Public Peek: Truflation US Inflation Update for August 2024
The following is a public peek at our exclusive monthly CPI update, available in full by subscription, here.
The Mysterious Labor Market
Economists and market analysts have been predicting a softening of demand which is in turn the driver of unemployment slowdown. However we haven't seen a slowdown in demand either through consumer spending or retail sales. Additional recent positive sales numbers in the Q2 earnings reports of key retailers including Walmart, TJ Maxx, Nordstrom, Footlocker, Abercrombie & Fitch, etc have reinforced the strong retail environment.
Yet this doesn’t reflect the full picture, as we are seeing a significant uptick in start-up business shutdowns and an increasing number of bankruptcy filings, all suggesting challenges in certain sectors. Despite this, the overall unemployment rate hasn’t risen significantly, which raises questions about the reasons behind it.
The labour force participation has been rising, driven in part by increased immigration, indicating more people are actively seeking work. This larger pool of job seekers could explain why the unemployment rate isn’t spiking, despite rising business closures.
- Labor Force Participation Up: 1.16 million new participants YTD.
- Unemployed Up: 1 million YTD.
Exhibit 1: Labor Participation vs Number of Individuals Unemployed
Source: Bureau of Labor & Statistics
A recessionary labor market requires existing workers to lose their jobs and the size of the labor force to stall or contract, which is what we saw in 2001, 2007, and 2020 but right now the opposite is happening with the labor force now at 158.7 million workers - and has been steadily rising.
The low level of job cuts that we have recently experienced, illustrated by Challenger Gray layoff announcements, has been reported at 461k since January 2024. This suggests that the source of the rise in unemployment is not job cuts but a rise in labor supply. Additionally with the increase in labor supply, it could put downward pressure on wages or lead to more competition for available jobs, which is also what we are seeing in the average hourly earnings for Nonfarm Payrolls, which has reduced from 4.4% YoY in January 2024 to 3.8% YoY in August 2024.
The low jobless claims announced over the last 4 weeks have come in better than expected and as a percentage of the labor force — which is at an all-time high in terms of size – claims look even healthier. At the current levels of around 0.14%, they are at half the range that they were when the 2007, 2001, and early 1990s recessions began. Point being, we need to see claims rise well above 250,000 and stay there into the autumn months before it will be a useful “tell” that recession worries should be front and center. And if the Fed cuts rates in the meantime (as disinflation is giving them room to do), prospects for further job creation should only brighten.
The U.S. labor market appears resilient overall, with relatively stable unemployment and low jobless claims. However, the rising business shutdowns, increased labor force participation, and downward wage pressure highlight underlying vulnerabilities. The market is absorbing a larger number of job seekers, which is keeping unemployment ...