It won’t surprise you to learn that SocGen’s Albert Edwards is skeptical this week.
Skeptical about a lot of things (and quite possibly about everything), but particularly about the notion that the US economy is “booming” and, of course, of the notion that it’s a good time to pile into equities.
If you know anything about Albert, you know he goes to Jamaica for two weeks early each year, and 2023 was apparently no exception. “Having landed back in the UK last Friday after my usual two-week January sojourn, I was welcomed by blockbuster January payroll data,” he wrote, of the much discussed US jobs scorcher.
Edwards eschewed the temptation to deride the headline payrolls print as abject farce. He did use the word “farce” on Thursday, but he also expressed “some sympathy with government statisticians” considering that unadjusted payrolls plunge three million every, single year in January which “gives statisticians a tricky job to do.”
It’s worth noting that Albert harbored a pretty optimistic outlook for the jobs market due to the simple fact that firms will be loath to fire workers they had to bend over backwards to hire, especially when finding new ones (should you need them) will likely be expensive and difficult.
“Companies are more reluctant to shed workers after having made Herculean efforts to find and hire them,” he wrote. The good news is, that points to resilient spending, as consumers are more likely to have jobs even if the economy takes a turn for the worse. The bad news, Albert said, is that it’ll probably “make the Fed more likely to overdo the rate hiking cycle,” while labor hoarding also leaves corporates vulnerable to margin compression, which could in turn lead to lower business investment. (That may already be happening, by the way.)
Edwards focused Thursday on the latest Senior Loan Officer Opinion Survey, and particularly on lending standards for small firms. Suffice to say you can make a recession case.
The color accompanying the January vintage of the survey was unequivocal. “Over the fourth quarter, significant net shares of banks reported having tightened standards on C&I loans to firms of all sizes,” the Fed said. “Banks that reported having tightened standards… cited a less favorable or more uncertain economic outlook, a reduced tolerance for risk and the worsening of industry-specific problems as important reasons for doing so.”
Editorializing around “yet more severe tightening of credit conditions,” Edwards noted that historically, “this [kind of] extreme tightening in US bank lending standards to the corporate sector has always coincided with recession.”
Albert doubts this time is different. “Like all the other key indicators screaming recession, investors ignore these reliable early warnings at their peril,” he wrote.
It would be interesting to map the Edwards data above against credit spreads, maybe on a time series. Intuitively, I would guess the data above leads spreads widening.
A job-hunting millennial I know tuned me in to a possible trend consistent with Edward’s point about companies resisting the need to shrink their labor. The job-hunter noted (with dismay) that he’d been chasing job openings where the company’s internal messaging was “hiring freeze in effect”. So some companies are leaving open positions that they don’t actually intend to fill any time soon. It makes sense to me – job reqs are not easy to get approved, after all, and a hiring freeze could be temporary. Put another way, there’s a lag between a hiring freeze and closing out a bunch of positions altogether. Purely speculating, but if that phenomenon scales up to JOLTS level, then the openings data can be overstating actual hiring intent by companies. Don’t believe everything that JOLTS tells you when the economy is at an inflection point.
Good point. My brother in law had a verbal job offer from Amazon rescinded and explained as a hiring freeze. (He’s an electrical engineer with good experience.) That job and all the other ones that were posted at the time were still up months later, not sure if they still are. The high school I work in also has openings posted for every department but we are not actively hiring, just proactively building a candidate list because there has been so much turnover.
Related, Dave Rosenberg flat out called the JOLTS data skewed because so many jobs are posted on multiple platforms that they are being mistaken for unique openings. Not sure if that’s true but thought it was insightful.
It does not appear to be collected from platform Job Postings. https://www.bls.gov/opub/hom/jlt/data.htm
Good note, that bit about lending standards tightening is thought provoking.