On Friday, Wall Street cheered a better-than-expected jobs report.
Stocks pushed to new record highs thanks in no small part to news that the US economy added 128k jobs in October, a month affected by the General Motors strike and the drop-off of temporary Census hires.
Revisions added 95k to the totals for September and August. Throw in a dash of trade optimism, and stocks powered to a fourth consecutive weekly gain (bottom pane in the visual).
Still, the pace of hiring has slowed, and October’s report was only a “blowout” by reference to consensus. That’s not to take anything away from the report (or from the market reaction to the numbers), it’s just to state the obvious.
The question for many (or maybe this is the question for everybody) is whether the cooling labor market is a harbinger of recession. It’s a generic topic, but an important discussion nevertheless.
As Barclays writes in a new note expanding on a “tipping points model” which stress-tests a stalling US economy, “since the early stages of the recovery, US payrolls have largely increased at a monthly pace of about 200k per month, more than sufficient to push down the unemployment rate even with the steady net inflow of workers into the economy and rebound in participation rates of prime-age workers”.
The chart in the top pane above shows the monthly averages for modern expansions. The three-month average on headline payrolls is 176k after the October report. That represents a substantial slowdown, even as things look better now than they did after the September report.
“There appears to be widespread consensus among economic forecasters that this slowing will continue given the pressures on aggregate demand from softer global growth, fading fiscal stimulus, trade policy uncertainty, and potential limitations on the supply of additional workers with the unemployment rate already at a five-decade low”, Barclays goes on to say, in the same note cited above.
The bank uses a model that employs (no pun intended) monthly payroll gains to “estimate the probability of being in various business cycle phases”. Those phases are: “rapid expansion”, “expansion”, “stall”, and “recession”. The key restriction is that a recession must be preceded by a stall.
Cutting straight to the conclusions (which by definition leaves most of the nuance untouched), Barclays notes that their baseline scenario where monthly payroll gains decelerate to 100k/month by the end of next year lifts the probability of an economic “stall” to almost 30% in Q4 2020 – or right around the election. That probability was just 3% in the third quarter of 2019.
Bear in mind that consensus saw the US economy adding just 85k jobs in October, less than the 100k in Barclays’ baseline, and the pace at which the odds of economic growth flatlining would rise to roughly 1 in 3. What, you might ask, does the bank’s model suggest for monthly payroll growth below 100k?
“Stall risks rise substantially if the slowing in payrolls is more rapid, larger in magnitude, or both, relative to our baseline”, the bank writes, adding that “in a scenario in which monthly payroll gains descend to 50k by mid-2020 and then stabilize, our model thinks that the probability of being in a stall would approach 85% in H2 2020”.
Needless to say, a stalled economy is not something Donald Trump would be pleased with during a campaign that some say will live and die by the extent to which voters are still willing to suspend disbelief in the interest of buying into the (largely false) notion that the president has presided over an economic renaissance.
If you’re wondering how a “stall” affects the odds of the economy falling into recession, Barclays answers that question too.
“Once the US economy is in the stall phase, the probability of transitioning to a recession within a four-quarter horizon (56%) is about 10x higher than the probability than if the economy is currently in an expansion (4.9%)”, the bank says.
This seems like a good time to re-run the following short clip that finds Jeff Gundlach stunning Fox Business with a pseudo-prediction for 2020…