Join Danielle DiMartino Booth, CEO and Chief Strategist at QI Research, as she explores the current U.S. labor market and the economic indicators pointing towards a potential recession. In this video, Danielle discusses the National Bureau of Economic Research’s role in dating recessions, the predictive power of the McKelvey Rule on unemployment trends, and the Federal Reserve’s recent policy shifts under Chair Jerome Powell.

CHAPTERS:
0:00 Danielle DiMartino Booth
01:38 Recession Estimations
03:21 The McKelvey Rule
08:08 Job Gains in 2023
09:00 Top-Line Capitulation
12:45 Tandem Cost-Cutting/Bankruptcy Cycles
14:54 Underemployment Determines Income
16:12 Non-Recessionary Recession
19:55 Surpassing Long Wait Into GFC?

TRANSCRIPT FROM VIDEO:
00:00
Danielle DiMartino Booth, she’s CEO and Director of Intelligence for QI Research, a research and analytics firm and the author of the amazing bestseller Fed Up, an insider’s take on why the Federal Reserve is bad for America. Danielle, it’s the front page of the Wall Street Journal above the fold. Fed may slow interest rate hike pace. She is considered one of the best in the street and I happen to respect her judgment as much as anyone else.

00:30
Again, this is Danielle DiMartino Booth, CEO and Chief Strategist at QI Research. I am so delighted to be back for my second installment with my great friends at ITM Trading. We are really close by, if you will, proximity-wise to two events occurring that make me wanna talk about the labor market. So let’s do just that. We’re gonna jump on to the first slide here.

00:57
And this gives you just a little bit of an idea about how slowly the hands of time move at an organization called the National Bureau of Economic Research. Now, since the time that Truman was in office, my goodness, a long time now, this is the particular organization, the National Bureau of Economic Research, the NBER, that dates recessions.

01:23
One of the reasons that on average it takes so long to date a recession is because there are so many revisions to data that come out with a huge lag time. I’m showing you the extreme example. Normally the MBER comes out within about 10 or 11 months of when recession hits and says, “‘Gee, this is when the recession started’ and it backdates it and tells you when they determined that it started.”

01:53
In the case of 2007, the Great Recession, we call it, it took the NBER 366 days, longer than a year, to determine that the U.S. economy had fallen into recession in December of 2007. One of the biggest signposts that they use is not just GDP. For heaven’s sake, they didn’t know until July of 2009.

02:21
By then they’d already made the call that recession had started. They didn’t know until July of 2009 that if you can zero in on that first quarter of 2008, printing initially with a positive number in front of it, positive 0.6, it wasn’t until July of 2009 that we actually learned that that was a negative print. We wouldn’t see the dust settle on all of the revisions that the statisticians bring in.

02:48
for 10 years and three months. That’s how long we had to wait and see exactly how long and protracted and deep that recession had been. One of the things the NBER used however, to say, gee, it looks like recession started in December of 2007, just a little over a year later, was the labor market.

03:12
Jumping onto the next slide. One of the ways that we tell that the labor market has turned, if you will, the inflection point, is something called the McKelvey Rule. A lot of people talk about the SOM Rule, which has a little bit different parameters to it, but Edward McKelvey was the chief economist at Goldman Sachs. Bill Dudley, who went on to be the president of the New York Fed, worked for Ed when I met him. And that was when I was…

03:42
first introduced a couple of decades ago to the idea of the McKelvey Rule. What is the McKelvey Rule? Because it has a perfect track record. That’s what we wanna recognize. It says that an 0.3 percentage point rise in the three month moving average unemployment rate compared to the last 12 month low.

04:05
February 1970, February 1974, January 1980, the list goes on and on all the way down to October of 2023, where we are today. And of course, December of 07 before it. I’m not counting the decline that happened during COVID, because I consider that to be kind of a manmade event, right? They flipped the switch off, they closed the economy, they flipped the switch back on, they reopened it. Did that really constitute?

04:35
a two month recession in March and April of 2020, given the economy and the stock market, everything else took back off like gangbusters. So I don’t really consider that to have been a recession in any event. In any event, the McKelvey rule was triggered in October of 2023.

04:56
And that’s why I’m not a crazy person. That’s why I’m of the opinion of the mind that that is exactly when the NBER is going to backdate the recession to having started in October of 2023. And the funny thing is, or the not so funny thing, it depends on what your position is, right? As an investor and where you think the economy is. But it looks like Jerome Powell has come around to my way of thinking.

05:22
Last Wednesday at the podium after the FOMC meeting had concluded and the statement had been released and it was time for the Powell press conference. He said, you know what, for the last several years, we’ve been focused on inflation. That’s been our primary focus. And for several years now, he’s been saying that if we bring inflation down, then the labor market will follow and that that’s going to be the best thing that we can do for the labor market. But last Wednesday.

05:51
He shifted his focus. He said, you know what? We’re back to being a dual mandate fed on an official level. He was concerned about indeed.com and the job postings there declining as consistently as they have. Indeed also has a wage tracker that shows that wage inflation has come down precipitously. I’m not sure exactly which indeed data he was referencing. It’s unusual to see.

06:18
a Fed chair reference anything but the Bureau of Labor Statistics or Department of Labor data. He also spoke to the conference boards data that showed that Americans who lose their job now see it as being the most difficult time since 2011 to get another job. So that focus of Powell’s has shifted. This also probably played into his thinking. Because Powell had seen this.

06:47
in a report that came out the prior week by the Bureau of Labor Statistics showing that when you dispense with the survey, it is an establishment survey that produces the non-farm payrolls that are announced every month. That’s a survey based on 700,000 establishments who are, they’re surveyed. On a quarterly basis though, the census collects hard data.

07:17
from 1.6 million US employers. And it combines all of those numbers to come up with the hard, hard, hard data on what actual employment was, not surveyed, but actual. And what we learned was in 2023’s third quarter ended September the 30th, 2023, what we learned is rather than

07:46
a positive 640,000 jobs that we had thought had been created, according to the Bureau of Labor Statistics, instead we had seen job losses of 192,000 in that quarter. So this is kind of important when you think about the McKelvey rule having been triggered saying, hey, it was October of 2023 that it looks like, that it looks like the United States economy was in recession.

08:15
According to this rule, lo and behold, we hear now that there were job losses in the third quarter. I will tell you that the McKelvey rule was triggered in 1974 and in 1981, ahead of two very brutal, long U.S. recessions. Historically speaking, the McKelvey rule was not triggered until three months into recession, according to when the NBER dated it. And that’s, it’s very, it’s very possible.

08:44
that recession might have started in the third quarter of 2023, given that we know that there were job losses in that quarter. So it might be dated back to September or August of 2023. We’ll know soon enough. Something else happened on Non-Farm Payroll Friday. Something highly unusual happened on Non-Farm Payroll Friday. And that is that the mighty services sector that employs 80% of US workers

09:13
we saw negative employee employment index prints come out of S&P Globals, Services PMI, and the ISM Service Survey. So again, this applies to 80% of US workers and both of them printed in deeply recessionary territory. No reason to linger on this, it’s just know that

09:40
The ISM Service Employment Index has a very long and rich history typically when you see something with a 45 handle on it when 50 is the line that denotes expansion from contraction. Typically once you see something with 45, you are already in the soup in recession. We’re learning something similar with data out of Challenger, Gray, and Christmas. Challenger, Gray, and Christmas, you may know, they track employment data.

10:09
using two prisms, the prism of job cuts that have been announced and the prism of the happier prism of hiring plans that have been announced. When you net one from the other, you typically want for that to be positive. You want for there to be more hirings announced than firings, if you will. That has not been the case for the last six months, however. We’ve seen six straight months now when…

10:39
there were more job cuts announced than there were plans to bring on new hires. As you can see, historically speaking, that red line there, which is non-farm payrolls, also tends to, of course, with revisions in hand, tends to follow that into negativity. We will probably see with revisions that that red line was no longer above the line, but indeed below the line showing job losses. On that note,

11:08
we saw something quite extraordinary in the immediate aftermath of the pandemic well into 2022. And that was that was this kind of quiet quitting revolution. I call it the take this job and shove it quotient, you know, where you you know, that the job market is strong enough that you can quit your job, and you can get another job in a heartbeat. So that was very prevalent.

11:35
because we did pay Americans to not work. We paid for their rent. We told them they no longer had to make their car payment for a good bit of time. Student loans were on hold for almost four years. Of course, there were the rental and the foreclosure moratoriums that were going on at the same time. And we paid extraordinary amounts of unemployment to such an extent that for a good while,

12:04
The power seat really was with US employees as opposed to employers. That has disappeared. We have fresh data that you’re looking at out of the Philly Fed that tracks the probability of a worker moving, the probability of a worker being mobile, jumping, job hopping, going from one to another. And we are indeed, if you look to the very end of that red line,

12:33
we are where we were during the Great Recession. So there’s yet another indicator that job insecurity, if you will, has been increasing. The bankruptcy cycle is yet another tall tale sign. We’ve just had the largest healthcare bankruptcy in quite some time, I believe liabilities of up to around 10 billion. A major hospital chain is filed for.

13:01
chapter 11 and of course these types of events, they tend to herald in the worst cases, what we call permanent job losses. What are permanent job losses, Danielle? Well, anybody who has been out of the workforce and looking for work for six months or more, they are considered to be permanent job losses. Now we’ve got 25% of the pool of unemployed.

13:29
who have been in this bucket. Actually, it’s higher than that with the most recent payroll print, but now we’re 13 months in a row of at least a quarter of the pool of unemployed being among permanent job losers. Another thing that we’re seeing is tremendous growth in part-time workers for economic reasons. In other words, they’re taking the part-time work even though they would rather have full-time work. They can’t get it. So these are two, again, tall-tail signs of…

13:58
recession, something that we don’t necessarily have up that we’re showing you is that we’ve also seen an explosion of the number of stores and restaurants that are being closed. It was just today as we were getting ready to film this segment, I learned that Wendy’s is going to be closing 100 of its weakest performing franchise locations. And these announcements, they just keep coming one right after another.

14:26
Of course, we’ve seen Joanne Fabrics go in and out of restructuring Route 21. We’ve seen all of those changes are going to go straight into liquidation, and there’s rumblings out there that Red Lobster could also be the next to go. But bankruptcy cycles, they go hand in hand with people working part-time for economic reasons and or worse, not being able to get a job. Let’s stick with part-time for unemployment, part-time for economic reasons for just another minute here.

14:56
when you’re tracking the income generating capacity of an economy that is 70% consumption, right? So it’s 70% consumption means that the United States economy, 70% of GDP is consumption, the United States economy relies greatly on what we’re making, what we’re bringing home in our paychecks. That is the ultimate determinant of income capacity. So to understand that better,

15:25
look not to the U3 unemployment rate that is announced every non-farm payroll Friday, it’s 3.9%. Instead, focus on the underemployment rate, much higher. And that shows you the percentage of the population that would rather be working full-time, rather be getting that bigger paycheck. It’s one of the reasons that we’ve seen

15:53
the proliferation of individuals who are working full-time and part-time jobs. In addition to that, let’s say your spouse loses his or her position. In some cases, you know, it may turn out to be the case that, that one or the other maybe starts driving Lyft or Uber at night to bring in that extra income. We’re also seeing an extraordinary phenomena, truly extraordinary.

16:19
Phenomena in the current episode and that’s that we’re seeing a spike in health care and education Job cut announcements. These are considered to be what economists think of as Teflon type of sectors People in these sectors just don’t lose their jobs. They’re considered to be recession proof We’re always gonna need to go to school Our children are always gonna need to go to school and we’ll always have a reason to go to the doctor

16:45
or go to a hospital, right? So we consider these to be acyclical industries that are very much impervious to recession. And yet here we are. We’re seeing entire colleges announced that they’re going to be closing. And as I just mentioned, one of the largest bankruptcies that we’ve seen thus far this year is going to be a hospital chain. We’ll see what that looks like if they can come successfully out of restructuring. But pay attention to this because it is

17:14
Highly unusual. We’ve also seen the small businesses throughout the country begin to flag as their biggest problem, poor sales. We’re not bringing enough in, we’re not bringing enough revenue and we’re not bringing enough sales and we’re talking about the mom and pops. But of course, small businesses employ more than any other sector in the US economy. So we pay attention to when they’re starting to have poor sales, when they’re starting to miss.

17:44
on their revenue projections because of the very, very tight co-movement, the very, very tight correlation, 0.83 correlation with the unemployment rate. In other words, this is yet another reason to anticipate that we’ve seen the bottom in the unemployment rate and that Federal Reserve Chair Powell is right in focusing on the Fed’s next move being to cut rates.

18:10
Something also unusual for the current episode is that we really have not seen appreciably large construction job losses, but we do see it coming down the pipeline despite the Inflation Reduction Act, which of course should be in in in air quotes because now you’re talking about unionized workers, ESG, DEI initiatives that are attached to the kind of spending that the government is putting out there.

18:38
and again, unionized workers. So you’re gonna be spending more than you otherwise would, but some of the infrastructure spending has prevented the construction job losses that we would have normally seen by this juncture in the cycle. What we’re hearing, however, from plans to conduct construction projects from the Dodge Momentum Index, from the Architectural Billings Index, which precedes the Dodge Index by about…

19:05
nine to 12 months where the leading indicator of a leading indicator for sets, which you always want to know, you want to know what’s coming for the economy. You don’t want to be driving through the rear view mirror. But we’ve seen both of them come down very quickly and plans to, to break new ground, new construction, anything in the private sector really has come cascading down. And indeed, we saw that orange line on that slide. We saw construction job openings.

19:35
hit an air pocket in March. And indeed, what we’ve seen with the most recent data out on non-farm payrolls is that construction job growth really has slowed appreciably. I think this is going to be the next shoe to fall after a long wait. So this is gonna be today’s final slide. And I’d just like to put into perspective for you what the…

20:03
current cycle looks like through the eyes of the Federal Reserve. How long can Powell hold off? In theory, if he was to hold off until after October, in other words, not cut rates in June or July or September, my goodness, we’re going to have how many payroll reports in between now and then. But only if he gets to October will the Fed have waited as long as policymakers did.

20:32
ahead of the Great Recession. The reason I bring that parallel up because we’re already 10 of the 15 months there is that if you wait for too long to cut rates, and then you start to be in tenuous territory, then you start to risk having waited too long and committing a policy error such that maybe we’re not talking politely as we are today about.

20:58
basis point decreases in the federal funds rate, but rather having to pull out the big guns and do 50 basis points or 75 basis point rate cuts in order to try and play catch up because as an entity, the central bank simply waited too long to start cutting rates. And again, we’re already at the second longest in history looking back from when we had our last rate cut until where we are.

21:29
today if I had to guess if it’s not going to be the July FOMC, and there’s a possibility that it won’t be. Chair Powell said that he’d have to be sure that the 4.0% year end unemployment rate target is sticking. In other words, it is not gonna kick back down to 3.8 or 3.9% before he pulls to the trigger. But my best guess today is that we will be waiting until the September FOMC.

21:55
He did state at the podium, you know what? The calendar’s not gonna make one bit of difference to me if it’s the right thing to do to lower interest rates. I’m not going to let the fact that the September 18th FOMC is the FOMC that precedes the election day. He said he would go ahead and lift off at that point if need be. And I think the best thing we can do at this point is to take him for his word when it comes to US and the unemployment rate.

22:25
That’s all that we’ve got for today. I hope that you are edified and entertained and understand a little bit more about the US labor market than you did just a few minutes before. Again, this is Danielle DiMartino Booth here with my good friends from ITM Trading. And I really do appreciate your time today. Until next time.