08/09/2022
The latest blockbuster employment report on Friday is puzzling. First, let’s repeat the key conundrum. There has been a 2.7 million increase in workers through June 2022, yet official GDP data shows a decline in economic activity in the first half of the year. What are all these new workers doing?
The official data sources reveal an unprecedented drop in productivity (output per hour worked). Q1 productivity was -7.3% and on Tuesday we will get the first estimate for Q2 direction is currently estimated at -4.5%. Given that the average hours worked was also revised higher for June, first-half productivity was even worse. Two consecutive negative productivity growth quarters of this magnitude haven’t happened in 75 years.
And for the third quarter, we now have half a million new workers in July and an increase in hours worked yet forecasts for 1% GDP growth this quarter—another puzzling set of data to kick off this quarter.
Productivity and GDP are the two most important economic variables—so we need to see more analysis reflecting on the credibility of either the hours worked data or the GDP data. We thought jobs data would come in under expectations, but the robust employment report casts aside the notion our economy is deteriorating rapidly. We will get another employment and two inflation reports before the September Fed meeting. But we clearly will have at least another 50 basis points hike at the September meeting based on this strong employment report.
On Wednesday the 10th, we’ll get the CPI report. Overall, it is estimated to be only 0.2% as the monthly figure because of the tremendous drop in energy prices; however, the core inflation rate is expected at 0.5%. Forward-looking prices have been holding their own or declining. Elon Musk commented that over half of the material costs to produce Tesla’s are now declining for the first time since the pandemic began. That is positive inflation news.
We do have rising wage costs which, unsurprisingly, should be going up based on the tightness in the labor markets and we will continue to see wage pressure and high inflation in the service sector of the economy.
We’ve had earnings reports from about 75% of the companies in the S&P 500 and things were not that bad, particularly given the dismal GDP reports. Beats are certainly not what they were last year, which were the biggest in history in terms of earnings coming in ahead of analysts' expectations. We have some warnings about future profits, but it's likely the equity rally over the last 5-6 weeks was partly due to earnings coming in not as bad as feared.
