New Data, New Views

AI Door Dash?

We are seeing historically high layoffs to start the year, similar to the start of 2023. However, this year the job cuts are more broad-based, and firings due to “technological updates” have increased. In a potentially problematic development regarding AI replacing jobs, almost 10% of this year’s job cuts were chillingly classified as a “technological update.” The increase in layoffs attributed to new technologies over the last two months is stunning. The total amount of workers shown out the door this year equals the sum of workers replaced by new technology over all previous years since the outplacement firm Challenger, Gray & Christmas started keeping records in 2007. February represented 90% of the total cuts so far this year, so we will be watching the March number closely.

The technology firm layoffs that grabbed headlines last year are down by half this year, perhaps cushioned by AI-related employment. Tech is still the largest job cutter, but the composition of industries firing workers has shifted, and cuts are more broad-based. Financial firms announced 50% more layoffs in 2024, with their total number a close second to technology firings. Also troubling are the large jumps in Industrial Goods, Energy, and Education that have started the year with 10x the amount of layoffs relative to last year. However, this data is not surprising in light of the National Federation of Independent Business Survey data reporting that small businesses are more confident they can replace the workers they fire. This is a potential game changer and could reverse the trend of strong labor demand.

‍Finding Qualified Job Applicants Just Got Easier—Current Jobholders Should Worry

Now that employers are more comfortable with the available labor pool from which to hire, small businesses will be quicker to fire people. Finding qualified workers has been the number one rated problem for small businesses since the pandemic began because so many people chose not to return to the workforce. That fact forced businesses to retain their existing employees based on the legitimate concern that they would be unable to replace those workers. The NFIB Jobs Report released last week showed the lowest number since the pandemic began of small businesses who felt that hiring qualified workers was their biggest problem. This change is significant.

First, small businesses are the major driver of employment across the U.S. economy. Second, employees had job security because even if sales slowed, workers weren’t getting fired because their employers’ number one concern was that they could never staff up afterward. Secure employees translate to solid spending. However, in the January NFIB survey, sales expectations for the following three months were the lowest since April 2023. If sales weaken further, the next time costs need to be cut, management will look to cut staff for the first time in years. If consumption continues to weaken, it could fuel a vicious cycle where companies start firing employees, further dropping sales. That is a recipe for recession.

Employment Report Confirms Our Concern Household Survey Points Down, Not Up

When the payroll report was released Friday, the establishment survey where businesses report their employment situation increased by 275,000, stronger than the 198,000 increase expected by economists. Because better data was announced along with slightly lower wage inflation, stocks moved strongly higher. However, the more important household survey portion of the report was negative, matching the message from the Challenger and NFIB data that pointed to weaker employment.

Last week we said to pay attention to the household survey, which collects data from individuals, not the establishment data that polls businesses, because the establishment survey double counts multiple job holders. The household survey posted a 4.8% annual growth of employment 2 years ago, and it is now only 0.4%, a level that is lower than the average employment growth at the beginning of the last two recessions. There is a way to equate the two surveys, and while the payroll employment method continues to rise, the adjusted household employment data has fallen in December, January, and now February, meaning employment is shrinking, not growing.

Meanwhile, analysts and investors are celebrating, saying this report reduces the risk of labor demand pushing inflation higher, opening the door for the Fed to cut rates in July. The problem is that shrinking employment coupled with slowing wage gains will translate to lower spending, and from what I outlined above, that will lead to even more unemployment, resulting in even lower spending. With investors going in the opposite direction, it does not rule out further asset price gains, but this will not end well.

What To Look for This Week

1. The February Consumer Price Index (CPI) inflation report released on Tuesday is critical because it could unify a currently divided Federal Reserve. The divide is between members who are certain the CPI is on its way toward their stated 2% inflation target, which is the Fed’s green light to cut interest rates soon, and members concerned we are repeating 1986. That year the Fed was encouraged by softening inflation and cut rates prematurely, only to have to raise them again in 1987 as inflation picked back up. Last month, core CPI (excluding noisy food and energy inflation stats) was expected to be 3.7%, came in stronger at 3.9%. The core CPI data, instead of moving lower, has been firm, holding at a 4% annual rate of inflation for the last 4 months.

Economists are again forecasting a 3.7% inflation rate, so beating expectations on Tuesday would make it a fifth consecutive reading near 4%. If that happens, FOMC voters will question whether inflation is on a clear path to the Fed’s 2% target. More commentary will come out from the Fed that they need to postpone rate cuts until there is evidence of a renewed downward inflation path. Because equity investors firmly expect three rate cuts this year, an upset by a higher CPI can potentially tank stocks. While there is virtually no expectation the FOMC will cut interest rates at next week’s meeting, they will publish their fed funds forecast, and Tuesday’s data can be a swing factor. Based on the CPI data, investors will anticipate changes in that interest rate forecast for March 20. Prepare for volatile markets on Tuesday.

2. The U.S. 10-year Treasury bond auction follows CPI on Tuesday at noon E.S.T. and could cause a big shift in yields that will impact markets globally. That potential exists because the Japanese Yen has been rising the past few days in anticipation of a Bank of Japan (BoJ) central bank rate hike. Why does a stronger Yen help our bond market? Japanese investors own $1 trillion U.S. Treasury bonds. When a Japanese institution buys a U.S. bond, it is priced in dollars, so they sell the U.S. dollar to insulate themselves against currency fluctuations.

Lately, buying that insurance against a weaker dollar has been very expensive, causing them to pass on buying Treasuries. Higher interest rates in Japan make the Yen rise in price, which makes treasuries an attractive purchase for them. Because global investors expect this increased Japanese demand, Treasury prices have risen recently. If U.S. core CPI comes in stronger than the 3.7% expectations, rates will rise before the auction, and if those higher yields do not attract investors at the auction, that is strong evidence of weak demand. Bonds could see a fast selloff as investors who have bought bonds recently will sell. Those higher yields will be a negative factor for stocks, and prospects for higher interest rates could cap future economic growth.

3. February Retail Sales is important to watch this Thursday because the January report showed a very sharp drop. Based on what we learned from the NFIB report, workers are no longer insulated from being fired, so if sales do not bounce back, workers are vulnerable to losing jobs for the first time in years. The conclusion investors may make based on weaker retail sales numbers is that the risk of recession is rising unless consumers start spending more.