Don’t Count Your Chickens…
A sizable rise in payroll employment of 175,000 in April was taken as an indication of a slowing economy, which could lead to 2.0% inflation and Fed rate cuts. Is that possible? Sure. Is that likely? That’s far from clear based on a single month’s data. Once again, people are making investment decisions on the basis of their dreams coming true, well before those aspirations are realized. Don’t count your chickens before they hatch.
The rise in payroll employment was possible only because of the influx of labor supply provided by illegal immigration and a return of women to the workforce. Otherwise, job growth would slow even more. It isn’t possible to hire people who aren’t out there. Even at this lower hiring pace, the economy remains dependent on illegal immigration. If the borders were ever sealed, hiring would slow overnight, growth would also slow and the unemployment rate would plummet, driving up prices and inflation. Immigration policy is now the hostage of job growth and inflation objectives.
There is still little reason for the Fed to cut policy interest rates. Inflation is still running hot. If hiring slows enough, inflation might eventually follow. But it would be presumptuous to expect that outcome based on a single jobs report showing 175,000 net new hires, especially since that still represents solid growth. While hiring moderated, the composition of Q1 GDP suggested strong growth ahead, particularly the decline in inventories, which must be replenished. Defense spending is set to rise and munition stockpiles are still being depleted. Green initiatives are still being pursued and billions have been distributed to companies to build chip manufacturing facilities within the U.S. The economy still enjoys many tailwinds. Much of this is reflected in the Atlanta Fed’s GDP NOW forecast for Q2 of 3.3%, while private sector economists are raising their estimates.
The jobs reports garnered the most attention, as usual, but the Employment Cost Index, reported earlier in the week, was without any doubt quite troublesome for the Fed. A rise of 1.2% for the quarter, or 4.8% at an annual rate, is far too hot to be offset by productivity, precluding any possibility of the Fed getting closer to its 2% target in the near future. Investors seemed to appreciate the significance of that report, which is why the stock and bond market got pummeled. Average hourly earnings get more attention, but only because they are released monthly instead of quarterly. They are also less accurate. The ECI adjusts for changes in job mix, which is not done by the average earnings figure. So, it seems like investors are inclined to extrapolate any good news so that they can anticipate Fed rate reductions. That view may prove correct, but it is also highly presumptuous.
Speaking of counting chickens, of the seven swan eggs laid in one nest next to a pond near our place, five hatched on Thursday and another egg hatched by Friday morning. Those cygnets entered the water over the weekend. I just saw them swimming around closely guarded by their parents. This was a major event locally, since only one egg hatched over the past five years and that lone cygnet was a victim of the many raptors in the area. We’re hopeful some of these cygnets escape that fate. They are off to a great start.
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