62.4% is a Passing Grade

“I’d like a mortgage…I don’t really have any money though…is that cool?”

?????????????????? ??--Wall Street 2

When did optimism go out of fashion?

It seems as though the sun went down recently, especially in financial circles:

·????????Central Bankers’ forced to tighten, choking demand off leading to a recession;

·????????Russian gas and China lockdowns increasing the certainty of supply contraction, also leading to a recession.

It is hard to see any ray of hope on the economic landscape. However, we saw one in Friday’s Employment Report. The chart below shows that labor force participation was steady from 2012 into the first two months of 2020. Then came the lockdown, then the stimulus, and can see that the July release saw it match the previous high this year of 62.4%

62.4% was the lowest reading seen during that flat 2012-2020 range (see circled area). Matching that level in the current report is one--albeit small--reason to celebrate. Getting back into that old range is a positive sign. One negative statistic was the 800,000 increase in the labor force, almost double the 440,000 increase in the household employment survey, which is why the employment rate rose to 3.7%

If it weren’t for the chart above, I would be a lot more worried about the unemployment rate rise, since it is inching toward the magic 4% level. A 4% unemployment rate would mark a .5% rise from the low in unemployment, and that is the threshold that signals recession. The rise in the participation rate has been a missing ingredient for Powell and the FOMC, since a broad labor force helps cap wage inflation. Average Hourly Earnings has been a focus for the market, and as I have mentioned, has stopped rising, and this increased participation rate supports that reversal.

The potential for a détente with the market relating to the recession debate is meaningful. The overwhelming ?consensus is for a recession, and I am in agreement. However, the timing may get pushed out, and that fits with my view of waiting to a better level in September to trim long exposure.

The break below 3950 SPX in the last three hours of a thinly traded session before a three day weekend is still a break below an important threshold. Therefore the decision to get defensive regarding core longs has been made as far as I am concerned. Now the issue is timing. I think it is prudent to begin to place stops on large, concentrated positions. 3900 is another important line in the sand, below which we should have seen heavier selling—I will follow up in a note tomorrow regarding how sold out the market is currently, supporting the case for at least a bounce.

Peter Corey

PavePro

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