The Wet Nanny

As any affluent ancient Athenian worth their toga could have attested, wet nurses have long been a staple in prosperous households. There are Biblical references to nursemaids. In the 1300s, newborn nurses, some of whom self-manufactured sustenance for the babes, were domestic servants. The British Empire heralded the era of the “nanny,” a term first recorded in 1785. Per, “Nannies reported to the ‘lady of the house’ and were often children themselves when first employed but they would stay for years to look after generations of the family down the line. Nannies assisted the maids of the house with general housekeeping. They were often educated so would act as a tutor until the children were of school-age. Women at this time weren’t allowed to work so nannying appealed to many unmarried girls who wanted to live independently.” QI’s experience with nannies arrived in December 2007, with the birth of Danielle’s twins. With the Great Financial Crisis raging and her writing daily markets briefings at the Fed, assistance was de rigueur. The not-so-funny thing: Said nanny insisted she be W-9’d. Her performance cliff-dove the minute she qualified to file for unemployment benefits, which is exactly what she did…to plan.

Thus far this earnings season, the biggest tech names have announced they’ve shelled out north of $10 billion in severance and other costs associated with slashing headcount. Technically remaining on payrolls helps explain suppressed initial jobless claims, but where was the hotly anticipated evidence of those mammoth layoffs in last Friday’s January jobs report?

The explanation is the nature of the labor market downturn; it’s a “white-collar” recession. Most severance packages last around six months. It’s no coincidence that the lag time from the onset of manager payroll declines and the manifestation of those losses in initial jobless claims is seven months (upper left).

Jobs recessions can be progressions that begin with the least nefarious means by which to reduce the biggest expense of labor — reduced work hours. This is followed by scaling back on contract workers and consolidating middle management, as Meta announced it would do (it sounds more like an outright elimination, which will ripple throughout Silicon Valley). To tease out the number of employees in U.S. management ranks, take the difference between the Bureau of Labor Statistics’ all-employee data and that of production/nonsupervisory employees (a.k.a. workers).

With limited history from 2006, we can observe manager employment performance in the lead into the Great Recession. Manager payrolls went into a down cycle in 2007, before the 2007-09 recession officially started. We can thank the credit cycle for that. As is the case today, corporate bankruptcies were ramping in 2007 and continued to climb through the recession that followed (green line).

As QI’s Dr. Gates explains, “While these credit events unfolded, initial jobless claims didn’t blink until a losing streak for manager payrolls was already in the rear-view mirror. The turn in claims had more to do with worker pink slips; these employees didn’t have the same golden parachutes (read: severance) than those above them on the organizational chart. And managers didn’t have the same urgency to file for unemployment.”

If you squint at the red lines or yellow bars representing manager payrolls, you can see that this cohort did indeed see a decline in January vis-à-vis a huge gain for workers. Of course, one month, a trend does not make. That said, we do have 57% of industries pushing through manager layoffs (turquoise bars). The pandemic aside, the last time the breadth was this wide, the economy was clawing its way out of the 2015-2016 industrial recession.

More importantly, from an investment framework, should the credit cycle echo 2007, more persistence in manager employment is in train. We will be exploring just this subject in this week’s Quill as multiple signposts are flashing a credit event is barreling towards the global financial system.

As for the explosive headline, we’re sitting this one out. Seasonal snafus swung January’s establishment survey headline gain to a +517,000 from what would have been -2.5 million. We’ve been writing about Challenger, Gray & Christmas’ abysmal data on announced hirings. If you hire a fraction of past years’ holiday workers, you don’t need to fire as many as the seasonals typically dictate come January. As for the household survey, if you net out the mega-population adjustment, the gain swings from 894,000 to 84,000. Neither survey engenders confidence.

The composition of payrolls is also discouraging. Full-time employment peaked in May, followed one month later by part-time for economic reasons troughing. There are 4.050 among the ranks of those who’d take full-time work if they could get it. Since June, their numbers have swelled by 419,000 even as full-time workers have fallen by 166,000 since May.

Hysterical headlines aside, something about the payrolls data feels wrong, kind of like that nanny insisting she be properly taxed so she could expeditiously collect unemployment benefits. We can’t square the circle of S&P Global’s U.S. Services PMI saying that hiring has ground to a halt on the same day the Street loses its mind over what appear to be specious payroll data. Speaking of S&P, after all of the hullaballoo surrounding the strongest jobs report in forever, our favorite GDP modeler Ben Herzon (at S&P) only saw fit to reduce his first quarter 2023 GDP estimate by 0.1% to -1.3%. It appears the internals didn’t lie.

Posted in Daily Feather.