The cooling labour market is still warm enough

Good morning. Markets were unimpressed by Friday’s strong(ish) jobs data, making for an uneventful end to an otherwise shaky week. Below, we work through what to make of those jobs numbers, and check in on last week’s most notable stock market loser, Apple. Email us: robert.armstrong@ft.com and ethan.wu@ft.com.

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Duelling readings of the jobs report

Friday’s jobs numbers, which showed the US economy adding 216,000 jobs in December, looked stronger than forecasters expected, and perhaps that’s no surprise. Labour market resilience has been a constant of this cycle, upending last year’s widespread expectations for a recession. A jobs report surprise is, in a sense, more of the same.

But there have been enough signs of softening in peripheral labour market indicators to suggest that the string of strong employment reports might come to an end soon. The quits rate, a key feature of the ultra-tight pandemic labour market, is now a tick below 2019 levels. Labour demand has moderated, as measured by both job openings and ISM employment surveys.

In this context of weakness at the margin but resilience at the core, Friday’s payrolls numbers split Wall Street. Two camps emerged.

Cracks are spreading, worryingly. The most concerning data point comes from the official survey of households (the headline payroll number comes from a separate survey of businesses). December’s household survey showed the overall employment level falling by 683,000 jobs and the employment-population ratio declining 0.3 percentage points, the biggest one-month decline since the pandemic. The “prime age” employment rate is now below pre-pandemic levels:

In a note published yesterday, Skanda Amarnath at Employ America points out that

In the 1990, 2008, and 2001 recessions, prime-age employment rates began falling about a year in advance. Not all slowdowns lead to recession but all recessions begin with slowdowns. Nascent declines in prime-age employment have proven to be among the most empirically worrisome type of slowdown.

Such employment declines would normally raise the unemployment rate but, as Alex Scaggs notes over at Alphaville, were offset by an unusually pronounced shrinkage in the labour force. These data points join a modest but growing list of classic labour market warning signs — including rising underemployment, rising temporary unemployment, more workers with multiple jobs and a shortening workweek.

A final concern: the sector composition of job gains looks uneven. The private sector is adding jobs largely in two areas: leisure/hospitality and private education/healthcare. These two have made up 75 per cent of private payroll gains over the past year. This is abnormal, as Deutsche Bank economists illustrate in the chart below (which shows these two sectors as a share of net monthly job gains):

Put together, the case for worry is that a slowing, narrowing job market is being dragged along by a couple of sectors, and that further weakness may be coming.

This is just what a nice, steady cooling looks like. Any decline from a very high level of activity is going to look, on the margin, like deterioration. But many of the concerns discussed above look like noise, and the broader soft landing story hasn’t changed. 

Zooming in, the big employment decline shown in the household survey is hard to believe. The data is volatile: the 683,000 jobs lost in December came after 586,000 were added in November. The underlying data on flows into and out of the labour force also looks like a wash, argues Omair Sharif of Inflation Insights. “Frankly, I’d probably just average out these last two months given the volatility,” he writes. 

Likewise, Manuel Abecasis at Goldman Sachs argues that the “worsening” sector composition of job gains isn’t a problem:

Our explanation for the concentration of hiring in a few industries is that understaffed industries where output per worker was furthest above trend — especially healthcare — increased wages by more than other industries in 2023 and hired the most workers. This means that their dominance of recent hiring is not incompatible with labour demand still being strong in other sectors — they were simply in greater need of workers and paid up to attract them…

Abecasis thinks the bigger picture is a gradual return to stable job gains, perhaps towards 100-125,000 a month from today’s 150-200,000. That view appears consistent with how payroll gains have moderated so far:

What do we make of it? It’s important to remember that unemployment is non-linear: it remains subdued right up until the moment it rises sharply. Even still, seen through the eyes of the Fed, today’s signs of labour market weakness may be too marginal to justify rate cuts. On top of solid headline payroll gains, Don Rissmiller of Strategas argues that wage growth, which rose 0.4 per cent month over month in December, still looks rather fast, “making rate cuts before 2Q of 2024 tough to justify”. 

The second interpretation makes more sense to us. Fed officials are seeing serious disinflation with only limited signs of job-market stress. That creates a temptation to play for time, to make sure the inflation data keeps coming in tame. Unless employment weakens even more rapidly, the Fed will probably take things slow. The payroll report may not be as strong as the 216,000 headline number, but scary weak it isn’t. (Ethan Wu)

Apple as defensive stock

Apple shares have fallen 6 per cent in 2024, which is a bit spooky, because Apple is the biggest company in the world by market capitalisation and accounts for 7 per cent or so of the S&P 500. A bad patch for Apple shares could be an ill omen for stocks generally. What is going on? 

The stock has received analyst downgrades from Barclays and Piper Sandler in recent days. The brokers’ concerns were mostly about iPhone sales. As well they might be: iPhone sales fell a bit in the fiscal year that ended in September. At the company level Apple grew neither revenues nor earnings per share last year. That said, Apple’s growth has always come in waves that track product cycles. Here is sales and earnings growth over the past 10 years, along with Wall Street’s estimates for the next three years:

Wall Street, as the chart shows, does not see a spike in growth in the next few years, and if that’s right, it would represent a change in the recent historical pattern. But I don’t think Wall Street or anyone else — even people inside Apple — can predict how the product cycle is going to look more than a few quarters in advance.  

But growth is not the only issue here. Since the pandemic, there has been a remarkable step-change in Apple’s valuation, both in absolute terms and relative to the wider market, as you can see here:

This is striking! Apple’s average multiple since the start of the pandemic (that is, post-February 2020) is 90 per cent higher than it was pre-pandemic. To be clear, the valuation charts of the rest of the magnificent seven big tech stocks do not look like this. The pandemic elevations in their valuations of the other six were not as extreme and/or have reverted already. The only remotely similar chart is Microsoft, but its valuation rose steadily from 2014 through 2020 rather than leaping suddenly. The hard question, then, is less about Apple’s growth but whether its valuation should remain on its current elevated plateau.

Note that the shift in valuation may have to do with more than just the pandemic and the associated fluctuations in monetary policy, inflation and demand. Apple’s valuation started to spike in 2019. I picked the February 2020 date for the regime change only for lack of an obvious alternative.

I’d argue that along with the ructions of the crisis, there has been a justified change in the way the market sees Apple’s business. For a long time, Apple traded at a discount to the market because the tech hardware business was considered to be hyper competitive. The way that very strong handset businesses such as Nokia and RIMM/BlackBerry all but disappeared overnight left a deep impression on analysts and investors, and Android phones, most permanently Samsung’s, looked like a real threat to Apple’s franchise. No one thinks this way now: the Apple handset business looks like one of the best defended tech businesses out there. It is perceived as a hassle to switch, and the pricing is competitive, and there is tremendous brand loyalty. The business is so profitable that it can invest in staying ahead.

There are of course clouds on the horizon. Google’s antitrust trial could cause a meaningful, but not huge, hit to revenue if Google can no longer pay to be the default search engine on Apple products. An antitrust suit against Apple itself may be on the way. Other efforts by competitors are afoot to bring down Apple’s App Store fees and make Apple applications like iMessage portable to non-Apple hardware. These threats are important, but nothing new to Apple or any other big tech company (Microsoft, the world’s other $2.7tn company, has been fighting similar suits for decades).

Apple, even a slow-growing Apple, deserves a premium to the market, because its franchise has such strong defensive characteristics. I wouldn’t know how to quantify how big a premium — the current one may prove to be too high — but trying to be precise about this is probably a mistake. The relationship between valuation and stock performance, considered in isolation, is just too indeterminate. The point is just that, barring some operational disaster, Apple seems unlikely to revert to its old valuation regime.

Typo watch

A hawk-eyed reader caught a typo in our Friday interview with JPMorgan Asset Management’s Bob Michele. If Michele’s scenario for 250bp of Fed cuts in 2024 holds, it will take at least a few 50bp rate decreases, not increases.

One good read

Hurrah for standardised tests.

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