Today’s jobs report just made the Federal Reserve’s work much more difficult.

One reading does not make a trend.  Nonetheless, today’s employment numbers are concerning.  Total non-farm payrolls declined by 92,000 in the month of February, according to the US Bureau of Labor Statistics. 

At the same time, oil prices have skyrocketed since the conflict in Iran began.  Higher energy prices tend to be inflationary.

The combination of higher prices coupled with declining job prospects is a lousy mixture.  As we know, the Federal Reserve is tasked with a dual mandate – full employment, and price stability.  The Fed can fight inflation, or it can encourage job growth.  However, what does the Fed do when inflationary pressures are brewing AND job creation is waning?  That is the million-dollar question.

Thoughts and Observations:

• Monthly jobs data is extremely fluid and is often restated.  Beware of overreaction from the markets.  Today’s reading is likely to be revised in the future – both short and longer-term.

• Geopolitical risks appear to be increasing.

• The large rise in oil prices is likely due to the conflict in Iran.  However, energy prices are very fluid and can change quickly depending on the supply and demand equilibrium / dis-equilibrium.

• The Atlanta Fed’s GPDNow reading (as of March 6) shows a 2.1% growth rate for Q1.  Nothing to write home about, but also not indicative of a recession.

• Services in the US economy represent some three quarters of GDP, primarily driven by consumer spending.

• It appears the US is currently in a K-shaped recovery where those with assets are feeling comfortable and continuing to spend, whereas those within lower economic demographics are holding back due to ongoing pressure from higher prices and inflation.

• Those within the higher socio-economic strata are currently feeling the “wealth effect” due to appreciated assets – especially stock portfolios, and perhaps other holdings such as real estate, and other assets which have grown in value.

• The wealth effect is keeping the upper side of the K-shaped recovery growing, which in turn is keeping overall GPD expanding, due to higher spending, which translates to increased services, which drives the US economy. 

• The US stock market has been dropping of late.  Only mildly negative year-to-date but negative, nonetheless. 

• If the US stock market were to drop significantly, does this dampen the upper part of the K-shaped recovery due to the dwindling wealth effect? 

• Odds are the word stagflation will be mentioned often in the coming days. Stagflation is when employment is challenging yet inflation is high.  So far, it does not seem we are in a period of stagflation.  However, even the possibility of this is concerning.

• Today, unemployment stands at 4.4%.  Although rising, it is still relatively low on a historical basis. 

• Risk of stagflation is being considered as a possibility, but currently NOT a probability, in our opinion. 

• Fortunately, and perhaps most importantly, corporate earnings remain strong and the outlook remains encouraging.

• Ultimately corporate earnings move the equity markets. 

• The question becomes can corporate earnings continue to increase should jobs become difficult to come by while inflation is showing signs of continued acceleration?  Perhaps AI is already beginning to show efficiencies and productivity?   

This brings us back full circle.  All eyes will be on the Federal Reserve’s Federal Open Market Committee (FOMC) meeting March 17 and 18 when it decides on interest rate policy.  For now, unless one is needing cash sooner than anticipated, or is concerned over increased potential volatility, it seems prudent for long-term investors to stay the course.  We will continue to monitor the situation and attempt to assess if the stagflation scale looks likely to tip to probability vs possibility.

As always, here if you need anything or care to discuss specifics of your personal situation and / or portfolio.