Bank results should see levels begin to normalise
With much of the focus on the earnings season and how U.S. regional banks weathered the Silicon Valley Bank storm, it is easy to overlook somewhat less sexy macro data such as Initial Jobless Claims or Continuing Claims. The Fed most definitely won’t as labour market pressures are a key ingredient when it comes to assessing wage inflation which is in turn critical for Services ex-OER inflation, one of the most important gauges for Chairman Powell. Both of the aforementioned were out yesterday and trends continue to point to a gradual easing from very tight levels.
Starting with Initial Jobless Claims, the figure for the week ended, Friday 14th, came at 245k, compared to lows of 180K, which were seen seven months ago in late September 2022. If we look at the data pre Covid, Initial Jobless Claims moved roughly between the 200k and 250k mark from January 2018 through to February 2020. Indeed 245k would have been the third largest reading in that 26-month period. Continuing Claims also bottomed out in September 2022 at just under 1.3m and have since been on a steady upward trend to yesterday’s 1.86m number. Similar to Initial Jobless Claims, these would have been a relatively high number in the couple of years preceding the pandemic. One of the reasons these have not resulted in higher unemployment is that Participation Rates have increased slowly but surely from Q1 2020 lows, which is good news given the tightness of the labour market.
Another interesting dynamic can be found in the composition of Non-Farm Payrolls. The chart below shows the monthly Change in Non-Farm Payrolls split by sector. The starting point is arbitrarily September 2020, which is the first post pandemic month in which the Change in NFP came at below 1m. If we look back two years ago at March 2021, as a comparison, when NFPs were growing at a rate of 800k per month, the increase in NFP was a lot more widespread across sectors than what it is today. In March 2023 reading, the Government, Leisure & Hospitality and Healthcare & Social Assistance categories explain close to 75% of the change in NFP. Government and Leisure & Hospitality are the only two sectors (apart from the small “Other” category) that have a smaller payroll than in February 2020. The rest of the sectors payrolls are between 2.15% and 7.15% larger than at that date. In other words, in the vast majority of the U.S. payroll, there are more people employed compared to pre pandemic and right now close to 75% of payroll increases are coming from sectors that are lagging. For completeness, at March’s pace, in four months’ time these two laggards would have larger payrolls than pre pandemic. Considering that the remaining sectors are already larger and progress there seem to be stalling, it is not unreasonable to assume that the trend in NFP will continue to slow down in the next few quarters.
For the avoidance of doubt, we are not saying the labour market is weak. In fact it is still very strong. But the decelerating trend is quite clear in many indicators. This is good news for the Fed as the lion’s share of the monetary policy adjustment is yet to be felt in the real economy which means NFP will continue to decelerate but, very importantly, in the context of a very low unemployment rate.