The monthly jobs report keeps tricking investors.
For October, the report stated the U.S. economy added only 12,000 jobs. (This was later revised to 36,000.)
That was much fewer than economists were expecting. It was also the smallest figure since December 2020.
Hurricanes in the Southeast and a strike at Boeing got the blame for the poor figure. But the small number meant eyes were closely watching the November report.
A strong bounce would prove that the weakness in the labor market was a minor blip.
And that’s exactly what we got…
Payrolls for November blew past expectations with 227,000 new jobs. This showed the labor market is back on track.
But that report is misleading as well.
That’s because one overlooked detail is helping a recession signal stay locked in…
Dissecting the Jobs Report
The monthly employment report contains a couple of different job figures. They’re tallied in different ways.
Every time you hear about jobs created or lost during the month, that figure comes from the “establishment survey.”
It gathers data from nonfarm businesses on changes in their payrolls.
You also hear a lot about the unemployment rate.
But here’s where things get interesting… The unemployment rate has nothing to do with the establishment survey.
The monthly payrolls report also contains the “household survey.” As the name implies, this figure comes from monthly interviews with 60,000 households.
Note that we calculate the unemployment rate from the household survey.
Critically, the household survey can diverge significantly from what you hear about in the mainstream media.
So you can have a strong payrolls figure, but looks can be deceiving when the household survey starts diverging…
Locked In
Something interesting happened in the aftermath of the latest payrolls report.
Despite the strong headline figure, odds for a December interest rate cut by the Federal Reserve surged higher.
Inflation levels remain elevated. So you would expect a strong jobs figure to make the Fed less likely to keep reducing interest rates.
But this is where the household survey comes into view.
The most recent jobs report appeared strong on the surface.
But the household survey showed a loss of 355,000 jobs. In fact, the household survey has seen total job losses of 723,000 over the last two months.
That’s why the unemployment rate actually increased in the most recent report.
Those cracks in the labor market are why the Fed wants to keep lowering short-term interest rates.
In turn, that’s locking in a recession signal shown by the yield curve…
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What the Yield Curve Tells Us
As a reminder, the yield curve is simply the difference between long- and short-term interest rates. A popular measure is the 10-year minus the 2-year Treasury yield.
That’s the line in the chart below.
In normal circumstances, long-term rates are higher than short-term rates. After all, people expect to be compensated for locking up their money for a longer time.
But the yield curve will often go “inverted” when the Fed raises interest rates. When short-term yields rise above longer yields, the line in the chart can dip below zero (inversion).
But usually, the Fed will worry it’s risking too much damage to the economy from too high rates. So it will start cutting…
Cutting rates pushes the yield curve back into positive territory.
And that’s exactly what has happened before each of the past four recessions (shaded areas in the chart).
Now it’s happening again. So this is a signal we shouldn’t ignore.
The Fed wants to keep reducing rates to steer the economy away from recession.
But inflation remains sticky. And the recent cracks in the labor market suggest that it may be too late…
Regards,
Larry Benedict
Editor, Trading With Larry Benedict