September Jobs Report: Has the Rot Already Set In?

It could have been worse, but it wasn't good. That's my basic take on the September employment report. Judging the numbers vs. expectations, they were decent. However, taken in the bigger picture, the economy is almost certainly slowing, and the odds of a recession in 2020 have gone up substantially. Headline job gains not that bad Bloomberg's economist survey pegged expectations at a +145,000 increase in non-farm payrolls, and +130,000 including only private payrolls. This month's figures missed by a bit (+136,000 and +114,000, respectively) but with +45,000 upward revisions to prior numbers, it leaves us with basically an in-line report. I think trader expectations were even worse than the +145,000. After the mediocre ADP report and the weak ISM Employment expectations, people were bracing for a bad NFP. Hence, we're getting a pretty good bounce even off an in-line report. The Household Survey, which is used to calculate the Unemployment rate, was more robust, showing job gains of +391,000. This survey is highly volatile month to month, but it is a nice number nonetheless. Combined with a meager increase in the labor force, the strong household job gains were enough to push Unemployment down 0.2% to 3.5%. Looking further out, the outlook is dim While I understand the market's immediate reaction to this number, in the grander scheme, this is a bad report. Or put another way, the only way this report was going to make me feel better about the 2020 outlook was if it was a huge beat. We are on a bad trend, and that trend needs to reverse very quickly. If not, it will mean that the rot has already set in, and a recession is imminent. Using a six-month rolling average, the current level of NFP gains are the worst since 2012. As I wrote in Wednesday's column, job gains running below +170,000 suggests the economy has hit a stall speed. The ISM reports from earlier this week represent additional evidence that the pace of hiring is falling quickly. The Employment segment of both the manufacturing and services survey showed either frozen or outright declines in payrolls were expected. Note that there is a logical lag between when firms report a hiring freeze and when that shows up in the NFP results. For example, people who count as newly hired in the NFP for September are those that actually start on the job. Most jobs take several weeks in between the job opening up and someone actually showing up for their first day. So there's a good chance that +130,000 people who were net gains filled jobs that opened up in July. It is a good chance that when ISM hears that companies aren't expanding, it is that they aren't putting out new openings. It will take a couple months for that to flow through to NFP. So, this report isn't great. The trend is bad. There's no evidence the trend is getting better. Trades I like All the trades I mentioned on Wednesday still look great: leveraged 5-year Treasury, weaker U.S. dollar, and long 5-10 year bonds. The only thing I'll add coming off this number is that the market seems to be putting slightly lower odds on a Fed cut in October. If the Fed takes a pass in October, it will be a huge mistake, and a great buying opportunity for the 2-year. If you get a chance to buy 2's above 1.50%, you should do it as aggressively as possible.

September Jobs Report: Has the Rot Already Set In?

Let's face it, the numbers aren't great and the trend is bad.

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