Let’s get this out of the way now…
The September employment report was absolutely abysmal. The United States added 142,000 jobs last month, well below estimates of 200,000. What’s more, the lackluster report for August was revised down by 40,000 to 136,000. Back-to-back weak jobs reports are the start of an unpleasant trend for the US economy.
To make matters worse, the average hourly wage fell a penny and 350,000 people dropped out of the workforce, putting participation at its lowest level since October 1977.
But these numbers shouldn’t have surprised Wall Street. We have been seeing signs of this slowdown in the US economy for some time and it makes it very clear what the Fed will do for the rest of 2015.
The clues that have dotted Wall Street are the layoff announcements from the companies that are doing the actual hiring, not an estimate of who hired whom and who fired whom.
Challenger, Gray & Christmas, Inc., a staffing firm that compiles all layoff announcements each month, released its September results on Oct. 1, and they weren’t pretty.
The number of jobs that will be laid off, according to a company press release, totaled 58,877 in September, 43% more than the previous month.
Monthly results like this alone don’t tell you much.
But once you put it into context, the data tells you that low rates are here to stay. Let me explain.
More economic weakness is on the horizon
Two important indicators are lining up to show a significant slowdown in the US economy. An important fact to distinguish is that these two indicators have different time frames. For example, nonfarm payrolls are a lagging indicator: this hiring/firing has already happened. Layoff announcements are going off in the near future, a forward-looking indicator.
Another interesting tidbit from Challenger’s statement is that the company noted that at the beginning of the year the layoffs were concentrated in the energy sector, but now it has translated into layoffs in the computer industry and in consumer sectors such as retail and automotive.
This is a big change. It portrays the impact that a slowing economy, lower oil prices and higher wages will continue to have on our employment situation.
And the trend in rising layoffs goes back further than last year. Looking at the quarterly data shows that the last third quarter was the second highest in job cuts since the Great Recession.
These layoff announcements are worrying for the US economy, the markets and Fed Chair Janet Yellen.
The Fed missed its chance
Ms. Yellen routinely includes the labor market as an important measure considered when deciding to raise rates, which is why all eyes are on nonfarm payrolls today.
But the truth is, based on our payroll data, the Federal Reserve could have raised rates a year ago when the US economy was at its strongest: unemployment was steadily falling and employment reports were strong. Past layoff announcements tell me this is about to change.
In short, the Fed missed its shot.
Nonfarm payrolls had been trending higher in recent years, but now those results have started to slide, an environment in which the Fed doesn’t want to raise rates.
This tells us one thing: the US economy will see low rates for at least another decade.
Your quest for yield will not abate and income-generating stocks will be in high demand.