International Forecaster Weekly

MANY JOBS WILL BE SACRIFICED AT THE ALTER OF LOWER INFLATION - Invest and Save Accordingly

One of the economy’s many enigmas in 2022 has been “blockbuster jobs growth during a time of very low unemployment vs. complaints of a labor shortage,” according to Courtenay Brown and Neil Irwin.

They add that since earlier in the year, it’s seemed like something has had to give. Now, new evidence suggests that "something" may have arrived.

ADP, the nation's largest payroll processor, rolled out its new measure of private-sector payrolls on Wednesday. 

In partnership with Stanford University’s Digital Economy Lab, the ADP Research Institute indicator infers data based on workers added or cut and paychecks sent by its own massive client base.

The other day, it showed private employers added 132,000 jobs in August — less than half from the 270,000 in July, and the lowest reading since January last year. 

The newly designed ADP report aims to capture underlying employment trends compared to its older version that essentially represented little more than a prediction of what the BLS would report two days later.

Well…today’s job report shows that 318,000 jobs were added to private payrolls last month, the lowest gain since April 2021 and well below July's 526,000, but just slightly below economists' estimate of 318,000.

Guest Writer | September 2, 2022

By Dave Allen for Discount Gold & Silver

One of the economy’s many enigmas in 2022 has been “blockbuster jobs growth during a time of very low unemployment vs. complaints of a labor shortage,” according to Courtenay Brown and Neil Irwin.

They add that since earlier in the year, it’s seemed like something has had to give. Now, new evidence suggests that "something" may have arrived.

ADP, the nation's largest payroll processor, rolled out its new measure of private-sector payrolls on Wednesday. 

In partnership with Stanford University’s Digital Economy Lab, the ADP Research Institute indicator infers data based on workers added or cut and paychecks sent by its own massive client base.

The other day, it showed private employers added 132,000 jobs in August — less than half from the 270,000 in July, and the lowest reading since January last year. 

The newly designed ADP report aims to capture underlying employment trends compared to its older version that essentially represented little more than a prediction of what the BLS would report two days later.

Well…today’s job report shows that 318,000 jobs were added to private payrolls last month, the lowest gain since April 2021 and well below July's 526,000, but just slightly below economists' estimate of 318,000.

We don't yet know what explains such a wide divergence between Wednesday's ADP and today's BLS figures (BLS's is 186,000 or 140% higher), but I can't wait to learn more about it.

The bigger question is, does now-official government employment data for August showing a slowing, support the idea that big-time job growth is ending? 

After all, the government's U-6 unemployment rate, which includes discouraged job hunters and those working part-time for economic reasons, rose from 6.7% to 7.0%

Both the Fed and the Biden administration have indicated that would be a welcome shift.

Michael Arone of State Street Global Advisors believes “this report supports the Fed’s ability to engineer a soft landing. Markets like it (so far).”

Futures markets pulled back anticipations for a third consecutive 0.75 percentage point rate increase at the Fed's meeting later this month. The probability for that move was 62% as of 10 a.m. ET, down from 75% yesterday.

Arone added that the jobs report is “not strong enough to get them to be more aggressive in terms of rate hikes, and not weak enough to have them slow down.” I don’t think today’s jobs report changes anything about the path the Fed was on.”

Charles Schwab's chief investment strategist Liz Ann Sonders says, “This could very likely be a recession where you don’t see the kind of carnage in the labor market that you see in most recessions."

Possibly, but...

Powell the Sadist...or Just Masochist?

Fed chair Jerome Powell has been warning that bringing down inflation will require economic pain for households. But how much pain...and for whom? 

B&I say the answer “will determine what the job market looks like in the years ahead.”

When central banks like the Federal Reserve work to lower inflation, they do so at the cost of slower economic growth and a diminished labor market. 

Economists and investors alike have been trying to figure out how big of a blow is ahead for the economy as the Fed tries to bring down raging inflation.

Enter the "sacrifice ratio" – an esoteric estimate of GDP growth and employment that will need to be "sacrificed" so inflation comes down. 

In other words, for each percentage point reduction in inflation, how much excess unemployment is necessary (see below)? 

No doubt the labor market has been humming, with 11.2 million job openings as of the end of August – still about two vacancies for every unemployed American.

But, as B&I warn, the Fed's efforts to “squash inflation…will eventually come at the expense of the solid labor market.”

At least the Fed can take comfort in supply chain disruptions that are easing. RSM economist Tuan Nguyen calls that a “tailwind.”

His research indicates that "about one-third of inflation was caused by supply chain disruption. Historically, it's been all about demand."

That's something RSM takes into account in its own estimate of how many jobs the economy will have to shed to tame prices.

The firm claims that for inflation to fall to more acceptable levels within the next few years – closer to the Fed's 2% target – headline (U-3) unemployment would have to spike to at least 4.6% or as high as 6.7%. 

That, RSM estimates, translates to a loss of between 1.7 million and 5.3 million jobs. That wide range, Nguyen says, depends on a lot of unknowable variables, including when will the Fed will declare victory.

By contrast, former Treasury Secretary Larry Summers is arguing that it will take unemployment of 5% – for five years – to contain inflation.

Yes, it is possible that past experiences with bringing down inflation could understate how much pain the Fed will have to inflict on the economy today, particularly workers, to put a lid on prices. 

Top ECB official Isabel Schnabel believes, "Central banks are likely to face a higher sacrifice ratio compared with the 1980s…as the globalisation of inflation makes it more difficult for central banks to control price pressures."

Clearly, here's another case of the past not being prologue. Invest and save accordingly.