- by New Deal democrat
Despite some very soft employment and production data in the past several weeks, Wall Street has been on something of a tear, making repeated new all-time highs. Over the weekend I saw the following comment, which piqued my interest:
It certainly does seem that Wall Street is dismissing the news as inconsequential, and to be fair, Q2 earnings as of the most recent update have risen to all-time highs as well:
As a result, as I wrote on Seeking Alpha this past week, the “hard” monthly data and the high frequency data have diverged, the latter being heavily influence by a declining US$, a decline in new initial jobless claims, and the aforementioned stock market reaction.
We know that ICE is conducting daily raids rounding up undocumented workers (and also some lawful permanent residents and even a number of US citizens who unfortunately for them happen to be brown. And we know as a result in at least a few areas these workers have disappeared out of fear as a result. And according to the Federal Reserve Bank of Dallas, immigration to the US was down -82% in the first quarter of this year compared with Q4 of last year.
An abrupt decline in immigrant labor whether through formal deportations or simply ghosting employers out of fear could explain the decline in new jobless claims we have seen in the past month or so. Even if Los Illegales are not eligible to file such claims in certain states, employers might hold on to their native-born labor more tightly as a result.
But I am not sold on the idea of a downturn in immigrant labor as a reason to be sanguine about the recent soft employment report.
The “waning labor supply” argument is the reverse of the - as it turns out correct - argument in the past couple of years that the surge in immigration was behind the rising unemployment rate. Simply put, as an example if we start with an unemployment rate of 4%, the labor force then suddenly increased by 5%, and the number of new employees as a result increased 4%, the unemployment rate would go up: from 96% of the labor force employed to 100/105 of the labor force employed, meaning a 4.8% unemployment rate.
Conversely, if the labor force suddenly goes down 5%, and 4 out of those 5 were employed immigrants, then the unemployment rate would decrease to 3.2%.
But here is the catch: those immigrants who have either been deported, or else stopped showing up for work are *also* either newly cash-strapped, or else not consumers at all anymore. In other words, in the above scenario consumption *also* goes down. Which means sales and production go down as well. In short, there is a recession.
And if sales and production go down, then almost certainly corporate profits go down as well.
So I am not sold at all on the “optimistic” Wall Street argument.
One final point to consider is that the labor force participation rate is something of a long lagging indicator. Typically it only goes down once the mass of potential employees understand that the jobs market has softened, and only goes up after a recession after they understand that the jobs market is worth entering. Here is the long term graph from the 1980s:
Messy, but the general trend is that growth in the labor force participation rate peaks *after* peak growth in employment. And currently, the prime age labor force participation rate is -0.6% lower than a year ago (hence my addition of 0.5% to the rate, so that it shows at the 0 line in the graph above.
And as you can see from the above graph, typically such YoY declines in the prime age LFPR for longer than several months only happen during or right after recessions.
Further, the LFPR has turned down for *both* the native and foreign born:
Unfortunately these data sets are not limited to the prime age group, so must be taken with an extra grain of salt. But the decline among the foreign born has only eclipsed that of the native born in the past several months, not enough to explain the decline that was already ongoing.
In short, the situation with the labor force is not a valid source of Wall Street’s optimism.
