According to the BLS, the economy added 528,000 jobs in July, beating analysts’ estimates of 250,000. The strong report follows a Fed meeting last week that highlighted it was hyper-focused on the market of work, a sign of a weakening economy. The White House and the Fed are now on the run, ignoring negative GDP growth and hanging their hats on the job market. For now, this message matches their narrative.
The Fed is likely to stick to its aggressive course; however, that only brings the Fed closer to breaking something. A weak report would have given the Fed an excuse to pause and assess the impact of its hikes. A more aggressive Fed will mean it will be far too late to calm the hawkishness when rate hikes really start to bite. The Fed will likely have to adopt an even more dovish stance than during Covid once the carnage from their rate hikes fully materializes.
Figure: 1 Evolution by sector
The unadjusted numbers actually show that this month of July was much weaker than last July and only January was a worse month (by far).
Figure: 2 unadjusted monthly data
The BLS adjusts data to account for seasonality in the hiring market. Typically, unadjusted July is a massive negative number, but that changed after Covid. As shown below, the upward adjustment this month was actually smaller than what is usually seen in July, but larger than the past two years.
Figure: 3-year adjusted vs unadjusted
Break down adjusted numbers
Examining the raw numbers is interesting and shows how much the BLS models alter the final output. That being said, the market as a whole and this analysis will focus primarily on the officially released numbers.
Despite the strong headline report, this month actually saw 5 of the 8 categories behind the TTM average. Construction, Education/Healthcare and Government are the three categories that outperformed the 12-month average. The government was particularly strong, beating the 12-month average by 3.5 times. Government jobs weigh on the economy, so this shouldn’t be celebrated.
Figure: 4 Current vs TTM
The table below shows a detailed breakdown of the numbers. The overall 12-month average is 512k, which was beaten this month.
Key points to remember:
- Leisure and hospitality topped the 3-month average, but was 30,000 below the 12-month average
- The government sector added jobs at all three levels (federal, state and local)
- All three significantly exceeded the 12-month average
- Taking Covid into account, over the last three years the economy has only added 45,000 jobs per month on average
- This shows how much the Covid has still weighed heavily on the labor market
Figure: 5 Detail of the labor market
Although the title number receives all the attention, the number is usually revised several times. Revisions over the past three months were again net negative for a second month. This is a big change from a few months ago. The 12-month average revision is +102.7k against a 3-month average revision of -12.7k.
Figure: 6 revisions
The chart below shows data dating back to 1955. As the labor force has grown in aggregate total numbers, recessions along the way have caused declines in the overall trend. But the trend is still clearly upwards.
The Covid recession can be considered the biggest loss ever in the labor market. The chart also shows how strong the rebound was. The unemployment rate is back to the Covid low of 3.5%. It should be noted that the activity rate fell from 63.4% to 62.1% during the same period.
Figure: 7 Historical labor market
What this means for gold and silver
The strong jobs report will most likely push the Fed to consider another big rate hike in September, as predicted by the CME tool Fed Watch. It also likely means the Fed won’t pivot as soon as the market anticipated it.
That being said, interest rates haven’t risen so quickly in such a short time in decades. With all the debt piled up in the system, it will take time for the interest rate hikes to start breaking things down. It is very likely that by the time the Fed recognizes the weakness in the economy and slows its rate hikes, it will be too late to save the economy with a simple slowdown or pause in rate hikes. Instead, the Fed should probably continue extremely aggressive monetary easing, perhaps even more so than during Covid.
The high number of jobs does not fundamentally change anything. The rate hikes will further cripple the economy and send interest payments to the Treasury skyrocketing. On the contrary, the report will push the Fed to be more aggressive and potentially create even more chaos in the months and years to come. It will be then that the Fed will fight a battle on two fronts (high inflation and a spiraling economy). Gold and silver are the best insurance policy against such a scenario.
Data source: https://fred.stlouisfed.org/series/PAYEMS and also CIVPART series
Data update: monthly on the first Friday of the month
Last update: July 2022
Interactive charts and graphs are always available on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/
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