing a recession. Slower job growth would mean less pressure on employers to raise pay and pass those costs on to their customers through price increases — a recipe for high inflation. [This is the old school Wall Street analysis of “wage-price spiral” from the 1970s. There is NO evidence of a wage-price spiral today.]

Still, the Fed would need to see more sustained evidence that hiring and pay gains are slowing before it would moderate its interest rate hikes as it fights inflation. In September, hourly wages rose 5% from a year earlier — the slowest year-over-year pace since December but still hotter than the Fed would want. The proportion of Americans who either have a job or are looking for one slipped slightly, a disappointment for those hoping that more people would enter the labor force and help ease worker shortages and upward pressure on wages.

Traditionally this has been accomplished through immigration. Cleary all the GQP and Fox News fear mongering over a “border invasion” and “caravans” of immigrants overrunning the U.S. is just anti-immigrant racist hyperbole because we have a worker shortage in this country – migrants are being arrested in large numbers at the border, not filtering into the work force as in years past. Republicans should be cheering the effectiveness of the Biden administration in arresting migrants at the border. The downside to this “white replacement theory” anti-immigrant hysteria is a worker shortage, and that is contributing to inflation, particularly in food prices. Blame the GQP and Fox News “white replacement theory” anti-immigrant hysteria for higher food prices.

Leisure and hospitality companies, including hotels, restaurants and bars, added 83,000 jobs last month. Health care and social assistance employers gained 75,000 jobs, factories 22,000. But governments cut jobs. Retailers, transportation and warehouse companies reduced employment modestly.

In its epic battle to rein in inflation, the Fed has raised its benchmark interest rate five times this year. It is aiming to slow economic growth enough to reduce annual price increases back toward its 2% target.

It has a long way to go. In August, one key measure of year-over-year inflation, the consumer price index, amounted to 8.3%. And for now, consumer spending — the primary driver of the U.S. economy — is showing resilience. In August, consumers spent a bit more than in July, a sign that the economy was holding up despite rising borrowing rates, violent swings in the stock market and inflated prices for food, rent and other essentials.

Fed Chair Jerome Powell has warned bluntly that the inflation fight will “bring some pain,” notably in the form of layoffs and higher unemployment. [Again, this is the old school Wall Street analysis of “wage-price spiral” from the 1970s. There is NO evidence of a wage-price spiral today.] Some economists remain hopeful that despite the persistent inflation pressures, the Fed will still manage to achieve a so-called soft landing: Slowing growth enough to tame inflation, without going so far as to tip the economy into recession.

[T]he Fed is trying to accomplish it at a perilous time. The global economy, weakened by food shortages and surging energy prices resulting from Russia’s war against Ukraine, may be on the brink of recession. Kristalina Georgieva, managing director of the International Monetary Fund, warned Thursday that the IMF is downgrading its estimates for world economic growth by $4 trillion through 2026 and that “things are more likely to get worse before it gets better.”

Powell and his colleagues on the Fed’s policymaking committee want to see signs that the abundance of available jobs — there’s currently an average of 1.7 openings for every unemployed American — will steadily decline. Some encouraging news came this week, when the Labor Department reported that job openings fell by 1.1 million in August to 10.1 million, the fewest since June 2021.

Nick Bunker, head of economic research at the Indeed Hiring Lab, suggested that among the items on “the soft-landing flight checklist” is “a decline in job openings without a spike in the unemployment rate, and that’s what we’ve seen the last few months.”

On the other hand, by any standard of history, openings remain extraordinarily high: In records dating to 2000, they had never topped 10 million in a month until last year.

Economist Daniel Zhao of the jobs website Glassdoor argued that a single-minded focus on the job market might be overdone. Regardless of what happens with jobs and wages, Zhao suggested, the Fed’s policymakers won’t likely let up on their rate-hike campaign until they see proof that they’re actually hitting their target.

“They want to see inflation slowing down,” he said.

The Fed may be overdoing it with its old school Wall Street throw people out of work to contain inflation tactics. The Fed coud create a recession with its old school policies. The Fed needs to move quicky to adjust to changing economic circumstances.

Michael Brush explains at Market Watch, Inflation is going to fall just as fast as it rose, and that’s investors’ cue to enter the stock market:

When central banks, most notably the Federal Reserve these days, move too aggressively on interest-rate increases, things break.

Believe it or not, this is bullish in the twisted thinking of Wall Street. It’s why stocks rallied earlier this week.

Before you laugh this off, consider the logic. It is not completely absurd.

Faced with a financial crisis that threatens systemic risk — because a bank or investment firm “breaks” — the Fed might well abandon the policy-tightening plan it has mapped out. This would remove the heightened risk of recession. And that would be good for stocks.

“Markets stop panicking when central banks start panicking,” says Michael Hartnett, Bank of America’s chief investment strategist.

But the best pushback on this thinking has investors selling. They think the Fed might not actually have the liberty to back off. Half of the Fed’s job is to control inflation — and headline inflation numbers tell us inflation is still raging.

“U.S. and euro-area inflation data do not allow for dovish central bank responses,” says Barclays strategist Ben McLannahan.

We can tell this bleak view is consensus because sentiment is so dark. However, this still may be wrong, which would mean you will make money if you buy stocks now.

This consensus view is wrong, to me, because behind the scenes — in what I call upstream inflation numbers — we see a lot of evidence that prices are falling fast and hard. As that bleeds through to the headline Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) index that get all the attention, investors will ease up on Fed-induced recession fears. Stocks will rally.

That extreme negative sentiment caused by recession worries is also a buy signal. More on that below. But, first, here’s what history tells us about inflation spikes, and why it will be coming down faster than people think.

‘Round trips’ in inflation spikes are symmetrical

Historically, the amount of time it takes for inflation to spike is equal to the amount of time it takes for the spikes to reverse. Inflation probably peaked in March or April of this year, and it started to heat up in April 2021. This tells us the spike took a year to form, which suggests inflation will be back to levels that are not worrisome by next spring or early summer, says Jim Paulsen, an investment strategist at Leuthold, a market research group.

Sharp inflation spikes are excellent buy signals. In six of the seven biggest inflation spikes since the 1940s, once the CPI peaked, the low was in for the stock market.

“If you buy at the peak, you do pretty darn well over the next 12 months,” says Paulsen. Waiting until inflation is under control is not the way to go.

Take the three big inflation peaks during 1970, 1975 and 1980, an era that investors liken to the present. One year after the last two, the S&P 500 SPX, -2.05% was up over 30%. A year after the first one, it was up 8.8%. On average, stocks are up 13% one year after inflation peaks when there’s a recession, and 17% in a no-recession scenario.

Here’s are seven major trends that are about to drive that symmetrical decline in inflation.

1. Energy prices are down sharply. West Texas Intermediate crude prices CL.1, 1.99% are down 30% from June. A gallon of gasoline has fallen 23% since peaking in the same month. Energy is central to the economy, so its price has a big impact on the prices of almost everything. Plus, there is a psychological angle.

“Nothing is more central to how people think about inflation and the state of their finances more broadly than how much it costs to fill their gas tank,” says economist Mark Zandi at Moody’s Analytics.

CAVEAT: This analysis was written before OPEC Plus announced cutbacks in oil production to fix oil prices at an inflated level, well above what a free market would produce without cartels and price fixing collusion would produce.

2. Commodity prices are falling fast. The S&P Goldman Sachs Commodity Price index is down over 20% from its early June peak. Copper, steel and aluminum prices have fallen 31% to 48% since March. These are basic building blocks in the economy that go unfollowed. But the price declines are feeding through to headline inflation.

3. Rents are now dropping. A big concern is that services inflation is hot. That’s driven to a large degree by rents, which are rolling over. Follow updates from CoStar Group CSGP, -1.77%, a great source of data on real estate trends and analytics. “We’re seeing a complete reversal of market conditions in just 12 months, going from demand significantly outstripping available units to new deliveries outpacing lackluster demand,” says Jay Lybik, CoStar’s director of multifamily analytics.

Note: We have a housing shortage in this country because not enough homes were built over the past decade after the Great Recession caused by the subprime mortgage fraud of Wall Street.

4. Retailers are slashing prices to clear excess inventory. Target TGT, -2.09% grabbed headlines in early June when it reported it will have to cut prices to clear inventories. Nike NKE, -2.32% followed suit last week. Those two are not alone in over-ordering merchandise, expecting the pandemic-induced consumer preference for goods over services to continue. This inventory clearing will show up in headline inflation numbers soon. [Christmas buying season October-January.]

5. Supply chains are improving. Recent Fed surveys show that inventories are rising and delivery times are falling. Freight rates are down by one-third from recent highs. Monday’s Institute for Supply Management manufacturing business survey confirmed that order backlogs fell by 2.1 percentage points compared to August. Inventories also rose, indicating an easing of supply chain congestion. The Goldman Sachs Analyst Index also suggests that supply chain disruptions continued to moderate in September. Fewer analysts are reporting their sectors are experiencing supply constraints and more report rising inventories. All of this tells us that supply-chain problems — a big source of inflation — are easing.

6. Businesses are failing to raise prices. September data show that company sales are hanging in there but profit margins peaked in early June and slipped slightly in mid-September. “Companies are finding it harder to pass their rising costs through, as evidenced by the weakness in the profit margin recently,” says Ed Yardeni of Yardeni Research. Meanwhile, tech companies are back to their long-standing deflationary ways, putting downward pressure on prices again.

7. Labor market dynamics are improving. The Bureau of Labor Statistics on Tuesday reported over one million fewer job openings than expected for August, down to 10 million from 11.2 million reported in July. This was the biggest one-month decline since April 2020. This suggests the labor market pressure is starting to ease, which reduces upward pressure on wages — one half of the dreaded “wage price spiral.” [There is NO evidence of a wage-price spiral today.]

Why this matters for stocks

“Just the perception that the Fed is done raising rates would be enough to mark the bottom in the bear market and lead to a sustainable rally,” says Yardeni. Declining inflation will also boost consumer confidence, helping to avert a severe recession, if one occurs. We already see this happening.

Note: The Conference Board Consumer Confidence Index® increased in September for the second consecutive month. Consumer Confidence Improved Again in September.

The Bank of America consumer confidence indicator increased to a five-month high of 33.7% as of Sept. 25, compared to a trough of 27.6% in early July. “Consumers are feeling more optimistic about the economy as significantly lower gas prices have somewhat eased inflation concerns,” says Bank of America. The September University of Michigan Consumer Sentiment report was at its highest level since April.

Extreme negative sentiment ‘buy’ signal

The market certainly seems primed for a good rally. Investors are extremely bearish, a bullish signal in the contrarian sense. The Investors Intelligence Bull Bear ratio recently came in at 0.61, an unusually bearish read. Any readings below one historically suggests good entry points into stocks.

The American Association of Individual Investors sentiment poll released Sept. 29 showed only 20% of respondents were bullish, compared to 60.8% who were bearish. This put the bear-bull ratio at three, a high that has been reached just three times since this survey began in July 2008, says Oppenheimer chief investment strategist John Stoltzfus. “This suggests to us that bearish sentiment is at an extreme,” he says.

Bank of America is still cautious on stocks but a lot of the bank’s sentiment indicators are solid buy signals. Its proprietary bull and bear indicator is pegged at 0. That is maximum bearish, but maximum bullish in the contrarian sense. Bank of America also notes that fund managers it surveys have cash at 6.1% of their assets. Historically, the market is a buy when cash levels are at 5% or above.

So what he is saying is hang in there, things are improving and 2023 will see inflation contained and a stock market rally, and possibly a “soft landing” without a recession, if the Fed doesn’t fuck things up.

Why would anyone foolishly put Republicans, who have no economic policies other than tax cuts for corporations and plutocrats, and a well-estabished track record of wrecking the economy in charge of the government? Don’t be stupid!