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Back to the Tip of the Spear

CAMS Weekly View from the Corner - Week ending 1/19/24

January 22, 2024

We have addressed what we think of as a tip of the spear for the general employment market in a few editions over the previous year.  To be fair there are a few indicators that could be labeled as such but the Weekly Unemployment Insurance Claims measure is quite high on the list.


There are a few reasons for this one of which is we get a new update every week which offers a fresh view a few times per month.  In addition, if a person loses their employment they are highly incentivized to submit a claim for unemployment being their wages have ceased. 


Furthermore, employers are highly incentivized to lay off employees when their business slows down in light of decreasing revenues and actual lack of work available for their employee base to undertake in light of reduced orders. 


On this note there has been a belief out there in recent years that employer’s will retain their staffing even if their business slows in light of the difficulty businesses have had in attracting employees.  This rings of one of those scenarios where it sounds real nice in theory but upon reality entering the scene said theory gets tossed quickly.


A notable line item in most businesses Profit & Loss statement is their labor costs. 


Any business will be quite challenged to see an already large line item staying consistently high while supporting revenues are decreasing only pushing higher their labor costs as a percent of revenues (an efficiency measurement) not to mention watching their important unit labor costs sky-rocketing higher placing additional pressure on their competitive stance with consumers and ultimately their survival. 


Perhaps these theories have been bandied about from folks who have rarely if ever operated within a private sector business and experienced the heat of such realities?


 Weekly Claims Take Out the 200,000 Level


This past Thursday the already historically low Weekly Claims data caught our eye in light of its lower low reading.  Specifically, 187,000 Claims were submitted for Unemployment Insurance taking out the 200,000 level.  This is exceptionally low through the lens of history.  We had been running in the low 200k area but breaching this is noteworthy!


We are not able to ascertain from these levels that the employment market is red hot per se but what we can say with certainty is with Weekly Claims in the low 200k to now sub-200k the employment market is not limping along begging for interest rate support via cuts.  Offered differently, how can we possibly be talking about interest rate cuts while Claims are consistently posting these types of results?  This leans into lunacy.


The Federal Reserve’s Two Mandates from Congress


The Fed has two mandates from Congress – employment and price stability.  The above addresses the general landscape of the employment market.  We will add to the historically low Claims data with the well recognized Unemployment Rate.  For its part we also see a historically low level of 3.7%. 


For some brief historical context we had seen this Rate go sub 3% back in the 1950’s.  In the latter 1960’s it was in the low 3% area such as now.  After the 1960’s run of low 3% we hadn’t seen those levels again until the 2019-20 timeframe just prior to the Covid collapse.  In the previous two years we have been seeing mid-to-low 3% Unemployment Rate levels.  Think consistency. 


All told, what’s the problem on the employment side of the mandate whereby interest rate cuts are necessary to fix it?  Fix what? 


Let’s Talk Price Inflation Dear Citizen


Speaking to the Fed’s other mandate, back in June of last year – yes June as in 6 months ago – the well recognized Consumer Price Index (CPI) registered a 3.1% year-over-year increase.  At that time (and all the way through to current day) what we call “The Narrative” had assured if not guaranteed price inflation was dead and it was nothing but a waiting game to see this level drop consistently month-by-month to the point of meeting the Fed’s 2% price inflation target within X months.  That was the narrative.  This is the reality.

The above is a chart of the Consumer Price Index (CPI) registering the percentage growth in prices (year-over-year) over the previous decade for some recent context.  Our red circle highlights the growth in prices since June of last year. 


As offered, at that time CPI came in at a 3.1% growth rate with assuredness price inflation was a non-issue - it was over - the Fed had won the battle.  Current day, six months later, our most recent update reflects a 3.3% growth rate for CPI. 


In addition, via our red circle, CPI has not achieved its June level since.  This was not supposed to happen and seemingly (strangely) per the narrative is not actually happening. 


For further context, note our red arrow line highlighting the then “low” growth rate of 3.1% not only remained well north of the Fed’s 2% target but also north of various high level marks over the previous decade.  That is, we still have higher growth rates in CPI than at any time in the previous 10 years and per the chart its growth rate is not falling.  It gets worse.


Chiming in on this general price inflation storyline here in early 2024 the Cleveland Fed District Bank’s Median CPI measure updated 10 days ago reflects just over 5% growth in prices. 


We particularly like this measure as it is designed to go far deeper inside the general societal pricing storyline than many other price inflation measures.  This 5% growth rate remains the highest we have seen since 1984.


In addition, CPI Services reflects a 4.9% growth rate which remains the highest we have seen dating back to mid-1991 – multiple decades previous.  On this note let’s keep in mind that nearly 70% of U.S. economic activity is services related.


Rounding out additional quick views on price inflation are two measures relative to housing that are long standing gauges which are meant to depict shelter costs within the U.S. economy.  These also remain at multi-decade highs.  


Rent of Primary Residence stands at a 6.5% growth rate which remains the highest we have seen since 1986.  Owners’ Equivalent Rent stands at a 6.3% growth rate which also remains the highest we have seen since 1986.


All told, what’s the problem on the price inflation side of the mandate?  To answer, the problem is price inflation remains a problem. 


To wrap up today’s edition, interestingly, interest rate traders have pared back their strong views on imminent interest rate cuts here in 2024. 


Just a few weeks ago when the aforementioned narrative (price inflation is dead and done) went hyperbolic interest rate trader’s priced in a March 2024 interest rate cut as a sure thing – nothing to talk about it will be done. 


As ’24 is unfolding they are rethinking their views and are now pricing a March 2024 cut as a 50-50 coin toss with stronger expectations (meaning: subject to change) pushed back to late spring/early summer.  The bond market has also taken note as their yields (interest rate) have moved up nearly a half percent here in early 2024.


Rest assured, “The Narrative” will not change but reality continues to beg the question:  Why are we talking about interest rate cuts?

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


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