Misleading employment numbers, the coming banking crisis and why inflation will ease

Most of last week (until April 5th)^th), financial markets are concerned about the upcoming employment statistics, and when the market is anxious, the index will be depressed. However, following Friday morning’s (ostensibly) “strong” jobs report, these markets breathed a sigh of relief, recovering much of this week’s losses. Still, this week ended with lower stock prices in both the stock and bond markets. For the week, NASDAQ: -0.8%, S&P 500: -1.0%, Dow Jones Industrial Average: -2.3%. Perhaps the market is waking up to the problems in manufacturing that we’ve been hinting at for months. Therefore, the performance of the 30 Dow Jones Industrials has deteriorated significantly.

employment woes

The graph below shows Nonfarm Payrolls (NFP) and the Quarterly Survey of Employment and Wages (QCEW) prior to March 2022.
CEW
) were consistent with each other. The two then diverge, and the cumulative difference is that NFP will earn him 5 million more jobs. I find it odd that the BLS revised the original numbers downward for 11 months in 2023. According to the QCEW report, the average monthly salary increase for the 11 months ending December last year was +130,000, not +230,000 as claimed in the NFP report. In fact, this has been verified by economists at the Philadelphia Federal Reserve (See here).

And don’t forget the production numbers in the NFP report from the birth/death (B/D) model. This number typically adds close to +100,000 to the NFP to compensate for long-term growth in unexamined small businesses. Determine your NFP numbers. According to Rosenberg Research, B/D’s “add-ons” helped him create nearly half (1.36 million) of NFP jobs (2.75 million) in the year ended February. Rosenberg also said that in the year ended February, new business “births” fell by -4.4%, while business “destructions” increased by +24.1%. Therefore, even the lower bound of QCEW monthly employment growth of +130,000 seems questionable.

In a previous blog, we commented on the large disconnect between the NFP and data from its sister Household Survey (HS), which so far shows negative growth in employment in 2024. Looking more closely at the QCEW data, we see the following for the year ending in 2024: In February, full-time employment decreased (-284,000), but part-time employment increased (+921,000). According to Rosenberg Research, the full-time/part-time problem is even more serious than QCEW suggests. They show that full-time employment fell by -1.3 million jobs over the past year. Whichever is correct, negative numbers are bad here.

Additionally, although the BLS counts full-time and part-time jobs as equivalent, we know that they are logically different. The fact that full-time jobs are disappearing indicates a weakening economy, despite the headline NFP numbers.

Details of the looming CRE/banking crisis

We have discussed the ongoing commercial real estate loan crisis in the past few blogs. As pointed out last week:

Delinquency rates for leveraged loans are currently over 6% (typically less than 3%). This level is approaching levels seen during the 2001, 2008, and 2020 recessions. Office vacancy rates are at record highs, according to Moody’s. Commercial real estate (CRE) prices are in free fall. According to Rosenberg Research, 29% of all CRE and 56% of office loans currently have negative equity. Retail malls are struggling and apartment complexes are being overbuilt (rents are falling).

The pace of CRE foreclosures began with a small number of cases in the fourth quarter. Initially, San Francisco CRE had two large foreclosures. However, the pace accelerated rapidly in the first quarter, and now that the second quarter has begun, large CRE foreclosures seem to be occurring almost daily. The subheadings of this section, viz. The looming CRE/banking crisisThere are two reasons for this. First, as the graph shows, banks hold half of his CRE debt.

As a result, the allowance for loan losses (deducted from bank earnings and, in some cases, capital) is expected to increase rapidly as the quarter and year progress. As in the case of New York Community Bank;
new york cb
(NYCB) One or two major loan defaults in the fourth quarter of last year could have a significant impact on a bank’s financial health. Since this fourth quarter report, with support from former Treasury Secretary Mnuchin, NYCB has successfully raised additional capital. But as CRE foreclosures increase, as they seem to do, opportunities to raise capital will decrease.

As it has done in every banking crisis this century, if financial markets become disorderly or there appears to be large withdrawals by banks with large CRE losses, the Fed will It is very likely that a special “loan system” will be established that will allow for the establishment of Just as they did in March 2023 when Silicon Valley Bank and Signature Bank failed, they secured collateral (and possibly defaulters) and got the liquidity they needed at special rates and terms. Noda.

Nevertheless, as the CRE crisis grows, a recession is inevitable.

Inflation and the Fed

All recent Fed speakers have emphasized the need to see further developments on inflation before starting to cut rates. As a result, interest rates are on the rise.

Notice on the chart that the 10-year Treasury yield has risen from its interim low of 3.79% on December 26th.^th 4.38% as of Friday closing price (April 5th)^th). The next Consumer Price Index (CPI) release will be on Wednesday, April 10th.^th. If the report turns out to be “hotter” than expected, as was the case with the January and February statistics, interest rates could skyrocket even further, and stock prices are certainly likely to suffer. But he doesn’t think that will happen because shelter costs, which account for more than 35% of the CPI index, are delayed in his CPI calculations (so we already know what impact it will have). ).

Rent growth fell sharply in early 2023 and has been negative since May last year (according to the National Rent Index chart above). Because the CPI calculation method uses lagged rent data, the large rent increase in 2022 had a big impact on the year-over-year calculation (a calculation the Fed seems to be fixated on). However, note that in the spring of 2023, these rents fell rapidly and turned negative from June to December. So if anything, rents that account for more than 35% of the index will have a neutral or negative impact on CPI until 2025. This is the main reason why we are not worried about a spike in CPI inflation. Nevertheless, the Fed seems concerned, and that’s important when it comes to markets.

One of the positive (dovish) points from Fed Chairman Powell is that in his recent public appearances, he repeated what he said after the press conference that the Fed would cut interest rates this year. Given the fact that full-time employment is shrinking, existing home sales are weak (mortgage rates are high!), industrial production is flat to declining, and real retail sales are stagnant, the Fed may rather cut interest rates sooner rather than later. I think it’s wise to do so. than later. Nevertheless, the market odds of a rate cut at the May meeting are microscopic, with the odds of a rate cut in June currently at just 50.8%, nearly even odds (see graph).

final thoughts

The employment statistics appear to be strong on the surface, but underneath it appears to be very weak. Full-time jobs are disappearing, and from mid-2022 onwards, the gap between NFP headlines (the only number covered by the media) and the Quarterly Employment and Wages Survey, which once closely tracked NFP The divergence is now astonishing. The fact that almost all of the first revisions of NFP since the beginning of 2023 have been negative may call into question the reliability of his current NFP methodology. And, as you might imagine, some people are screaming “manipulation.”

The rapid escalation of the CRE problem, and the fact that banks hold half of all CRE loans, could mean that the banking system is approaching another crisis. The share of losses in non-performing loans will certainly rise significantly as the year progresses. As a result, we can expect to see “capital” problems in the banking system as this situation unfolds, and in such a scenario we would expect the Fed to once again “save the day” as it has done throughout the century. doing.

While the Fed is currently persuading financial markets that interest rates will be “rising for an extended period of time” and that rates will recover half of their decline in the fourth quarter of 2023, Mr. Powell also said publicly that the Fed He played the role of a dove by repeatedly saying, “I will continue to do so.” Interest rates will be lowered in 2024. ” However, market odds on Friday (April 5th)^th) fell to 51% with the June interest rate cut. It was 59% on Thursday, so the “strong” NFP numbers received an additional boost from the “June rate cut” wave.

However, our view is that, given the CRE issue and its future impact on banks, and the immediate positive impact of falling rents on CPI inflation, lowering rates earlier and more quickly is optimal. I believe that this is a good policy. Unfortunately, we have no influence over the FOMC.

(Joshua Barone and Eugene Hoover contributed to this blog.)