Weaker Payrolls Will Reward Pent-Up Demand for Fed Pivot

A major reason for the Federal Reserve’s (Fed) relentless pace of rate hikes is the tight labor market that has been remarkably resilient in the face of weak economic activity and stressed financial markets. But that resiliency is about to turn. Expectations surveys across the economy have become quite pessimistic, with businesses expecting lower sales and consumers seeing bleaker personal finances. Last week’s Beige Book from the Fed, with reports of hiring freezes and more cautious consumer spending patterns, confirmed preparation for a downturn. Historically, such a broad and deep deterioration in economic expectations has been a leading indicator for a decline in employment.

Negative Expectations Across the Economy Bode Poorly for Job Growth

Surveys Include: Consumer, Forecaster, Small Biz, CEO, Manufacturing, Housing

Negative Expectations Across the Economy Bode Poorly for Job Growth

Source: Guggenheim Investments, Haver Analytics. Data as of 9.30.2022 for payrolls, 10.31.2022 for surveys. Survey average is average Z-score.

A more technical issue is also signaling an imminent change to weaker job growth. We’re seeing the largest gap since the 1950s between the year-over-year change in seasonally adjusted nonfarm payrolls and non-adjusted payrolls, when conceptually these measures should be equal. This gap is strongly mean reverting, adding additional downside risk to seasonally adjusted payrolls starting as soon as next month.