Unemployment: The Only Thing That Makes Us Stop Spending

The American consumer is unstoppable… unless the paycheck vanishes.

 

KEY TAKEAWAYS

• Consumption keeps the economy afloat—until unemployment hits
• Charts show a clear historical link between job losses and spending cuts
• Microsoft just laid off 9,000 more workers; ADP payrolls went negative
• Fed likely to consider labor weakness for next rate cut
• Watch today’s Nonfarm Payrolls closely—data matters

MY HOT TAKES

• The Fed isn’t driving consumer behavior—job security is
• Modern consumerism is built on credit, not savings or earnings
• Layoffs are the first domino in economic slowdowns
• Monetary policy can’t offset mass unemployment fast enough
• The labor market, not inflation, will steer the Fed from here
• You can quote me: “The credit card economy looks strong—until the paycheck stops.”

 

Wanted: help. Most of us have seen those black and white pictures of The Great Depression. A long line of mostly men on what looks like a hot, summer day in the city. Most are clad in suits, worse for wear, and some are wearing signs that read “will work for food.” Do you know the one? How about the one of a mother surrounded by what looks like too many children and too little food, based on the protruding ribs of her skinny brood. Playing in the background on an old barely-working Victrola is the song “Brother, Can You Spare A Dime?”

 

Now, I am not a spring chicken, but I am not that old to have lived through those times, however, I have to say that the pains of mass unemployment were much more present in the American zeitgeist when I was growing up. Today, we are surrounded by mass consumerism and easily-faked wealth. I won’t show you the chart of consumer credit that literally looks like a hockey stick. Designer clothes, lavish vacations, expensive cars, decadent meals, high priced watches–you know what I am talking about. And all this through thick and thin.

 

It seems like nothing can stop the US economy. Consumption, which makes up ⅔ of GDP, manages to carry growth even as corporate investment slows and the Fed slams the brakes. Even through the worst spate of inflation since the 1980s, the American consumer continued to buy, buy, buy the economy forward. So, what would it take to cause Americans to stop spending money?  Clearly, the Fed can’t affect consumers’ voracious appetite. You know that the Fed Funds Rate was like 0% for a long time and now it is at 4.5%, even after the Fed cut it last year. Has that changed your buying habits? Of course, not.

 

So, WHAT would it take? Well, if we look at history, we can see that unemployment is a factor, and that kind of makes sense. If you are afraid of losing your job, you may cut back on spending. If you lose your job… well, there is nothing to spend. Now the relationship is somewhat blunted by the massive amount of credit wielded by all income classes, but the relationship is still noticeable. Check out these charts, then keep reading.

 

 

 

Ok, so I hit you with a double shot, because I want the point to be clear. Let’s start with the first chart, but before that, an explanation. I chose to show you a timeslice that includes the Great Recession and it intentionally does NOT INCLUDE the pandemic. The pandemic was excluded because the numbers swung so far off the norm that the scale of the chart is distorted. Additionally, the Great Recession was the last “traditional” economic contraction witnessed by the US. Yes, we did have a flash recession in 2020, but, again, that was far from traditional.

 

Now, on to the charts. The first chart shows Nonfarm Payrolls (yellow line) and Retail Sales (white line). You should be able to clearly see how the decline in Payrolls which went from positive to negative in February of 2008 was correlated to the decline in retail sales. Negative Nonfarm payrolls means that the US economy is losing jobs.

 

The second chart shows the Unemployment Rate (blue line) and Real Personal Consumption (white line). PCE is the technical term for what I always refer to as consumption. Here, we note how Unemployment swelled to reach almost 10% in late 2009. You will also note how PCE declined along with the rise in Unemployment. Tough times. In fact we hadn’t seen unemployment like that since 1982. That’s not on the chart, but I will tell you that Unemployment peaked at almost 11% and had a similar, even more steep decline which lasted years. Something else I want you to notice on this chart is how long it took for Unemployment to return to pre-recession levels. Similarly, please note that it took nearly 3 years for PCE to return to pre-recession levels.

 

Ok, so we have established, graphically, at least, that there is some relationship between the health of the labor market and the health of the economy. Now this may be obvious to you, but I wanted to make it clear. What is also clear is that a healthy labor market is a major part of the Fed’s very simple raison d’être. And this highlighted relationship is probably why it is part of the Fed’s dual mandate.

 

Earlier in the week, I highlighted that the US labor market is showing some signs of weakness. Last week, I briefly touched on how we know, anecdotally, that companies are laying off workers. In fact, WHILE YOU SLEPT, Microsoft announced that it will lay off an additional 9,000 workers. This after several months of cutting. And it’s not just Microsoft. Ultimately, those numbers will find their way into the Government releases, like the one we will get this morning. Yesterday, ADP released its version of monthly New Hires and it missed by a mile, was worse than last month, and IT WAS NEGATIVE. Negative, as in a net decline in payrolls, like declines seen in our first chart, above. 🙃

 

The ADP report does a pretty poor job at predicting the monthly Nonfarm Payrolls number we are going to get this morning (a day early because of the holiday), but it is a number to reckon with, nonetheless. A data point. Why highlight this now? Well, it is very likely that unemployment will be the driver of the Fed’s next rate cut decision, and the market, as well as the President would be happy to get a rate cut. Also, based on the above charts, the economy too, may be happy to be in receipt of some monetary easing.

 

The message here is, if you care about economic health, or if you own stocks or bonds… or if you were an FOMC voting member, you should pay close attention to this morning’s release. On final note, there is an important saying amongst academic statisticians: “correlation does not mean causation.” In other words, the two may happen simultaneously, but one may not explain movements in the other. Just a disclaimer. Also, that Bing Crosby / Rudy Vallee classic from 1932, would likely be re-written as “Bro, Can You Venmo Me 20 Bucks To Buy A Sandwich?” Of course, you would, your Venmo is tied to your credit card. Just make sure to document the whole thing on social media, so everyone knows how well-off you are.

 

YESTERDAY’S MARKETS

Stocks gained yesterday, carried by mostly positive news about the progress of the Big Beautiful bill, and hopes of more trade deals. This, despite a serving of mostly bad economic figures; go figure. Gains were led by big tech. 😧

 

NEXT UP

• Nonfarm Payrolls (June) is expected to come in at 106k after showing 139k adds in the prior month.
• Unemployment Rate (June) may have ticked up to 4.3% from 4.2%.
• Initial Jobless Claims (June 28th) is expected to come in at 241k, slightly higher than last week’s 236k claims.
• ISM Services Index (June) probably hit 50.6 after the prior month's sub-50 reading of 49.9.
• Markets will close early today and be closed tomorrow for Independence Day. Check back in on Monday for calendars, so you can be in the know.

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