Something Strange Is Happening in the Labor Market

0:00 Hey everyone and thanks for jumping back into the macroverse. Today we're going to talk about the most recent labor market report and many of the mixed signals that we got. We're going to try to decipher what's actually going on and why the market is having a hard time understanding what the Fed is going to do next. If you guys like the content, make sure you subscribe to the channel, give the video a thumbs up, and check out the sale on ITCremium at intothecryptoverse.com where you can get access to these charts as many as well as many of the dashboards that we're going to show if you would like to follow along. I don't really talk about the macro as much, but we check in with it about once a month or so. and then as a reminder, as always, we do have the ITC conference coming up here. in just a few months and ticket prices will be going up on September 1st. So, make sure you guys get your ticket if you would like to attend. Let's go ahead and jump in. So, we're going to start with the total non-farm payroll because expectations were completely missed. I believe we were expecting like 80,000. We actually came in at 23,000.

1:16 Now, historically, when this starts going down over a longer period of time, it can indicate a contraction. Now, sometimes you'll have down months, for instance, like you know, July to August of 1997, and it's not necessarily a contraction, right? So, that's why we said it needs to be a durable drop where non-fin payroll continues to drop. If you go zoom in over here, you can see that it's been generally trending up with some down months. And so what I would encourage us to do is to first of all, we can go look at the month-over-month change. And what you'll notice is that there there, you know, back in 2021, 2022, 2023, and 2024, there were really no negative month overmonth changes.

2:06 It wasn't until 2025 where we first got one. And then you can see later in 2025, we started to get a few more and it's just been picking up, right? So clearly there is some weakening there. Clearly because 2021, no negative months in terms of total non-farm payroll. Now we're getting them. Now, if you look at it quarter over quarter, it kind of cleans up some of that. And so when you're looking if you're looking month over month any given month and can be negative just because of some random event quarter over quarter now you're comparing you know to several months before you're going to have fewer sort of false flags.

2:51 And in this case you can see it didn't go negative until about late 2025. Now where it gets really interesting is when you look at the year-over-year change. When you look at the year overyear change of total non-farm payroll historically when it goes negative it's been a recession. It has not gone negative. Right? So if you're like well why are we not in a recession if it's negative? It's not negative. It was negative for the month not for the year. Now, if you zoom in, it was pretty close to going negative earlier this year, back in February, but you can see that it bounced up a little bit. Now, if you look at a percentage change, just to kind of put this in terms to where we can really understand it. Back in 2022, the employment level was growing total non-farm growing 5% a year. So even though things felt bad and some people said it was a recession because we had two consecutive quarters of negative GDP, that wasn't really supported by what's actually going on in the labor market. And furthermore, one of those quarters of negative GDP was eventually revised upwards, I believe. So it ended up not even being two negative quarters of GDP in a row.

4:07 When you look at the labor market, you can see we're adding we were adding 5% to total non-fin payroll basically every month. Four to 5%. But you can see that that has changed. Look how we go through 2023, it weakened. You get into 2024, it then was at 1% less than 1%. Now we're basically at 2%. So effectively, there's basically no net job creation going on right now. Very there's a little bit, but it's very, very small.

4:40 And so what that means is that there's not a lot of margin for error. If the Fed were to misstep at any point in the coming months, coming year or two, it could easily turn this negative. Easily. Now again, a negative non-farm payroll print does not automatically mean the stock market has to drop 50%. Just because the stock market dropped 50% in 2008 and 2001 doesn't mean that every recession has been like that.

5:16 There's been plenty of recessions where you just had 20% drops, 30% drops, which can always happen. And if you're an investor here and you're constantly worried about that, you shouldn't be here is is is essentially what I'm trying to say, right? Any good investor that stays investing for a long enough period of time will experience those draw downs. You just will like I've accepted it a long time ago for for years and years and years. I've just DCA low expense ratio index funds as as far as the stock market goes. I don't know what's going to happen but when I buy them I'm not buying them for tomorrow.

5:52 I'm buying them for 20 years from now. Okay. So that's kind of how I think about it. In the short term, things can always be scary, but that's why they call it climbing the wall of worry. This is not negative yet, but again, there's not a lot of margin for error. So then you would expect that we had a negative non-farm payroll print. Therefore, it would stand to reason that the unemployment rate would have gone up, right? would make sense. But no, the unemployment rate continued to drop and now it's actually dropped from 4.5% last November all the way down to 4.1%.

6:39 So it's gone down4% basically over the last 7 8 9 months or so. How can that be? How can you have fewer draw fewer jobs but yet the unemployment rate is going down? You would expect that to not really make a lot of sense. But one of the main reasons, not the only reason, but one of the main reasons that the unemployment rate went down despite the fact that we lost jobs is if you look at the labor force participation rate, you'll notice that that's also been falling off a cliff. So, it is true that you don't have as many jobs, but there's also not as many people looking for a job. If you're unemployed and you're not looking for a job, you don't count as in the unemployed statistic.

7:37 What the unemployed statistic is looking at is how many people are out of a job but want a job. If you don't want a job, it's not going to count you. So, the labor force participation rate since November has dropped from 62.5% down to 61.4%. So, more than a full percentage drop in the labor force participation rate, which kind of helps explain why the unemployment rate has been trending down despite there being some weakness in the labor market. Now, the weakness in the labor market is not coming from layoffs.

8:20 Now, you've probably seen some headlines about some pretty big layoffs, but there's always layoffs in every economy. Even when things are going incredibly, incredibly well, there are still layoffs. There's always layoffs because there's always businesses that are that are going bankrupt, there's always businesses that are restructuring. There's also just people that get laid off for whatever reason. There's always layoffs no matter what. And what you'll notice is that while layoffs have been trending up, we're basically just at pre- pandemic levels, right? Like this would not suggest recessionary territory right now. You can see what happens in a recession. It really goes up. We haven't had that, right? We've just gotten back to the prepandemic levels. Now, if you don't trust this, you can also go look at something like initial claims.

9:09 When you look at initial claims, initial claims a few weeks ago just printed the lowest level in in a long time, like 189,000. The last time it was that low was probably 50 years ago. So, a lot of companies aren't really laying people off right now. They're just not. Maybe because they saw what happened in the pandemic where it was hard to find the right people and they just don't want to do that. But we have not entered into that feedback loop of layoffs leading to less demand which lead to then more layoffs. We are we are not in that right now. So layoffs are low. Initial claims are low. So then what is it? What do we mean when we say there's some weakness in the labor market? Well, we already covered one of them. Total non-farm payroll was negative and it's not that far away from going negative year-over-year.

10:00 If you look at job openings, that one has mostly been trending down, but recently it showed a little bit of resilience. This last month it it trended down. If you look at the total temporary cell what was it? I think it was the the help services total temporary help services. That one had been trending down for a long time. It started trending back up recently.

10:32 So, there's some pockets of weakness and pockets of strength. Now, some industries feel like they're like in the the deepest bare market that you can imagine, right? Like, think about the altcoin market. I mean, like, you know, the altcoin market has, you know, I mean, look, every single day there's bankruptcies basically. I mean, I see a new post on Twitter. Yeah. And it's Twitter to me every day. Basically, there's a new company going under. So there are pro you could argue in some industries they're already feeling what a recession would feel like. Remember crypto is further up the risk curve. It's going to get hit first before other things get hit. But then other industries don't really feel that bad. Now what's also interesting is like the AI. I mean yes AI if you look at semis recently there there was a a correction but so what right? They're still up a lot.

11:24 sometimes the biggest disconnect is regionally. And we actually have a lot of new charts that I I'll show you some of them. But regionally, if you're in the United States, you might feel like you're in a recession. If you're in parts of the United States, and then other parts you feel like things are great. Now, look at what I'm talking about. If we look at a map of the number, a map of the states, the United States, where the unemployment rate has gone up over the last 6 months, it's just kind of hit or miss. Like some states has gone up, some states that actually went down. To give you an idea of what a recession would look like, scroll this back to 2008. It's the whole country. The market will always look for a reason to go up, right? or it'll it'll just go up, I should say. It's not looking for a reason to go up. The market will go up as long as there's like a pocket of optimism somewhere.

12:23 It will climb the wall of worry because it'll say, "Well, you know what? Yes, I know that maybe this region of the United States is doing poorly, but over there they're doing great and so we're going to keep climbing the wall of worry." Where the recessions happen is when there's no silver lining to anything. Right now, there's still been the silver lining, right? There's still places that are doing okay. And if you play this, right, if you just sort of looked at 2021 22, there's pockets, but there's always a spot, right? There's always a few spots where it's okay.

12:55 There hasn't been a period in the last several years where it was the entire country. Not like what you saw back in 2008 and 2001 where it's literally the entire country. So, we have to consider that. Now if we if we count these up as a function of time and look at the number of states where the unemployment rate is rising and we look at just over over say the last 6 months you can see that it's you know it's reached some high levels but there's always been a small pocket. You can see it never went up to basically being the entire country. I guess you could argue that in 1990 it wasn't the entire country, but also guess what? In 1990, we had a 20% correction in stocks. And you know, we already had a 20% correction in stocks, right? Back over here with the whole tariff stuff. We had a 20% drop. That 20% drop quantitatively is not necessarily any different than the 20% drop we had in 1990. And by the way, that actually did correspond to a recession.

14:02 But you can see that it has not been the whole country and so the market continues to climb the wall of worry. Now thinking about the unemployment rate, some of you are not from the United States and you probably get somewhat tired of me only ever talking about the United States. We have started to add some other regions as well. for instance we can look at the unemployment rate for various countries right so if you want to look at various countries you can look at the United States you could then look at say like Japan Canada New Zealand I'm going to New Zealand next month so you can see the New Zealand unemployment rate has been trending up South Africa way up there Switzerland a lot lower the UAE you've got China Brazil and so on and so forth Mexico, the Netherlands. What's really interesting is we can average these out, but I don't want to average them in a way that weights them all the same. I want to weight them by their GDP. So, if we average out a lot of these different countries, we might ignore a couple of them just because we don't have the data series going back far enough. You can read the description here if you want to pause the video and read it. If you average them out and weight it by GDP, you get a chart that looks like this where the unemployment rate has been slowly trending up, but it's kind of stalled out recently and has been going back down. That's why there's been this discussion about are we going to get a rate hike or not? On one hand, the unemployment rate's been going down, but on the other hand, inflation had gone back up some, right? Like inflation had ticked back up recently.

15:48 It's pulled back some. There's still this geopolitical conflict stuff going on. It's hard to know what's going to happen. If you look at a global inflation rate map, we don't have it for all the countries yet, but we can see we have it for some. You know, it's still relatively low in a lot of the different countries compared to where it was back in say like 2022 when it got pretty bad. You can see that things have cooled off, but inflation's still not home as they say. like it's still not necessarily back at that 2% target. If you go back and look at some of the other labor market statistics, you could go look at things like the unemployment duration and see that that has been trending up, right? So things are kind of getting worse, but it's very slow and no one really knows like when it's going to tip the iceberg and actually really start to matter. If you look at the unemployment, I want to look at reason or let's actually look at the youth unemployment rate. If you look at the youth unemployment rate for the United States, you can see that that has been in an uptrend, but that's actually a lot higher. It's at 9%.

17:03 It's a lot different than what it is for people that are a little bit older. We could also look at the unemployment. We sorry we looked at the unemployment duration already, right? Like that's been trending up. But I wanted to I think it's under the other category. It's the reason for unemployment. let me just search it up here in the search box. Reason unemployment level by reason for unemployment. You can see that if you're if you're just looking at job losers, it's kind of stalled out here. If you look at job losers on temporary layoff, that would actually picked back up a little bit. you can see permanent job losers. Let's just select all of them and then let's look to see which ones are are highest. So, you can see all the way up here job losers is is highest. But you can also go through it and see that some of them are from being on temporary layoff. Some of them are not temporary layoff.

18:00 793,000 were just from people leaving their job. Okay. So, in a lot of these categories, it's actually stalled out recently and has not continued that uptrend. But when you think about the unemployment rate going down, the reason the market is somewhat confused is because non-farm payroll was negative. Therefore, now the market's not so convinced of a rate hike in September. There's only about a 43.9% chance as it stands right now that you're going to get a rate hike in September. You might, I mean, according to the market, perhaps October or December, but it has it sort of tilted away from September. Obviously, there's still another labor market report to go.

18:42 There's another inflation report to go. So, a lot can change between now and then. There's actually probably two there might be two inflation reports to go depending on the timing of it. so this though I was thinking about and we cover the Fed a lot, right? And we'll talk about, you know, interest rates and and we'll talk about what the Fed's doing. But if you look here at the United States, obviously the Fed has stalled out. But go through some of the other ones. Look at Brazil looks a little bit different, right?

19:18 They lowered rates and they raised rates again. Look at the Euro area. They've already started raising rates, right? You can see that actually went back up a little. Singapore, you can see the easing cycle has sort of stalled. Look at South Africa. Again, they raised rates. Australia, rates have been going back up. The UAE stalled out, not a rate hike yet. South Korea, rates have already been going back up. Canada hasn't started yet. India hasn't started. Japan, they they missed the rate hiking cycle that a lot of other countries went through in 2022 and 2023, and now they're kind of raising rates pretty late on. Mexico has been going down. Actually, New Zealand, it looks like New Zealand is starting to head back up. And then you got the UK stalled out. and then of course, China. Now what I thought though is what if we do the same thing. What if we calculate interest rates GDP weighted? Now when you do that it looks like this. You can see that weighted interest rates stalled out at around 4.6%. They then fell down to about 3.4 but they've been slowly trying to go back up. So the easing cycle has stalled and it's arguably one of the reasons why crypto has continued to struggle throughout this midterm year. if you need a narrative, but you don't need one. But if you needed one, it's right there for you.

20:39 So, it's a it's a really interesting dilemma right now where the Fed doesn't really want to make a mistake because we already saw total non-farm payroll year-over-year change is really close to going negative. They don't want to hike into an economy that's slowing down. The problem is we don't know if the economy is actually slowing down or not. I would argue that it's not necessarily at this moment. And one of the arguments for that is if you look at interest rates in the United States and if you kind of buy my argument about the the neutral rate and the 2-year yield, but if you look at interest rates that are currently at 3.75%, if you were to overlay the 2-year yield onto that chart, what you'll notice here, let me pin this to the scale. What you'll notice is that the 2-year yield is now above the Fed funds rate. And a lot of times the Fed funds rate will chase the 2-year yield. So if this is not to come back down quickly, then the Fed might eventually have to chase this.

21:42 There is precedent for it, right? Like we saw this happen in the '9s. If you go look at the '9s, you can see that the Fed funds rate was going up, it went down. but then as the 2-year went back up, we did get a rate hike. And then and then we the 2-year collapsed in 98, went all the way back up. the the Fed chased it for several months and then we finally got the end of the business cycle, but it took years to play out, right? It took years.

22:13 So, you know, and if you look, by the way, if you look at interest rates in the if you look at interest rates in the United States and subtract out interest rates in Japan, what you'll see is that when this metric drops quickly, it often will end with a recession, which are these green lines. We just haven't had it yet. Who knows when it's going to be? My guess, as I've said, within the next couple of years, but doesn't necessarily have to mean right now. In fact, we have a dashboard to track it. We have a on the website if you want to sign up, links in the description below, we have a macro recession risk dashboard. And if you look at the summary risk, it shows you that the risk of a recession over the last four years or so has been relatively low. Four to five years. Like it's only gotten to like.16 risk. So, it hasn't really elevated to the point of calling for a recession. And again, it's some it's often a fool's errand to call for it. Yeah, I mean, we'll get one at some point, but a lot of money, more money is made, more money is lost betting on crashes than the actual crashes themselves. So, yes, at the end of the business cycle, it will likely all come to sort of a sort of a climax, an ending to the business cycle, but it it's clearly not there yet. And until you start to see initial claims head up, I've said before, as long as initial claims are below 300K, we're just not in a recession. And it's kind of foolish to say that you're in one when initial claims are that low. When the unemployment rate is turning down, you're not in one, right? But when that changes, then we'll talk about it. So, we have this macro recession risk dashboard. We also have a liquidity risk dashboard that takes into account a lot of different things like policy rates, yield, dollar strength, central bank liquidity, and funding stress proxies. You can see that things have been relatively tight for a while, but they can stay that way, right? And this is one of the reasons why the blue chips of the industry have been have been doing much better than the than the riskier plays is because people kind of sense that there's this uncertainty and and AI has been keeping the stock market going for a while and it probably can continue. but people want to bet on companies that they think will survive.

24:39 And when you're in a business cycle environment like the one we're in, you people bet on the blue chips, right? right? They bet on the blue chips a lot sooner than they'll bet on on riskier stuff. So, that's an important lesson I think a lot of people learned this past cycle. It's one of the reasons why we've been tracking Bitcoin dominance where the entire cycle. And by the way, I know some people say, you know, Ben's not talking about Bitcoin dominance because it's gone down. But guys, first of all, I never said it was going to go up forever. But second of all, if you exclude stable coins, it's still going up, right? Just because if you include stable coins, it's dropped. But look, if you exclude stables, Bitcoin dominance is still going up. In fact, it's almost near where it was back late last year.

25:19 The only reason it's dropped is because stable coin dominance went up. So, there's a lot of interesting things going on in the market right now, right? For the S&P, my guess is that the strength will likely continue for a little bit longer, but I would look for a correction to start by late September at the latest in line with prior midterm years, 2014, 2018, 2022. A majority of those years had corrections that started in September and then they continued on into October. One of those midterm years, it started in August. But I got to believe that it's going to it's going to play out in the same way in the same way that it it usually does. And when you look at the Fed, the next Fed meeting is September 16th. So, you know, maybe they don't raise rates and the bond market revolts or maybe they do raise rates and people get nervous that the easing cycle is over. I don't know what the narrative is going to be, but oftentimes around midepptember, you'll start to see a correction over in the stock market. So, we still might have, you know, several weeks before we see that play out. But those are my views. And again, we've got all these different charts on the website, all these macro charts that you can look at and and track and and see what's going on. So, in in in a lot of ways, we've expanded it. If you want to check it out and see what's going on in sort of your region of the world, you can try and do that. But again, if you guys like the content, subscribe, give the video a thumbs up, check out the sale on the platform. You can find that to the link in the description below into the cryptoverse.com. And finally, if you want to come do this in person, come listen to some people speak about these charts. I'll be speaking at the ITC conference in November. Make sure you get your ticket. Prices are going up on September 1st. the conference will take place in late November. Thank you guys for tuning in. Subscribe. I'll see you guys next time. Bye.