‘Tis the Season for Seasonal Adjustments.
A visit to my local Lowe’s home improvement store showed the dwindling supply of ghosts and ghoulies being overtaken by the cheery and rosy faces of elves and a fat man wearing a red suit. In reality, these decorations have been omnipresent since July! This week was news-packed and showed some very interesting insights into the state of the economy. Inflation and Jobs data came out leading the markets to believe there is a high likelihood of the Federal Reserve (Fed) still cutting the federal funds rate by 0.25% (25 bps) at their meeting next week. Despite the flood of information, all eyes are still looking to Tuesday’s elections.
Last weekend saw Israeli retaliatory airstrikes against Iranian military targets. The markets took this as a good thing, not because of the strikes themselves but because Israel didn’t strike Iran’s vital oil assets. This led to a reduction in oil prices of about 6% which will be helpful for inflation and energy costs going into the holiday and colder-weather seasons.
We saw the week’s first employment report with September’s Job Openings and Labor Turnovers (JOLTS) from the Bureau of Labor Statistics (BLS). This is the same period where we saw a huge increase in job creations (254K) from the BLS September Jobs report that came earlier in October. The market was expecting about 8 million job openings, and we saw only 7.4M. The Quit Rate came in at 1.9%, which was the low (other than during COVID) back in 2015. If less people are quitting their jobs, this means they don’t think they can get a better job and other employers aren’t poaching employees. There are some inconsistencies in both reports. For example, the September Jobs report stated that there were 785K government jobs created in the month, while the JOLTS report said there were 22K less jobs in the same period. This 785K figure was one of the main reasons the unemployment rate ticked down and caused mortgage rates to spike upwards.
The Conference Board issued its Consumer Confidence report showing that the index rose to 108.7 from 99.2 in October. This is the highest level since January. It is likely that the stock market gains are fueling this rise. This number is weighing on bonds. Barry Habib reminded us of a quote from the famous investor, Sir John Templeton: “The most pessimistic times are the best times to buy, and the most optimistic times are the best times to sell.” We may be at the peak before the sell-off.
ADP came out with a stronger-than-expected employment report for October. They showed 233,000 jobs created versus estimates of 115,000. In an effort for these reports to be consistent even during wild swings during different parts of the year, statisticians will make adjustments to the numbers called Seasonal Adjustments. For example, during the ramp up to the holidays it is expected that more retail hiring will occur. Typically, the reporting will adjust the numbers negatively (downward) to offset this swing. By the end of the year, all adjustments will have been removed and the final, year-end numbers will be accurate. From 2016 to 2022, all October ADP reports showed seasonal adjustments down. In 2023 and this year, they made upward seasonal adjustments. The actual number this year prior to adjustments was 117,000, almost exactly as expected, but they adjusted it up to 233,000. While we don’t know why there was a huge seemingly counterintuitive adjustment, this will be adjusted/corrected by the end of the year. That correction will be good for mortgage rates.
The first reading on Quarter 3 GDP (Gross Domestic Product – our nation’s income) showed the US economy growing at a 2.8% rate. This was slightly lower than the 3% expected. Interestingly though, 0.85% of this number came from the huge government spending that has occurred. An economy can’t be sustained by growth in its government. The growth needs to come from its industry and services.
The Fed’s favorite measure of inflation data, PCE (Personal Consumption Expenditures) came out showing a rise in headline inflation of 0.2% month over month and a yearly decline from 2.3% to 2.1%. The Core rate (stripping out energy and food which is very volatile) rose by 0.3% and was slightly hotter than estimates. The yearly number remained at 2.7%. Remember, the Fed’s target is 2% on Core inflation.
Friday saw the much-anticipated October BLS Jobs report. Unlike the September report, which shocked with a better-than-expected number that has caused mortgage rates to worsen significantly, this report showed incredibly weak numbers. Remember, there are two different reports contained in this release: the Business/Establishment Survey which uses statistical modeling called the Birth/Death ratio to estimate job creations, which gives us the Headline jobs number, and the Household Survey, which is where thousands of families are called and asked about their employment. This Survey produces the unemployment rate.
The Business Survey showed 12,000 jobs were created. This is way under already low estimates of 113,000. Granted, there were strikes and hurricane-related losses, but they didn’t cause this low number. As we have seen throughout this year, the Birth/Death model has overstated job growth. This month the model showed 368K jobs created in small businesses. ADP only showed 4K in this sector. Even with this 368K in modeling, the BLS only squeezed out 12,000 jobs.
Turning to the Household Survey that sets the unemployment report, we saw the rate tick up slightly from 4.051% to 4.145% ,which after rounding shows maintaining 4.1%. This sounds like it shouldn’t be that bad. A deeper dive shows that the reason for the rate staying the same is due to 220K people no longer being in the workforce. That is defined as not seeking work for four weeks or longer. The report did show that employees classified as “not at work due to bad weather” totaled 512K, but they were not included in the unemployment totals as they are still considered employed. We know some of these employees will not be returning to the jobs as they no longer exist. When they join the number of unemployed workers, that will increase the unemployment rate. That is a sad thing, but it will be good for mortgage rates. The household survey also showed that out of the jobs that were lost, 164K were full-time jobs and 227K were part-time.
Looking Ahead:
Next week all eyes are on the election and the Fed:
- Tuesday: ISM Services, 10-year Treasury Auction, Election Day
- Wednesday: 30-year Treasury Auction
- Thursday: Fed Decision Day
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