Labor Market Conditions Index

Hey everyone and thanks for jumping back Into the macro verse today we're going To talk about the Kansas City fed labor Market conditions index and how it can Be used to better understand the state Of the US economy if you guys like the Content make sure you subscribe to the Channel give the video a thumbs up and Also check out into the cryptivorous Premium at into the we Do have several different tiers Available including a free one links Down in the description below let's go Ahead and jump in so we do occasionally Jump into the macroverse to better Understand the overall macro conditions That we currently face within the United States and this index I think provides a Unique perspective now there of course Been all sorts of Indicators some are more you know some Are more optimistic some are more Pessimistic and the truth is is there's Plenty of reasons for it for sort of Both sides to find evidence to support Whatever view they want but this Indicator is interesting because it Actually combines Different things right so this is sort Of looking at not only the momentum in Labor markets but also the level of Activity and it's actually a combination Of 24 different labor market data sets Including things like the unemployment

Rate which we have videos on Um the initial claims which we've talked About and of course the label the labor Force participation rate so it includes A lot of different indicators to go in To measuring this market conditions Index now we could always point to Things like two consecutive quarters of Negative GDP like we had back in the Early the first half of 2022 as as a Reason for our recession but the truth Is that the US economy has route has Remained relatively resilient and the Labor market has remained secularly Tight and the truth again is you know When you look at the labor market we're Sitting at a really low unemployment Rate about 3.4 percent now it is true That the unemployment rate tends to get The the labor market gets extremely Tight usually just before it it makes a A big move to the upside because the FED Is actively fighting against it it tends To bring High inflation that's something The FED doesn't want to see so of course They want to see some loosening of labor Market conditions but the point is to Say that until that actually manifests Itself the U.S economy has still Remained relatively resilient so one Thing to consider we have seen a lot of Layoffs uh this year and and last year As well but so far the U.S economy has Been able to absorb that and one of the

Reasons I suppose is because the the Participation rate in the labor force is Still Um not really I think where where the FED would want it to be so you know I I Do think there's a lot of people that Are just simply choosing not to you know Not to go back into the labor force Especially after the last two to three Years so that's something to consider Um but when you look at this chart it it Does tell a fair a fairly compelling Story and you know one of those stories Is until you really see this Make that big move to the downside right It's hard to call it a recession now it Doesn't mean a recession's not coming And I I've talked about this before There is a good chance that this Inevitably will resolve in a recession But that could be six months from now it Could be 12 months from now we simply do Not know and I think the average time Again after the inversion of the yield Curve is is like you know about a year And a half sometimes before you'll Actually see see a recession Um come into play but when you look at This what you'll notice is that you know In in fact during crash we saw The labor market conditions index here Slowly go down while we were also in Sort of the first stage of the bear Market right like the first half of the

Bear Market if you will And then the the latter half of the bear Market occurred once the unemployment Rate really took or once the Unemployment rate we know took the Plunge off the cliff but also a lot of The other labor market conditions also Started to go to sort of um go down you Know or some of them went up right like Initial claims that have been going up But in general the U.S economy was Deteriorating at that time and sort of That was the second half of of the bear Market so the first half was you know The the economy was holding on uh the Second half the economy wasn't holding On you know and then you can also see The financial crisis where it seemed Like things were starting to recover but Then ultimately we saw another another Downturn One thing to note okay and this is Important and this is and we've talked About this before the the market is Forward-looking so you know the S P 500 Will will likely bottom well before uh You know this bottoms if it goes below Zero now you could always make the case Well what happens if it doesn't go below Zero and we we get this no Landing Scenario that a lot of people are Talking about well that's always a Possibility but I will I will say you Know I I can't believe how quickly we

Went from hard Landing to soft Landing To no Landing to Rocket Emojis all Within the span of like two or three Months and and just remember that I I do Think within the context of history that Is actually a natural progression right You know you everyone we get to the Point where we think a hard Landing is Going to occur and then you get a bounce Then we start talking about a soft Landing and then it seems like the worst Is behind us but then the reality of the Situation is we still haven't even felt The rate hikes from last year yet I mean We've talked before about how it can Often take 12 months to fill those rate Hikes the first First Rate hike was in March of 2022. So arguably we've only you know just now Begun to fill to fill the the initial Rate hikes that we had from almost a Year ago and so I I think we have to Take that into serious consideration When when you know prematurely declaring That there's not going to be any type of Landing right whether it be soft or hard Landing and just sort of calling it a no Landing scenario I think that that might Be a little premature to call especially Because again because I don't think We've really felt the full effect of the Rate hikes and because the Federal Reserve continues to raise interest Rates uh because inflation is sticky you

Know and we are still technically in a Period of disinflation but it's not Coming down quickly enough I I that's The issue I think and so we run the risk Of continuing to tighten into a Weakening economy so again the US Economy has been relatively strong for a While but the Federal Reserve runs the Risk of contain continuing to tighten Into a weaker economy if they don't get To the appropriate terminal rate as Quickly as they can and and so this was Sort of one of the arguments we I used To say Um that I thought the last rate hike Should have been 50 basis points but Then you know leading into the weeks Before before it I mean it seemed quite Obvious that the market was suggesting It was only going to be 25 and so we you Know I just said all right well it's Going to be 25 and we're likely just Going to experience more 25 basis point Rate hikes is is my guess because I I Think it would send a very Um confusing message to markets if they Go 25 and then back to 50 and then back To 25 it would sort of seem like they Don't really know what they're doing if They were to do that Um so I think they're probably just Going to keep going with 25 basis points And the again the the risk that we must Think about is do they continue to

Tighten like this Later into the year when the U.S economy Is is starting to show signs of weakness From the rate hikes from last year okay So that's what you know that's Ultimately I think the risk and that Will come into play I think in the Second half of this year you know and I I mean arguably we're getting a 25 basis Point rate high next meeting probably One after that in you know in later on In the summer so I guess the question is Is will they reach the appropriate Terminal rate and and hold it there Before the U.S economy really starts to Deteriorate but again what you'll notice Is that the s p bottoms before this does Right bottomed here in October of 2002 And then this metric didn't bottom until March of 2003. So if you had waited for this to bottom Um it would have been a half even a half Year or two late almost and you wouldn't Have even known this was the bottom but It does go to show you that there's of Course some Merit in in a you know Especially as you get into some low Levels right like in a DCA strategy just Because you don't know where the bottom Is going to be and then over here again Right I mean the market bottoms before This metric bottomed In 2020 same thing right the market Bottomed

Right before this one did by about a Week right but still technically I mean It all happened so quickly Um and and you can see here right the Market bottomed and then this metric Bottomed basically one week later So right now this metric slowly moving Down but it hasn't really taken that Plunge you know and I I don't know what Exactly would cause us or what what time Frame it would take that plunge whether It's going to be in three months or or In nine months I do know that when you Look at the context of history and you Read articles about what happened in the Past there's always sort of this idea That the unemployment rate's low so you Know hard Landing avoid it right or even Soft Landing avoided right like no Landing possible Um but you still run the risk and I you Know I I have had some people ask me Well what would be some of the reasons That the unemployment rate would go up Because we still have you know a Relatively low labor force participation Rate you know I mean there's just a lot Of people that don't want to work and Um and so I have to think I mean I'd say There's there's two obvious things that I would say could make an impact maybe Three Um the first one is well probably yeah Maybe three the first one is just simply

You know it the the the time frame for Monetary policy to take effect is about A year so you know first it starts with Tech layoffs but those will slow those Are slowly building right I think meta Is talking about another round of Layoffs Um and you're seeing more and more Companies announce layoffs that amount I Imagine will slowly filter through and I Think right now the people that are Getting laid off are in general having Not so difficult of a time finding a new Job just because the labor force Participation rate is still so low that You can still find a job you know at Least I think most people are still able To find a job and and this is sort of Backed up Um you know when you look at things like Initial claims you can see initial Claims Um are are still despite all this are Still really low you know and and when You see this what it means to me is that The people that are getting laid off are Are not having that difficult of a time Finding a new job So that's something to consider and you Could also look at at continued claims As well and I think that one's been a Little bit more elevated right yeah it's Been a little bit more elevated but it Does go to show you that as of right now

The market or sorry the US economy has Not really deteriorated and I think a Way that a lot of people thought it Would by this point Um So the the first the first obvious Reason would be you know Tech layoffs or The sort of the tip of the iceberg and Eventually that's going to filter Through into into other areas if you Think about you know if people have uh From the tech sector not spending as Much money that's going to reduce demand In other sectors and then those those Companies are going to lay people off so It could just be one of those really Slow aspects of the business cycle the Layout the the unemployment rate is Usually like the last thing to move and Then you know once that makes this move Then we're in a fresh a fresh cycle the Second thing I suppose that that could Cause this would might not even be Anything related to the Federal Reserve Or the you know the the economy but it Could just be a base around something Like artificial intelligence we've seen You know Um this sort of surge recently in in Ai And you have to imagine that if if that Continues on that could lead to layoffs Um you know of a lot of different Sectors if those jobs are no longer Deemed necessary if you can just type

Something into a bot and have it produce Something similar right so that's a risk And then the third risk that I think Could make the unemployment rate go up Is And I this is this is kind of an Interesting one but you know student Loans have been deferred for a long time And and there's there's a risk that Sometime middle this year later this Year that people are going to start have To pay on paying on the student loans Again and that actually might make People Um it might make the labor force Participation rate go back up because You know now you've got bills you got to Pay that you didn't you did not once Have to pay so again a lot of different Reasons to sort of think that eventually The unemployment rate will make a turn To the upside but as I said before the The point is yes there's a lot of things That sort of suggest that that this Could happen Um there's sorry let me start with the First one right there's a lot of things That suggest that this could happen but It hasn't happened yet right it hasn't Happened yet and and until it does You're just not looking at a recession Right but it's probably going to happen At some point but we just we just don't Know when that's going to be so again

This first indicator is a measure of the Level of activity in the labor markets Okay and again it's based upon a lot of Different things you also have this Other one that is based on the second One so this is the momentum indicator And you can see that it's heading in the Wrong direction now before we talk more About that one what I want to do is I Want to look at the monthly change on This one and maybe take say like a seven Month SMA so you can see that it's Heading in the wrong direction right Like you can see here clearly that we're Not going in the right in the right Direction For you know the the economy is getting Weaker You can see The rate of change could also maybe Mark The bottom and arguably this would have Marked the bottom in 2001 but then we Had you know we had um because that was Where the recession was but then because Of the events of 2001 and the Fallout of That you could argue that that's why we We continue to go lower it always shows You that no matter what there's always a Risk in the market right and the site This this delusion that people can Unilaterally call the bottom on anything Without comparing what the risks might Be it's just simply unfounded right you Have to consider what the risk is and so

You have This indicator which shows we're Trending in the wrong direction But we're not there yet right like we're Not there yet and that's why the market Has continued to sort of ignore it for a Long time And then you have the momentum indicator Which shows you that the momentum has Been slowly Going to the downside right if we take Say like a three-month SMA You can see where where it is right now Now there are periods in the past where It it briefly went negative and then it Went back up and we avoided a recession That would be a soft Landing right so That would be a soft Landing if it if it Just sort of slowly comes down and is Unable to really go into the depths like We did during the financial crisis over Here or like we did there to Crash back over here so that's what We're looking at Um but these are the things that we we Must consider as we as we navigate Financial markets so we have you know The labor market conditions index Um and the momentum indicator both Coming out of the Kansas City fed Hopefully this has been insightful for You to navigate financial markets if you Guys like the content make sure you Subscribe to the channel give the video

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