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Employment up (non-farm payrolls), unemployment up (household survey)


March 08, 2024

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Sometimes, and February was one of those times, the information on the U.S. labor market doesn’t make sense. Many argue that government agencies are cooking the books. However, the counter argument is: Why wouldn’t they cook the books ‘consistently,’ that is, if they cook the non-farm payrolls survey up to show strength in the labor market they should also cook the books for the household survey. The problem is that to keep the ‘consistency’ over time, especially if you have a particular agenda, it means that statisticians would have to ‘change’ the ‘recipe’ every month (i.e., that is, they will have to change their lie every month), which would mean that they will be easily caught. Thus, there is no conspiracy behind these numbers. These are just two different surveys with different characteristics.

In February, the non-farm payroll survey showed 275,000 new jobs added while the household survey showed a loss of 184,000 jobs. How could that be? Easy, as we said above, these are two very different surveys, and they have very different characteristics. Thus, they give, sometimes, very different views of the labor market. While in the non-farm payroll survey an individual can have more than one payroll job during a specific month, in the household survey, that is not possible. In the household survey you are asked if you worked over the last several weeks or months. If you say no but you have been looking for a job, then you are unemployed. If you say no and you have not been looking for a job, you are out of the labor force and not considered to be unemployed.

In the payroll survey, as long as you are in the payroll of one or more than one firm, then you are employed, and you are counted.

What the February non-farm payroll report showed with the downward revisions to December 2023 and January 2024, down a net of 167,000 jobs, is that the surveys are probably still having issues with seasonal factors, which made them adjust the numbers considerably. Thus, we should also expect some revisions to the February non-farm payroll number.

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Why are prices not going back to pre-COVID-19 recession levels?

We have heard that consumers are longing for prices to go back to pre-COVID-19 pandemic recession levels. That made one of us remember the 1970s. At that time, one of us was a high schooler with great ‘future’ income expectations. I remember that on my way to school I would drive (using one of my parents’ car!) by a car dealership and would say “I want to start saving money so I can buy a brand-new Volkswagen Beetle,” which at the time, cost about $3,000. At the time, my income source came from newspaper deliveries. It would have probably taken me about 20 years to save that money if I depended on that source of income while living with my parents and having no other expenses. It wasn’t that I liked the Volkswagen Beetle, but it was the cheapest new car on the market at the time. Of course, I was never able to buy the car, not only because of what it would have meant, but also because the 1970’s stagflation worsened, and car prices surged and never came back down.

As I abandoned the idea of buying a new car and settled back into asking my mom for hers (or taking public transportation), my older brother and I started our stamp and coin collections. By 1979, when I graduated from high school and my brother had finished his first year of college, we sold our stamp and coin collection to fund our backpack travel through Europe for three months. All our pre-backpacking travel plans went smoothly. We bought a book called “Europe on

$5 dollars a day, Scandinavia on $15 dollars a day.” Then, on the first day of our arrival to Europe, reality struck. As we were walking toward our U.S. hostel in Madrid, we passed a newspaper/magazine kiosk where we saw the new edition of our European backpacking travel book. The new edition was called “Europe $15 on dollars a day, Scandinavia on $25 dollars a day.” That is, we started our three-month trip with a daily deficit of $10 dollars per day, per person! And since the airline trip from the U.S. was a chartered flight that had a fixed schedule…we were stuck, we could not come back earlier and cut our losses.

Thus, we adapted, reengineered our trip, ate less (lost about 20 pounds!), slept less and/or less comfortably, and skipped Nice, France overnight, only staying during the day after a small pizza cost us $20 dollars while sleeping on a train, four hours in one direction and then four hours in the opposite direction, for a ‘nominal’ total of eight hours of ‘sleep.’ Good thing we bought the Eurail pass in advance of our trip, so we could hop on a train as many times and directions as we wanted during a two-month period. We also learned fast from students that were doing the same thing as us, and validated the Eurail pass almost a month later so we could extend our travel, i.e., we cheated a bit…and thank God, were not caught! Of course, electronic ticketing would make this almost impossible today so don’t try it, I hear the fines are severe today!

Why do we come up with these anecdotes? Because prices are not coming back to pre-COVID-19 pandemic levels, as we learned when dreaming of buying a Volkswagen Beetle for $3,000 or visiting European countries on $5 dollars per day and Scandinavia on $15 dollars per day. But not because prices cannot come down, they could, but for that we would need something close to a Great Depression, with wages coming down also to pre-COVID-19 pandemic levels. And that is even more difficult because economic theory shows that wages are highly sticky downward. That is, a typical economic adjustment implies adjusting the number of workers rather than bringing down salaries to clear the labor market. Furthermore, wages and salaries, more or less and typically with a lag, have accompanied the recent increase in prices and thus, have been helping Americans catch up with the increase in prices, i.e., inflation.

The graph below shows one measure of real wages and salaries adjusted for inflation (in this case median usual weekly real earnings) and it shows that real wages and salaries have started to increase as firms have adjusted nominal wages to reflect higher prices and inflation has continued to come down.

Our guess is that we want prices to go back to pre-COVID-19 pandemic levels because that would mean that our incomes would have a higher purchasing power if we had those prices compared to today’s prices. However, as we said before, because wages and salaries are probably not going back down unless there is a serious economic contraction that lasts for many years, we will have to continue to adapt to these new prices and worry less about trying to buy that $3,000 dollar Volkswagen Beetle or visit Europe on $5 dollars a day and Scandinavia on $15 dollars a day!

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Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.

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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

The Conference Board Coincident Economic Index: An index published by the Conference Board that provides a broad-based measurement of current economic conditions.

The Conference Board lagging Economic Index: an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month. ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.

ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories.

ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month.

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.

Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.

The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan.

Source: FactSet, data as of 7/7/2023

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