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Despite a stock-market bounce in October that gave the Dow its biggest monthly gain in more than 45 years, economists are warning that there’s a very real danger of recession in the United States. Mortgage rates are at their highest levels since 2002, consumer spending and business investment is falling and the Federal Reserve is fighting persistent inflation with higher interest rates.
But somehow, US labor markets have bucked the trend. The unemployment rate is 3.5%, a five-decade low. Demand for workers is strong. There are currently 1.7 job vacancies for every unemployed American.
We’ve got all the ingredients for a downturn and yet companies keep hiring.
What’s happening: New data this week will likely show that there were 10 million job openings at the end of September in the United States. That’s about the same as in August and still far greater than the 7 million openings pre-pandemic.
Labor costs have also grown at a rapid clip as employers increase salaries and benefits to attract and retain employees. US employment costs grew by 1.2% in the third quarter, according to Labor Department data released last week.
“While job openings should continue to fall in the months ahead, the fact that they remain well above normal levels should continue to support strong job growth, possibly all the way into 2023,” said David Kelly, chief global strategist at JPMorgan Funds.
The job market is good for workers but it’s not good for inflation. The mismatch between demand for hires and the supply of workers is keeping wages elevated and protecting Americans from a slowdown just as the Federal Reserve is working to cool the economy and limit demand.
High employment numbers signal to the Fed that they must continue their aggressive rate hike cycle to temper inflation. That further increases borrowing costs and slows growth.
What’s different: History shows us that when the Fed tightens, employment drops: During periods of high inflation in the 1970s and 1980s, tightening by the Fed led to unemployment rates of 9% in 1975 and 10.8% in 1982.
The Fed’s own projections find unemployment rates should rise to 4.4% by the end of 2023, nearly a percentage point higher than where they stand now.
The problem is that this time around, the shape of the job market is different. Employers are less concerned about layoffs and more concerned about their ability to fill open positions. So they’re hoarding workers and holding off layoffs, just in case.
Vice Fed Chair Lael Brainard said earlier this month that “businesses that faced significant challenges finding and retaining qualified workers following the pandemic may be more inclined than in past cycles to retain rather than lay off their workers as demand weakens.”
No one is quite sure how the economy is going to land in the next few months. If the Fed does achieve a soft landing, that means it could remain incredibly difficult to hire qualified employees. If the economy does grind to a halt, expect more drastic HR moves.
What’s next: This week is full of labor data and policy. JOLTs job opening data for September is expected to be released on Tuesday at 10 a.m. ET. The Fed meets this week and is expected to raise interest rates sharply again on Wednesday. That meeting comes two days before the October jobs report, which some experts worry will show even more signs of inflation due to strong wage growth.
The Dow’s very good month
The upward bounce is a bit of an anomaly.
The blue chips remain off by nearly 10% this year. Meanwhile, the S&P 500, which closed down 0.8% Monday, has dropped about 20% in 2022. The tech-heavy Nasdaq finished 1% lower Monday and has plunged 30% this year. But both indexes also had strong Octobers. The Nasdaq rose about 4% while the S&P 500 was up 8%.
The broader market is undeniably struggling this year due to concerns about inflation and the fact that the Federal Reserve has raised interest rates significantly to try and defeat the scourge of rising prices.
But there’s a saying on Wall Street that there’s always a bull market somewhere. The Dow proves it, along with a long list of well known, brand-name stocks trading at record highs.
Chevron is even trading near an all-time high. So is rival (and former Dow component) Exxon Mobil (XOM). Big Pharma leader Eli Lilly (LLY) and health insurers Cigna (CI) and Humana (HUM) are also at record highs.
It’s not just energy and health care stocks posting solid gains this year. Several consumer staples firms — companies that sell food and beverages — are thriving as well. McDonald’s (MCD), Pepsi (PEP) and cereal makers General Mills (GIS) and Post (POST) recently hit record highs.
Yelling at Yellen
There’s a clear gender bias in Federal Reserve Congressional hearings, according to new research by James Bisbee at New York University, Nicolò Fraccaroli at Brown University and Andreas Kern at Georgetown University.
The academics analyzed every congressional hearing attended by the chair of the Federal Reserve from 2001 to 2020 and found that legislators who interacted with both Yellen and at least one other male Fed chair over this period interrupted Yellen more, and interacted with her using more aggressive tones.
“Our results point to the important role of societal biases bleeding into seemingly unrelated policy domains,” they wrote.
The daughter effect: Interestingly, the researchers found that the increase in hostility experienced by Yellen was absent among those legislators with daughters.