Date: November 7, 2022

Strong Jobs Report But Look Under The Hood

On Friday the government released the employment report. The economy grew by 261,000 jobs versus the 205,000 estimated. On the surface that is great news. However, when you have a Federal Reserve hellbent on destroying demand, this kind of economic strength only feeds fuel to the higher interest rate fire. The unemployment rate ticked up to 3.7% versus the 3.5% estimated.

Without getting wonky the birth death model, an algorithmic tool used to estimate new business openings and closings, added 455,000 jobs to the report. Right around elections, conspiracy theorists come out of the woodwork on this model, but the truth is that the birth death model has been around for decades and does a decent job except at major turns. I would argue that the economy is at one of those turns right now.

We all know that employment is a lagging economic indicator and may the most lagging. However, as I mentioned all year, there is no way the U.S. economy could possibly be in recession when it’s creating hundreds of thousands of jobs a month. That’s one reason why I thought recession would be a 2023 story. And the Fed is going full steam ahead until the unemployment rate hits 4% and the economy loses jobs. At that point Jay Powell will blink before he gets hauled before Congress for a bipartisan skewering.

The stock market was all over the map on Friday, soaring, plummeting and then jumping. I do not sense that stocks are ready to soar again right here, but we do have this little election tomorrow so nothing should be a shocker. Rather, I think we need some calming with perhaps some lower prices in the very short-term. Also on Friday, bonds fell sharply while commodities flew. The dollar sunk. Software had an awful day and is close to revisiting its 2022 lows. Lots of crosscurrents that need to be worked out.

On Friday we bought IJJ, EMB and PCY. We sold XME and levered S&P 500.


Paul Schatz, President, Heritage Capital