Flip-Flop: Labor Markets Gain While Liquidity Flows Slow
Trends in labor markets and liquidity flows are reversing. Employment continues to rebound while liquidity flows continue to slow. That's the complete opposite of the trends that were in place when the pandemic first hit.
Liquidity flows are a leading indicator. The abrupt slowing in liquidity does raise the risk of a quick reversal in labor market gains in the months ahead. But in the near-term income gains associated with job gains should support moderate gains in consumer spending.
In August, payroll employment rose 1.37 million, following a gain of 1.73 million in July. In the past two months, roughly 80% of the job gains have occurred in private services, or the industries that have been hardest hit by the full and partial closing of businesses due to the pandemic.
The churning of the labor flows---people moving in and out of the workforce due to firms re-opening or closing--is unprecedented. Jobless claims have average 1.2 million a week for the past two months, far above normal weekly averages, but monthly job gains still topped 1 million. The flows are so large and uneven it has made it most difficult for surveys such as the Institute for Supply Management (ISM) and ADP to accurately captures changes in employment levels.
Even the Bureau of Labor Statistics (BLS) is having difficulty measuring labor market activity. The jobless rate fell to 8.4% in August, off 1.8 percentage points from July's rate. But the jobless rate would have been 0.7 percentage points higher if some workers classified as being employed where in fact properly classified as unemployed. August is the sixth consecutive month that BLS stated that the "actual" jobless rate is higher than the reported number.
The household employment numbers look fluky. In August, household employment rose 3.7 million, Nearly one-third, or 1.13 million, occurred in the age group 16 to 24. That's a record increase for this age group.
But the unadjusted number paint a different picture. The actual job gains for this age group totaled 70,000. But in August young workers hired for summer jobs in May and June are supposed to return to school. Since they were not hired earlier in the summer they couldn't be let go like they were in past years. So seasonally adjusted the employment numbers for 16 to 24 jumped. Sounds fluky? It is. A sharp reversal in the employment levels for 16 to 24 will come in the September report.
A few weeks ago I alerted investors to a slowdown in liquidity flows. The liquidity flows index is based on changes in broad money, business, and consumer credit and growth in liquid assets. The deceleration in liquidity flows continued in August.
For the four-weeks ending August 24, broad money is up a mere 0.2% over a similar period in July. That follows a 0.7% gain in July. In the four months, March through June, broad money increased an average of 4% per month. Also, preliminary data shows business and consumer credit is declining in August, extending the month over month decline in credit to three.
The abrupt end to fiscal stimulus has to be one of the factors behind the slowdown in liquidity growth. Federal support payments were injecting more than $750 billion a month into the economy. That record inflow ended on July 31.
Failure to extend federal support payments to people and businesses will lead to additional weakness in liquidity flows. Equity markets will be the initial casualty of weak liquidity flows and it will be only a matter of a few months before that shows up in weaker economic growth and a reversal of some of the recent job gains.