Is The Labor Market Strong?

The biggest question on my mind as an investor who focuses on macroeconomics...is the labor market strong? This Friday we will get the non-farm payrolls data which has shown to be weakening off the peak for many months now. However, it is still showing a positive number of jobs created allowing the unemployment rate to hover around 5%. We also have the jobless claims data which is extremely low, meaning it’s indicative a strong labor market. There are obviously many other indicators, but jobless claims is a good tell-tale sign of how market participants view the economy. The market tends to crash when jobless claims skyrocket. I am predicting that the labor market will weaken which would normally mean jobless claims will increase rapidly. I will explain why I am making this prediction and why the jobless claims data may not be a good indicator anymore.

The first chart I have below shows profit margins. As you can see below, they have peaked for the economic cycle. Margins reached near the highest rate since the late 1940s. Because of this you could have predicted they would fall a few years ago before the peak. However, now we have the benefit of knowing they have peaked because of the recent data. We will get new data for Q3 in a few weeks. Although earnings are expected to grow 1% year over year which will end the streak of year over year earnings declines, I don’t think this trend in profit margins declining will be reversed. Declining profit margins causes companies to cut costs in an attempt to stabilize them. This eventually leads to firms announcing massive layoffs and restructuring their businesses. Currently most analysts are not predicting profit margins to continue their decline in 2017. This is one of the reasons why I am more bearish than them on stocks next year.

profit-margins

The chart below shows the non-seasonally adjusted unemployment claims. The level of unemployment claims is at the lowest rate since the 1970s. The U.S. population in 1975 was 216 million while the population as of 2014 was 318.9 million. This means the population adjusted jobless claims is the lowest ever. It’s tough to say that the employment situation is the best ever because of the decline in the labor force participation rate. However, even with the labor market being weak (meaning less people can be fired) the jobless claims should increase when the economy starts weakening at a faster pace.

jobless

Another aspect to keep in mind with these low jobless claims combined with the low labor participation rate is the new ‘gig economy.’ It is becoming too expensive to hire full-time workers, so employers are hiring more independent contractors than ever before. This may be responsible for this quirk in the data. Many independent contractors may not be counted as full-time workers and independent contractors do not get access to unemployment benefits, so they aren’t counted in the jobless claims data. Obamacare and other regulations are behind this change in the labor market. This may make previously reliable metrics of the labor market such as jobless claims become less relevant.

My main prediction is that the labor market is going to continue to weaken. I will hedge my guess that the jobless claims metric will increase because of this new ‘gig economy’ potentially changing things. Given how I already explained its effect on the metric, market participants may already be misunderstanding where we are in the cycle. Therefore, the point I made about jobless claims skyrocketing with a plunging market may be wrong. The market may plunge without a big increase in the metric.

The chart below shows the stock price of Robert Half compared to the price of the S&P 500. Robert Half is the largest staffing company in America, so it gives a great picture of the labor market. Given the potential problems with the jobless claims metric, this indicator is more relevant than ever before. That’s saying something because it has been a leading indicator in the past two economic cycles, as you can see below. The firm stated that it didn’t see the sequential lift in its business that it normally sees in September, saying it was sequentially flat. It saw the same situation in October. The firm also saw weakness in accounting temporary workers due to macro conditions.

robert-half

Conclusion

            The cycle in profit margins indicates that the labor market will be weakening. The traditional metrics may be wrong because of the new ‘gig economy.’ Even if they remain as accurate as they have been in the past, they are still lagging indicators. A better indicator to look at is what Robert Half, the largest staffing company in America, is saying about the labor market. Robert Half stock is weak, so I am on high alert for a market correction and labor market weakness.

Spread the love

Comments are closed.