The following article is based on our recent Smart Macro podcast: Jobs Data Divergence Nearing Recessionary Levels.
The US job market is showing signs of acute weakness with an alarming disconnect between the official government numbers and other metrics. According to Chris Puplava, Chief Investment Officer at Financial Sense Wealth Management, the widely-watched non-farm payroll report, for example, has shown consistent job growth of over 200,000 jobs per month for the past three months, while the household survey has shown significant job losses for three straight months.
This discrepancy is concerning, as the non-farm payroll report is often seen as a key indicator of the health of the job market. Puplava notes that the non-farm payroll report is skewed towards models and includes a "birth-death model" that estimates the number of new businesses and jobs created, while the household survey involves the government actually calling people to ask about their employment status.
Growing Divergence Between Household and Nonfarm Payroll Data
"These two reports could not be more polar opposite from each other," Puplava said, emphasizing the need to scrutinize the reliability of the government's data models.
The divergence between these two reports is not a new phenomenon, but it has become more pronounced in recent months. Puplava points out that the cumulative job growth since November shows a growth of 794,000 jobs according to the non-farm payroll report, but a loss of nearly 1.5 million jobs according to the household survey. This is a difference of over 2 million jobs, which Puplava describes as a major discrepancy that is really disconcerting.
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"These are extreme. I mean, these aren't even yellow flags. These are red flags," Puplava said. He also noted that the decline in full-time employment and temporary services payrolls were further evidence of a quickly deteriorating job market.
Fully Employed at Recessionary Levels
Temp Employment at Recessionary Levels
Two major factors that may be masking the current deterioration in the US jobs market in the widely reported and widely watched official data are: 1) The ease of people moving into the gig economy, and 2) lack of eligibility for unemployment benefits. According to Anna Wong, Chief US Economist at Bloomberg, many people who are eligible for unemployment benefits are choosing instead to work in the gig economy, where they can often earn more money than they would by filing for unemployment. This may be contributing to the low level of initial jobless claims, despite the weak job market. Also, given that unemployment benefits were extended for so long after the Covid crash and lockdowns, many people that took advantage of those previously may no longer be eligible.
Puplava also notes that the unemployment rate is rising in a majority of states, with 86% of states showing a rising unemployment rate above their 12-month average. He describes this as a "really concerning picture" that suggests the US economy is likely in a recession, despite the fact that the government data may not yet reflect this.
86% of States with Rising Unemployment Above 1-Year Average
Though many are very hesitant to the use the “R-word” (Recession) after widespread calls for one in 2023 failed to materialize, Puplava noted that the manufacturing sector is still contracting and has been in a recession since 2022, which is another sign that the economy is not quite as strong as people believe. He suggests that the market may not yet be realizing the extent of the economic weakness, as reflected in the data above, especially since Wall Street tends to focus on the widely-followed non-farm payroll report and initial jobless claims, which have not yet shown significant signs of weakness.
In terms of market breadth, Puplava notes that there is some strong breadth in large-cap stocks, with 78% of the S&P 500 companies above their 200-day moving average. However, he notes that the picture is less rosy when looking at small-cap stocks, with only 49% of Russell 3000 companies above their 50-day moving average, and only 59% above their 200-day moving average. This suggests that the market may be getting more selective, with investors favoring large-cap stocks over small-cap stocks.
Russell 3000 Breadth
Looking ahead, Puplava believes that the inflation picture is also shifting, with leading indicators for inflation suggesting a trough around the 3% range for the official CPI measure and possibly picking up to the 3.5-4% range in the months ahead, which could complicate the Federal Reserve's efforts to navigate a soft landing.
See related: Leading Indicators for Inflation Picking Back Up
In response to these economic and market dynamics, Puplava and the Financial Sense Wealth Management team have adopted a more balanced, risk-neutral position in their portfolios, noting that the US stock market is currently trading at expensive levels. While they have benefited from the recent strength in AI and Bitcoin-related stocks, they have been taking profits to preserve those gains, anticipating potential volatility ahead.
Puplava emphasized the importance of vigilance and staying attuned to the evolving economic and market landscape. "It's a high-stress environment where we don't have a universal bullish picture for the economy and the financial markets. They're at odds with each other, which definitely makes being vigilant all the more important."
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To listen to this full podcast interview, see Smart Macro: Jobs Data Divergence Nearing Recessionary Levels.
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