Rome Is Burning: It's Time to Recognize the U.S. Economy's Weakness

It was a Friday unlike any other day. The flames were burning brightly. The pain from the heat roiled the skin. Smoke in the eyes, filling the lungs. There was Nero — Yellen, Powell, Congress — playing the fiddle as the city burned. Some said there would be a soft landing. Not likely. Others said there would be no landing. What fools we mortals be. For, not only will there be a landing, perhaps a rougher landing than any of us would like, but we'll learn that this economy was never quite as strong as the players pretended it was. 

Anyone out of work can tell you how difficult it is to find full-time work, let alone a lateral move. For the Bureau of Labor Statistics (BLS) has dropped their monthly employment surveys for the month of July and, my dear Van Helsing, they are awful. Rolling up a year and a half of overstatement will not be easy and these awful numbers are very likely still overstated.

On Friday Morning

The BLS reported July non-farm payroll job creation (from the establishment survey) of 114,000 jobs. Downward revisions to May and June totaled 29,000 jobs, so net job creation was 85,000. Wall Street was looking for 182,000. That's a serious miss. 

What's worse, remove the seasonal adjustment and the birth/death model and the number magically becomes -914,000. That's right, the good ol' U.S. of A lost 914,000 jobs in July. That's not just ugly. That's fugly.

The household survey showed 67,000 more employed persons in July than in June. Just in case anyone in DC gives a rat's tail, that same survey shows 352,000 more unemployed persons in July than in June as participation increased to 62.7%. Somehow, despite the increase in participation, the employment-to-population ratio dropped to an even 60%. What? That's right. Fewer people are taking care of more people. Welcome to reality, a very twisted reality.

More Fun With Numbers

As "114,000 jobs were created" (wink, wink), the rolls of those working part-time for economic reasons, meaning they'd like to work full-time but this is all they could find or their hours were cut, increased by 346,000 jobs. "But Sarge, that means that there was a net loss of full-time jobs even using the bureau's funny math." Yes, yes, it does, and that has been nearly a monthly thing for quite some time now. In another sign that demand for labor is waning, the average workweek for full-time employees (part-timers don't count against the average) has now dropped to 34.2 hours, which is about as low as that data-point ever gets.

'Incoming!'

Let's do wage growth. On a month-over-month basis, average hourly earnings dropped to growth of 0.2%, down from 0.3% in May and below expectations for 0.3%. This equals the worst print in this space since February 2022. On a year-over-year basis, the print crossed the tape at growth of 3.6%, down from 3.8% in June and below expectations for growth of 3.7%. This was the worst month for hourly wage growth on an annual basis since May 2021. Don't look now, but wage growth is closing in on core CPI in a hurry.

The Unemployment Rate and Sahm Rule

Unemployment spiked in July to 4.3% from 4.1% in June. It was 3.5% a year ago. The underemployment rate spiked to 7.8% from 7.4% in July. A year ago, this rate was 6.7%. According to the St. Louis Fed, the "Sahm Rule," or "Sahm Recession Indicator" (named for economist Claudia Sahm), "signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months."

The current three-month average of the U3 unemployment rate is 4.13%. Last August, the three-month moving average for the U.S. unemployment rate was 3.63%. The rule has indeed been triggered, making the likelihood that the United States is either in or about to enter into a recession, probable.

Gender and Racial Demographics

For July, from June:

• Adult male unemployment moved from 3.8% up to 4%
• Adult female unemployment moved from 3.7% up to 3.8%
• Teenager unemployment moved from 12.1% up to 12.4%
• White unemployment moved from 3.5% up to 3.8%
• Black or African American unemployment held steady at 6.3%
• Asian unemployment moved from 4.1% down to 3.7%
• Hispanic or Latino Unemployment moved from 4.9% up to 5.3%

Education Demographics

For July, from June:

• High school dropout unemployment moved from 5.9% up to 6.7%
• High school graduate unemployment moved from 4.2% up to 4.6%
• Some college/associate degree unemployment moved from 3.4% up to 3.5%
• Bachelor's degree or more unemployment moved from 2.4% down to 2.3%

Market Reaction

Equities are selling off hard. It appears that a recession or something very close to a recession is being priced in. One thing is very obvious: the U.S. economy is now in an environment of slower growth and slowing inflation. This is what my pal, Keith McCullough founder and CEO of Hedgeye, refers to as a "Quad 4 environment." Why does McCullough come to mind? Because he has been two steps ahead of the rest of us during this wringing out of U.S. markets.

What do you buy in this environment? Not tech. Yes, I am still long tech, but that's not wrong. Ten right answers are gold, treasuries, utilities, other defensives. Yes, I am long treasuries, most of short duration. It would have helped to have been further out in duration, but I have been using my cash to make 5%. I am also long the S&P Utility Sector SPDR XLU, Southern Co SO, the SPDR Gold Shares GLD, the Goldman Sachs Physical Gold fund AAAU and real physical gold. Oh, the AAAU was McCullough's idea, too.

Brutal Reality

Listen, buckaroos: the U.S. economy has not been as strong as you've been led to believe. Not for a long time. 2022: The U.S. spends half of the year in recession. We simply changed the definition of "recession," and everyone shrugs. 2023: The full year GDP shows real growth of 2.5%. The full year GDI shows full-year growth of 0.4%.

Every single economist in the world knows that GDP and GDI are equals economically and are supposed to equal each other mathematically. The Federal Reserve tells us to flat out average the two when they are far apart because at least one of them has to be wrong. What do we do? We report economic growth of 2.5%. Why? Because it served the narrative that both DC and the media were trying to sell us. Honest economists and reporters would have stated growth at 1.45%.

Two weeks ago, the BLS came out in the BED report and acknowledged that the 3.1 million jobs reported as having been created in 2023 was probably more like 1.4 million. From the financial media? Crickets. That's a big freaking mistake to just slip by the sharp-as-a-tack financial journalists, don't you think?

There will be downward revisions made officially to non-farm payroll job creation over the past 18 months and there will probably be downward revisions made to 2023 GDP and H1 2024 GDP. Now, get back out there and fight for your money. God bless.

At the time of publication, Guilfoyle was long XLU, SO, GLD and AAAU.