WE DON’T NEED ANOTHER BEVERIDGE
EDU DDA Aug. 13, 2023
Summary: Evidence for the final stage of recession continues to pile up and in a variety of formats; that just makes the possibility all the more compelling. Another retail giant basically admitted consumers have changed because of unemployment prospects, though, as always, careful not to use that specific term. Doesn’t matter because that’s the way all the data keeps pointing, including the one curve which puts together the two friendliest data series on labor and still comes up with that final case.
ECONOMIST WILLIAM BEVERIDGE
Home Depot has been struggling for some time thanks in large part to the Federal Reserve’s rate-hiking program. There are, of course, sectors of the economy which are indeed quite sensitive to interest rates. Housing and home improvement both fall into that category. The issue over the Fed isn’t that, rather in how important those pieces are to the whole and how much of the rest of the system higher (or lower) rates might be able to reach and affect.
Data since the seventies shows they just do not produce much of an impact beyond those limited spaces (and even within them, there is considerable variation). Ironically, a key reason why is housing itself being held back by the lack of available credit in spite of more than a decade (before 2022) of ultra-low interest rates.
The Fed was counting on renewed vigor after the Great Housing Bust boosted by very low borrowing costs to help propel the US into full recovery after the Great not-Recession. Instead, banks tightened up and never loosened so that mortgages never took off and so neither did building. That’s because low rates are a product of what banks were doing not what the Federal Reserve theorizes about credit demand.
There may yet be an upswing in the housing market but it will have to wait for the other side, meaning recession. In today’s corporate report, Home Depot, like nearly every other major company in the past few months, cited unemployment as the biggest threat to its future results if purposefully avoiding that specific word.
They do love their euphemisms:
In an interview with CNBC, Chief Financial Officer Richard McPhail said Home Depot has contended with consumers who have a “deferral mindset” since the middle of 2023. Interest rates have caused them to put off buying and selling homes and borrowing money for bigger projects, such as a kitchen renovation.
Yet over the past quarter, he said surveys of customers and home professionals like contractors have captured another challenge: a more cautious consumer.
“Pros tell us that, for the first time, their customers aren’t just deferring because of higher financing costs,” he said. “They’re deferring because of a sense of greater uncertainty in the economy.” [emphasis added]
A “greater sense of uncertainty in the economy” isn’t more consumer prices. The jobs market has turned a corner and there is likely no going back. Once unemploy-ing workers reaches that unknowable critical threshold, that’s the real end of the cycle.
We’ve been dealing with a partial end since last fall when hiring abruptly sank into a deep freeze. That wasn’t accompanied by the usual surge in layoffs; hiring and firing typically come about closely together. This certainly hasn’t been a typical cycle, though more and more it is starting to resemble one.
Labor hoarding had been the chief defining feature, leaving central bank officials, Economists (same thing), politicians and the chiefs of the biggest corporate names wondering if hoarding would ever become de-hoarding at all. For the longest time, because of how much time it was taking in that half-recessionary, no-hiring stage, many had come to believe it would never happen, Goldilocks assured.
Instead, shock to Japanese CLO buyers, we seem to have found that point of no return over the last several months. Not only are the likes of Home Depot telling us their customers are behaving cautiously because of it, we are also amassing a considerable amount of data and confirmation. The unemployment rate itself, for instance, is a simple yet strong indicator all its own. There is also the so-called real-time Sahm “rule” which is none of those: it wasn’t invented only tinkered-with by Claudia Sahm; it is not a rule; and it also isn’t real time.
By the time it becomes time for Sahm, the recession is almost certainly several months old by then.
Another one derived from the labor data is getting to that same point, if for no other reason than it employs (pun intended) the JOLTS Job Openings (JO) series. In the same way the change in the unemployment rate is even stronger due to the fact the unemployment rate overstates the labor market (participation problem) and is therefore one of the most charitable views of it (undercounting the unemployed), the same goes with JO to an even greater extent.
Numerous problems with the BLS’s version of Job Openings are well-documented by this point, so beyond our purpose here. All we need to keep in mind is that the real figure is almost certainly much lower, thus what we’re using is again the best possible face for labor demand.
The Beveridge Curve plots that demand for labor (job openings rate) against the possible supply of spare workers (the unemployment rate) meaning in this way we’re lining up both of the friendliest views of the current employment/unemployment situation to see what those might tell us. The purpose of this “curve” is to potentially gauge the balance between supply and demand for labor.
There are two “accepted” ways to calculate the job openings rate; one used by the Fed, the other come up with by the BLS. Both end up with the nearly identical results regardless (I’ll present both anyway).
While policymakers and Economists are searching for a possible inflation tradeoff, still somehow believing in the Phillips curve view on prices, what we’re interested in is if we might be able to see if we can pinpoint at least the general area of that possible point of no return, where demand for labor falls off farther because businesses have turned over to firing.
The latest data through June (JOLTS) suggest the economy is right there already and that’s, again, using the best possible cases on both sides. To begin with, after several years of the supply shock with just unbelievable (literally) job openings estimates, the Beveridge curve shifted far to the right which was basically confirming there were more job openings per worker or slack worker and not because the openings were real but because employers post a lot more openings per hire for a lot of reasons including many that have little to do with hiring and legitimate demand for employees.
Despite the numerous flaws, the Beveridge curve had normalized (shifted left) over the last sixteen months anyway. As a result, the latest datapoints (through June) are right in line with the pre-crisis curve (2010s) and right near where it flattens out moving right in the section unemployment is going up much faster than the job openings rate is coming down.
In other words, that spot on the curve representing (we think) the real economy where demand for workers has dropped off enough signaling firms have reached the decision-point on laying them off.
Both versions of the “job openings rate” suggest the June estimates are right above that point at least as it was in the 2010s (another problem with the Beveridge curve is that it has been shifting to the right with no way to correct for the job openings problems). Despite these shortcomings, it is very likely that real job openings as opposed to JOLTS JO is already there for July with the unemployment rate rising to 4.3%.
That rate already implies – using the previous (2010s) Beveridge curve – job openings falling down below the 7 million level (from 8.18 million currently estimated). That would be partly due to another drop in the data alongside a correction to its overstating the true number. Either way, even with a JO figure above 7 million that puts July very close the flat part of the curve, right in the danger-zone for the non-linear surge for unemployment.
Using the BLS version of the job openings rate, the latter doesn’t even need to get that far; 7 million puts it right on the previous curve, strongly implying (as much as this comparison can) the US labor market has very likely turned that rotten corner. Again, it won’t take much to move the next monthly dot closer to that point.
On its own, this would be interesting if still short of persuasive factoring the numerous flaws. Because of them, they make it highly probable the actual condition on either side of the labor market is substantially weaker than they already appear right now. Demand isn’t close to JO while supply is very likely much greater than what the unemployment rate indicates.
However, when you start putting this together with all the rest of the data and anecdotes, including what was just released today by Home Depot, the combined evidence strongly implies the US (and world) is indeed past the point, strongly signifying the last of the recession dynamics. It was that realization which provoked such a sharp response in financial markets.
The significance of Japan’s place in it is one additional point. Remember, the Japanese had purposefully been “reaching for yield” buying boatloads of US corporate junk debt (CLOs) on the premise of a soft landing. Any substantial threat to that soft landing thereby greatly threatens that very same risky junk debt the most. In other words, the Tokyo Nikkei meltdown was itself another acknowledgement of everything here.
It isn’t one thing or another, it is becoming everything up to and including the Beveridge curve which puts together the two most charitable pieces of the labor market together and yet manages to put it in the same condition as all the most worrisome other signs.
One final note and somewhat related tangent: I want to makes sure I point out and highlight the latest data out of China because there was a lot of similarly strong signals of the same no-good variety. Foreign Direct Investment (FDI) had contracted at a record rate (only the second quarter decline in the entire series) during Q2 2024 and that was only the beginning.
Today, the PBOC reported the first outright decline in lending balances (stock) to the real economy since 2005. It was accompanied by more weak credit and especially banking statistics for the month of July. Not only that, the Chinese bond market rally consistent with those plus the state of the real economy (local and global) has achieved alarming proportions all its own.
Maybe most disturbing of all is how authorities are responding to this – not the economic situation nor banking, I mean the bond rally. What the central bank has been up to in recent days is nothing short of distressing all its own.
I ran down the list and the details in today’s YT video and I do highly recommend taking a closer look at them.
Put those together with more concerning data out of Europe today, with the US employment problem growing bigger, increasingly confirmed and then combined with China’s clear yet so far orderly further descent it all means globally synchronized is becoming more so with each passing step. At the very least, you can see why market curves are bull steepening, copper-to-gold is in 2008-09/2020 territory and US$ swaps are right there with it.
It doesn’t mean we’re careening headlong toward a Great not-Recession replay. What all of it does suggest at this still-early stage is the chances the US and the world escape or have any upside remaining have dwindled down close to nothing, leaving only more and increasingly adverse possibilities. The one positive is nothing has happened to that degree yet, at least not to the extent where it has become completely obvious therefore undeniable.
There is still a tiny sliver of the doorway open, though by all accounts it is down to just a fraction at best. Even Beveridge thinks so.
