Time for a Reality Check in the Jobs Market…

Hello and welcome back to Moneyball Economics!

As you may already know, I have quite a few hedge fund clients who pay a small fortune for access to my economic research.

And for the last week, these hedge funds have been ringing my phone off the hook nonstop.

They’re calling because, for one, the stock market lacks a clear direction right now. We’re a month and a half into the new year, and investors are still struggling to decide whether they should position themselves for bearish market action or a big bullish move.

But they’re also calling because I’ve been a bit of a contrarian lately. I’m very bullish on the year ahead, and some of my clients are having a hard time understanding why. That’s when I give them a bit of a “Reality Check” on the jobs market.

Click below for the full story:

Video transcript:

Welcome to Moneyball Economics. I’m Andrew Zatlin and I’m coming to you on a Friday of what has been a pretty interesting week out there.

It started off for me getting a lot of phone calls from my hedge fund clients because they’re very, very nervous and they’re nervous pretty much for two reasons…

One is that there’s not really strong direction right now in the markets.

The economic data has not been clearly signaling strength or weakness, and so that makes the markets very, very nervous. But they’re also nervous with me in particular because I’m very bullish about the economy and that’s actually, believe it or not, a contrarian view right now.

This week with all this economic data coming out and all this money being put down, well, they wanted to double check with me and see if my view had changed. My view is very simple:

We are transitioning from a normalizing economy, which is basically the COVID era, super-hot coming down to normal levels, and we’re transitioning from that to a bullish economy, and I have my reasons for why I think it’s bullish. I’ve got my data that signals companies are gearing up for growth, but I see everything out there as aligning with this bullishness.

Not only is the economy normally going to be growing, but we’re going to turbocharge it a little bit thanks to Trump’s policies, both fiscal and monetary.

Now, that sounds a little strange because if you’re heating up the economy, well, interest rates tend to move up, but under Trump, he’s going to try to keep interest rates where they are, if not lower.

Suffice it to say I see a bullish economy, and what I’ve been sharing is that if we’re going to have a bullish economy to get there from here, the data’s going to be, well, it’s not going to be uniform for a while. It’s going to signal weakness sometimes, strength sometimes, but that’s exactly what we want to see.

We want to see this choppy, conflicting economic data because it signals that we are transitioning from point A to point B from weakness to strength. Think of it as a ship that’s changing course. The waters get a little choppy as we change course, and then everything calms again.

I want to review three data points that came out this week. I want to look at them because at the headline level, they seem to be conflicting, some weakness and some strength, but when I dig in, oh no, it’s consistent strength all the way, and again, this is contrary to what consensus thinks, and as a result, when consensus finally catches up as they will in the next couple of months, I want you to be ahead of them. The stock market’s going to be raging and like I said, so is the bond market, which is a little bit different from what most people expect.

In any case, let’s talk the economic data that came out.

We had two data points that signaled softness. One was retail and one was inflation, consumer inflation, but then we’ve got a super bullish signal in the form of payrolls. What is going on? Well, let’s start with retail.

Now, retail came out, and this is a little bit lagging, it’s retail sales for December, so it’s a little bit late to the game, number one and number two, let’s level set. When we’re talking retail data that’s used out there, it’s supposed to be a proxy for consumer spending, but it’s actually a tiny slice.

When you look at everybody’s discretionary spending that they do out there, most of it goes to things, services, basically. People like to spend on concerts, they like to spend on travel, going out, football games, you name it. And that is the biggest slice of what gets spent retail though tracks essentially merchandise sold at stores or what it takes to sell that merchandise, like you go to a bar, you’re buying a beer, that’s merchandise, but then you got to spend to get there.

In general, when we’re talking about retail, we’re talking about stuff people have to buy, food, clothing. When we’re talking about all this other stuff that retail doesn’t track, that’s the fun stuff. That’s the discretionary stuff where I could spend or I could go to a casino and gamble or maybe I don’t.

That’s where I like to focus because that really tells me if consumers are spending a lot and willing to spend more or not. Suffice it to say my data showed that in December, consumer spending, it wasn’t accelerating. It was kind of flat, a little bit softer than November, but not by much, but the retail number came out, the spending on merchandise and stuff, oh, it’s terrible. 0% growth from November to December, but this is the most interesting bit to me…

Headline, that’s a terrible number. No growth. We all thought there was going to be some growth.

However, I believe the government manipulated the numbers. I don’t mean that in a conspiratorial way, I just mean they totally dropped the ball and there’s a specific category where it’s obvious that something’s wrong in the way they’re doing their math.

For December, there’s a category in retail, it handles 15%, one five, 15% of all retail sales. You wouldn’t be surprised to know that Costco, Sam’s Club and BJ’s Wholesale are in it. It’s called the warehouse club segment. This is a very big segment. It does about not seasonally adjusted at all, about 80 to a hundred billion dollars a month. It’s a big player out there.

But what’s interesting is Costco and Sam’s Club announced blistering white hot sales year over year. Costco, for example, in December, they announced that December sales were almost $2.7 billion more than they were in the prior year.

Now we can finesse that a little bit. Oh, that includes Canada, it includes Mexico, blah, blah, blah, but over 2 billion in the us a business in December versus the prior year, and you know what the retail number reported? Nothing. No change year over year.

Same with BJ’s. Same with Sam’s Club. They all reported massive growth in sales year over year, and we’re talking the raw numbers, not seasonally adjusted, and I’m talking the raw numbers in the retail, not seasonally adjusted, no growth whatsoever compared to the prior year, and that’s just flat out wrong.

That is in conflict with reality as reported by these companies. The interesting thing, you float this data back in retail, spendings back to where we all thought it would be not pushing the envelope up, but steady as you go.

Key point here, retail looks soft. It isn’t. It’s steady as you go. This economy is doing quite fine. Let’s talk about the second soft data point, and that’s inflation. So inflation ticked down a little bit, and again, this is the boogeyman for the Federal Reserve. T

hey keep saying, Hey, we can’t cut interest rates because inflation. Well, guess what?

Inflation’s ticking down and we’re talking core inflation. The stuff that really matters even better. It’s coming down in the area where it needs to come down, and that’s something called owner’s equivalent rent. Basically what I’m talking about is CPI has many different components. The biggest one of all is going to be 30% of that number, and that’s basically rent and shelter and the things that go into rent and shelter and mortgages and it’s coming down. This is a very, very sticky part of inflation. It’s coming down primarily because, let’s face it, the housing market last year softened.

It may solidify, it may firm up. This inflation could go up a little bit, but again, the softening inflation is not giving you a signal that the economy is slowing down. It’s giving you a signal that, hey, higher interest rates last year slowed the housing market. Gee whiz, the rest of the economy doing just fine. So again, strike two for anyone who thinks things are bearish out there, we’ve got retail. Somehow they fudged the number wrong. It’s actually just fine, and we’ve got inflation slowing for all the right reasons.

Next up, the bullish signal payrolls, oh my God, they came out blistering hot private payrolls. The total payroll was 130k, private was one 70k. Well, does this mean things are raging again? No. I told you that we would have a strong number. 170 was beyond what everybody imagined because yet again, the government with data is kind of a little sloppy these days.

In this case, let’s take that 170,000 private payrolls and split it into two buckets.

Bucket number one is healthcare. Last year and for the longest time, healthcare has been the only place where there’s been job growth and for basic reason, right? It’s guaranteed money. Everybody has to kick in money into Medicaid and Medicare from their paychecks. Every family who’s employed their employer and them, they pay for insurance, blah, blah, blah. Everybody, it’s like a tax. It’s a healthcare tax, and as a result, the more that’s paid, the more it’s sopped up by the economy and job growth happens.

So let’s take that one 70,000 number and split it into two buckets, healthcare and not healthcare, and this is what matters the most. Ignore healthcare, it’s a bogus number. The government claims of the 170,000 in January, 130,000 jobs were added. Just really reality check. They’re measuring the period from mid-December to mid-January when everyone’s on vacation and not seeing doctors and doctors’ offices are closed.

Somehow 130,000 jobs were created during that time and no, they weren’t. This is just the model kicking out a number. It’s a false number. Let’s talk about that 40 something thousand number that’s left over.

That’s what’s interesting because I mentioned a minute ago, healthcare has been driving all job growth for the longest time, and as you can see, that has suddenly been changing course with this month, I’ll call it the core economy, everything except healthcare.

The core economy is now adding jobs, and as I said, it’s going to ramp up from here, but January, that number good, not great, but as a standalone number that eclipses what we’ve been seeing for the last, I don’t know, six months or so on average. So this is a sign of gathering strength of bullishness, and there’s another sign within that 40,000.

10,000 came from temp workers, and this is hugely critical…

You see the temp worker section within the payrolls has been on a decline for almost four years. Since 2022. We have been seeing every month a steady erosion in the number of payrolls, excuse me, 23 since 2023 every month. In fact, for almost 30, I think it’s 38 months, we have seen negative payroll growth, with the exception of six months.

And guess what?

Of those six months, three of them were in the last three months. The key reason I focus on temp workers is that is a sign of strength for businesses. They like to add temp workers before they start adding full-time workers, and we’re starting to see a slow, steady increase. The key message here is, as I’ve been saying, a slow ramp up in this first quarter, that’s going to end with a lot of strength and that’s what the data is telling us. The private sector is starting to add jobs. Temp workers in particular are starting to, I’ll say limp back in.

We’re starting to see growth firm up and now it’s going to take off a lot more because growth has a way of creating more growth. Wins have a way of creating more wins, and folks, that’s where we are. We in it. To win it, you need to be bullish on the stock market. Buy the dips whenever you can and hold tight. There’s a lot of growth coming down the pipeline.

Zatlin out.

Have a great weekend.