A Very Hot, Damaged and Weakening U.S. Labor Market

QI TAKEAWAY —  Margins are being challenged by the enormous level of bravado among workers who know their value in the labor force. The economy is slowing, which is evident in declining workweeks and contracting job postings in two of the hottest post-pandemic sectors. And it appears as if the long-term scarring in the workforce will be worse than that of the post-GFC era. There’s every reason for the 10-year to have traded down to 1.47% and the 2s/10s to be flirting with 100 basis points. Maintain your stances.

  1. At 28.3%, those who have been unemployed for fewer than five weeks are now at a post-pandemic high; meanwhile, 31.6% of the unemployed have been out of work for more than 27 weeks, a 13-month low but still well above the 19.3% registered in February 2020
  2. After hitting a high of 41.7, the manufacturing worker workweek has fallen to 41.3, the lowest since December 2020; in leisure and hospitality, the workweek peaked at 25.3 hours in April with the last round of stimulus checks, before falling slipping back to 25.0
  3. Per Burning Glass, job openings in manufacturing are at -9.5% in the week ended October 29 vs. January 2020, the first negative read since last November; at -10.5%, leisure & hospitality openings have contracted for the last two weeks to their worst showing since January

Maximum Inclusive Employment an Unlikely Development

QI TAKEAWAY —  As the economy continues to flag late cycle and slow, Jay Powell hopes the realities of pinched budgets will force more workers back into the workforce and ease wage inflation. The scarring in the labor force combined with automation suggests otherwise. Even if there’s upside to today’s nonfarm payrolls, a flattening bias remains appropriate at this juncture.

  1. Unit Labor Costs saw a spike to 8.3% in the third quarter, beating out the 7.4% consensus and soaring above Q2’s 1.1% rate; while labor costs grew at their fastest pace since 2014’s first quarter, productivity moved in the other direction with a 5% drop, its worst since 1981
  2. The white LFPR has recovered to 65.7% from February 2020’s 68% vs. the black LFPR falling from 63.1% to 61.3% and the Hispanic LFPR from 63.2% to 61.5%; 2.8 million Black and Hispanic workers still remain out of work due to COVID and rising childcare costs
  3. The White unemployment rate is 1.1% above its February 2020 levels vs. 2.0% and 1.9% higher for Blacks and Hispanics, respectively; with minority groups seeing higher permanent job losses as well, recovery is far from the inclusiveness Powell aspires to achieve

Persistence to Test the Curve

QI TAKEAWAY —  Our Milton Friedman indicator continues to suggest durable goods inflation will remain persistently elevated. Wage pressures also are bubbling as backlogs have become pervasive across the economy. Short-term curve steepening is the ‘transitory’ trade post-today’s Fed meeting. But those with a flattening bias should not be deterred as Team Transitory keeps losing its fan base.

  1. The Cash to Supply spread, comparing cash equivalents to ISM inventories, has been above a +2 z-score for 18 months and was +5 in October; the series leads durable goods inflation, which snapped its 25-year deflationary trend last year and registered a +6 z-score this month
  2. Per ISM, backlogs are increasing in 29 out of 36 industries across manufacturing and services, a record high; as a result of the bottlenecks, the U.S. labor market is seeing earnings growth in the right-tail, with both paycheck and wage inflation above the 5% YoY threshold
  3. Yield curves steepened after yesterday’s tapering announcement by the Fed, though Powell held firm on decoupling tapering from rate hikes; however, the potential for further flattening long-term remains strong as evidence continues to defy the transitory narrative

Autos to Slump or Not to Slump?

QI TAKEAWAY —  Auto buying conditions across the income stack are severely challenged due to sticker shock. Notably, the biggest earners and biggest buyers are the most pessimistic. Vehicle pricing has an inverse relationship with sales over time. If the current run-up in auto inflation proves transitory, the consensus is correctly positioned with its auto sales optimism. Due to the magnitude of the demand pull forward, if the consensus is wrong, the risk is a slump in sales that would have ripple effects across the global auto complex.

  1. Lower, middle, and upper-income cohorts all had net pessimism regarding auto buying conditions, at -24%, -30%, and -35%, respectively, in October, per UMich; upper-income buyers have been the most pessimistic group in the last three months, not seen since 1981
  2. Since 1967, the correlation between CPI new vehicle inflation and new vehicle sales has been -0.47, with sales tending to rise when price rises moderated or fell; at roughly 9% YoY, current new vehicle inflation calls back to the 1970s, when sales ran at a 5-10 million SAAR
  3. Though October sales bounced back slightly to a 12.99 million SAAR, the downtrend since April’s 18.3 million still has room to run; the stellar bounce back to 16.3 million SAAR in 2022 is predicated on supply chains normalizing & demand not having been pulled forward

Safety in Non-Cyclicals

QI TAKEAWAY —  The closely followed ISM New Orders-to-Inventories spread compressed sharply in October and points to reduced production shifts across the manufacturing complex. Lead times echoing the 1970s inflation era also mean a slowdown in the production process and higher leverage to manage through the environment. Favor companies with less exposure to the supply chain, especially non-cyclicals.

  1. The ISM New Orders-Inventories spread shrunk to 2.8 in October, the lowest since last year’s re-opening; as a z-score, this is below trend at -0.67, and mimics the rest of the world, with only 59% of major economies seeing spread expansions, the worst since June 2020
  2. The factory workweek plus overtime collapsed from 45.7 hours in February 2020 to a low of 41.3 hours in April amidst pandemic shutdowns; since recovering in January, performance has been up-and-down, before settling just below January’s print at 45.6 hours in September
  3. ISM’s lead time commitment for production material advanced to 96 days in October from September’s 92 days; higher upstream costs have manifested into a near-record level of credit extension, with the NACM’s Credit Managers’ Index registering a 70.0 print in October

China’s Economy Still Matters

QI TAKEAWAY —  China’s slowing will inevitably induce a deflationary impulse, which is on approximately no one’s radar. The urge to stay on the curve steepening trade should be resisted as this inherently reinforces curve flattening.

  1. China’s manufacturing PMI was 49.2 in October, just below September’s 49.6 print as energy remains constricted; crude stockpiles hit 919 million barrels by October 24, 59% of capacity and the lowest since November 2018, and 13% of coal capacity remains offline
  2. At 31.7, ISM Mfg Customers’ Inventories are at their highest levels since February, despite lingering supply chain woes; as is the case with China, the globe’s marginal driver of demand, New Orders in the U.S., appear set to decline as inventories are replenished
  3. China’s services and construction PMI had a headline of 52.4 in October, shy of the 53.0 consensus forecast and well below September’s 53.2; economic activity in the world’s second largest economy is at the cusp of contracting, bringing with it a sizable deflationary impulse

Cyclicals Leave No Gray Area

QI TAKEAWAY —  We re-reiterate our call that Consumer Staples are poised to outperform in an environment in which it’s irrefutable that the majority of Americans have run dry of funds to splurge on inflation-juiced discretionary goods.

  1. Driven by services, consumption added 1.09 percentage points to Q3 headline GDP; goods spending, which shaved 2.3 ppts off GDP contribution to real spending, was flattered by services and non-durables, which slumped to a 5.4% QoQ pace from Q3 2020’s +25.9% print
  2. Inflation-adjusted growth in durables and construction spend fell to a -6.8% QoQ pace in Q3, down from 2020’s 65.4% record; meanwhile, per BofA, with a 19% 2-yr growth rate that’s 6 ppts above the summer average, services spending remains driven by higher income earners
  3. 3M’s stock price remains a cyclical stalwart, deviating from its 12-month trend in recent years only during the Euro crisis, the mid-2010s industrials recession, and today; the stocks’ correlation with ISM New Orders suggests an unexpected downside from the latter indicator


Asa & Ed’s Failed Peach State Raceway



  • Driven by services, consumption added 1.09 percentage points to Q3 headline GDP; goods spending, which shaved 2.3 ppts off GDP contribution to real spending, was flattered by services and non-durables, which slumped to a 5.4% QoQ pace from Q3 2020’s +25.9% print
  • Inflation-adjusted growth in durables and construction spend fell to a -6.8% QoQ pace in Q3, down from 2020’s 65.4% record; meanwhile, per BofA, with a 19% 2-yr growth rate that’s 6 ppts above the summer average, services spending remains driven by higher income earners
  • 3M’s stock price remains a cyclical stalwart, deviating from its 12-month trend in recent years only during the Euro crisis, the mid-2010s industrials recession, and today; the stocks’ correlation with ISM New Orders suggests an unexpected downside from the latter indicator


Asa Candler, Jr. felt the need for speed. In early 1909, the son of Coca-Cola founder and future Atlanta mayor Asa Griggs Candler had a vision to satisfy that need. Driven to compete with the recently announced raceway in Indianapolis, Candler set out to build a racetrack that would put car racing squarely in the heart of the Peach State. Candler and business partner Ed Durant quietly bought up properties along Virginia Avenue south of Atlanta. If you fancy yourself an archivist, you can find the original blueprint showing parcels of land purchased from Hapeville residents in the Candler papers at the Rose Library Rare Papers Archive at Emory University. It took 1,000 mostly unpaid prison workers all of five months to build the two-mile raceway. Alas, interest in racing didn’t even make it past a second season. Asa Candler, Sr. cut his losses and closed the track which subsequently underwent foreclosure. The savvy businessman reacquired the abandoned half-million property for $1,000 in 1914. Five years later, the property was donated for the purpose of an ‘aero landing place.”

Today, Hartsfield–Jackson Atlanta International Airport is the nation’s busiest by passenger traffic with about 104 million traveling through it, about 20 million more than for the second busiest airport in the US. For 19 straight years, Hartsfield has also been deemed the most efficient U.S. airport. This evening, QI will fly into Atlanta, doing our fair share to sustain the services spending that helped improve air passenger traffic to -20.2% in the week ended October 25th vs. the same week in 2019, a 1.2% improvement over the prior week. Clearly, our endeavoring to travel feeds the trend that lifted services spending by the 7.9% annualized pace in the third quarter GDP report that electrified markets Thursday morning. Overall, consumption added 1.09 percentage points (ppts) to headline GDP, with services adding 3.4 ppts, a tidy offset to goods contracting by 2.3 ppts.

For all of the hullabaloo, services spending declined in the three months ended September from a pace of 11.5% in the second quarter. The swing for goods was appreciably more pronounced – from +13% to -9.2% in the third quarter. As you see in the yellow line on today’s left chart, when you combine the contribution to economic output of inflation-adjusted spending on services and nondurables, the pace has slumped to a 5.4% quarter-over-quarter (QoQ) pace from 25.9% in 2020’s third quarter. As dramatic a pendulum swing as this is, services and nondurables don’t serve the role of leading indicators.

Monday’s release of September’s Chicago Fed National Activity Index (CFNAI) presaged the violence depicted in the purple line, which does lead the broader economy. When broken down into baskets, the only positive contributors were Employment & Hours and Sales, Orders & Inventories. These were more than counterbalanced by the negative drag of Production & Income. Say what you will about the relatively scant contribution of the non-services U.S. economy. Consider us old fuddy-duddy’s as long as cyclicals continue to successfully flag inflection points in the economic cycle, which brings us back to that purple line. In 2020’s third quarter, the sum of inflation adjusted QoQ growth in durables and structures (residential & nonresidential construction) was a postwar record 65.4%; one year on, it’s back in the red, at a -6.8% pace, the sickliest since the pandemic quarter that ended in March 2020.

We’ve been forewarned by the slowdown in China’s cyclical sector which, like it or not, is still the global marginal industrial signpost. And as our friends at the China Beige Book (CBB) astutely point out, China may be in clampdown mode beyond February’s Paralympics closing ceremonies. As CBB tweeted out yesterday, “We’ve cautioned about getting head-faked by a relaxation of policy crackdowns in the run-up to the 6th Plenum or Olympics. This ‘campaign’ is not about the Olympics nor Big Tech. The bigger picture doesn’t change until post-fall 2022 Party Congress, at the earliest.” That’s a year from now, folks, just as Americans head to the polls for what promise to be bloody Midterm elections.

For those of us paying attention, the good news is real-time indicators have long since broadcast the headlines to come. It’s called the price of 3M’s stock (blue line). Study the recent dips below trend. Aside from recessions and the initial shock of the pandemic, the stock price of this cyclical stalwart has deviated negatively from its 12-month trend three times in recent years – during the Euro crisis, the 2015/2016 industrials recession…and today. You don’t have to be a rocket scientist to know what’s to come for the red line, the one indicator that freaks out stock jocks almost as much as that initial nonfarm payroll print – ISM New Orders.

It’s an inconvenient truth that services spending continues to rise. Why the dour characterization? According to Bank of America, the catch is the sole driver is the wealthy: “The gain in spending amongst the higher income cohort continues, running at a 19% 2-year growth rate, which is 6 ppts above the summer average. This is a decisive turn higher that is not evident in the lower income cohort. We think this differential largely owes to the reengagement of leisure service spending which, on balance, is a higher share of higher income consumer baskets.” It’s almost as if we were looking at the U.S. economy through a microcosm of a circa 1910 failed racetrack.

Canadian Cross Currents

QI TAKEAWAY —  The BoC launched a shock ending to QE. Short-term Canadian government bond yields reacted with a violent repricing. While persistent inflation risk was behind the BoC’s pivot, a disappointing U.S. GDP report could create a slowdown narrative which generates calls that the sell-off in Canadian government bonds could be overdone.

  1. The Bank of Canada ended its QE program yesterday, causing a 26 bap jump in the two-year yield in the first twenty minutes after the announcement; after ending Q3 near 50 bps, two-year yields broke the 1% barrier as the BoC let the rate volatility genie escape from the bottle
  2. In the BoC’s Q3 Business Outlook Survey, 26% of firms cited difficulties meeting demand, a record high, on account of supply chain issues and a shortage of labor; meanwhile, roughly half of Canadian businesses expect inflation to be at least 3% over the next two years
  3. IHS Markit predicts Q3 U.S. GDP growth of 1.6% vs. the 2.6% consensus, with inventories driving the entire gain; trade data feeds this development, with goods exports falling by 5% MoM in September and more empty containers leaving West Coast ports than full ones



Discretionary Consumption Challenged Despite Buoyant Leisure Travel

QI TAKEAWAY —  Bearish signals on the stock market, cooling income expectations and auto and home buying uncertainty outweigh positive travel trends. For those with portfolio holdings in RV companies, such as high-flyers Thor and Winnebago, that have seen double-digit annual stock price gains, cashing in some chips might be a prudent course of action.

  1. October’s Conference Board consumer survey found 36.0% of consumers polled seeing stock declines in the future vs. 33.3% seeing stocks rising; though conviction is low, the -2.7% spread between increase and decrease was the first bearish signal since July 2020’s -1.8%
  2. Income expectations, which have a 0.61 correlation with stock price expectations since 1987, have also cooled slightly; meanwhile, household buying plan uncertainty for autos and homes rose above normal levels in October, on account of higher prices tempering purchases
  3. 47.6% of consumers signaled they intend to take a vacation within six months, the highest since February 2020’s 54.9%; Smith Travel Research data shows that intentions have been realized, with hotel occupancy growing at double-digit YoY rates for 31 weeks since March