With consumer prices remaining high and a seemingly strong labor market, it’s inevitable that the Federal Reserve will raise interest rates again in September.

The big question: By how much?

That depends on the economy.

Washington and Wall Street may be arguing about whether or not the U.S. economy is technically in a recession. But on Main Street, the story is a bit different. A recent poll found that 58% of Americans believe we’re already in a downturn.

Certainly, no one wants a recession. And it’s good news when people work. But is their work paying off?

Multiple Jobs and Falling Wages

Do you know anyone who holds more than one job? I certainly do. In fact, I’m one of them, with both my medical practice and my full-time job here at Investing Daily.

Moreover, in my medical practice, I know several full-time workers with more than one job. My partners and employees, as well as many of my patients, all have additional jobs or side hustles. Closer to home, I have a neighbor who teaches high school full-time and also tutors students privately.

So although Friday’s employment report delivered a stunningly strong headline — the creation of 528,000 new jobs — the story itself is a bit murky. Specifically, there are differences in the data provided by the establishment survey and the household survey.

In fact, as I’ll describe below, the number of multiple-job holders is rising. The Fed and anyone else making decisions based on jobs data should carefully consider this.

Where it all comes together is in the most recent Consumer Price Index (CPI) numbers, which show that real wages have been declining for the past 16 months.

A Bit of Background

The “employment numbers” widely quoted by the media are derived from two data sources: the household survey and the payroll survey, also known as the establishment survey. The data is combined to form the full document, the Employment Situation Report. You can get the details on how this all comes together here.

There are some very distinct differences between the two surveys, ranging from how the data is collected to how it is interpreted. There are also seasonal adjustments for both surveys to consider, as well as two very important but under-appreciated facts:

1. The household survey, which measures non-institutional employment, including self-employed and farm workers, is a broader measure from which the national unemployment rate is derived. This survey queries 60,000 eligible households per month. Here, multiple job holders are counted once.
2. The establishment survey (payroll survey) reports on non-farm employee and institutional data (larger employers). This survey counts “approximately 131,000 businesses and government agencies, representing about 670,000 individual worksites. In contrast to the household survey, however, the payroll survey counts each job held by a single individual separately.

So here is what happens: Say you work for a municipal agency or a corporation but need extra money to pay for your kid’s college. So you get a side job at Starbucks. In the payroll survey, you are counted every time you add a new job. In the household survey, you are counted only once.

Breaking Down the Numbers

Inside the June report, the household survey (red line) shows a weaker job market than the establishment survey (green line).

Source: zerohedge.com

In fact, the striking difference between the two surveys goes back to May. Since then, the household survey has flattened out, while the establishment survey has continued to increase. This suggests that a large number of the new jobs reported in the establishment survey are likely the second and, in some cases, third jobs held by the same individuals.

 

Source: Michael Every – Rabobank, zerohedge.com

Now, consider the fact that both full-time and part-time jobs have been decreasing since March, while the number of multiple-job holders has been increasing.

In other words, as the number of people who are working has flattened out, those who are still employed or seeking employment are working more than one job, which could explain why there are so many new establishment jobs — one person counted multiple times.

That’s important, because if the Federal Reserve raises interest rates more aggressively than expected in September (based on its perception of the establishment survey while ignoring what the household survey is saying), what may be a shallow recession could easily turn into something worse.

That’s because the system has little slack left in it. This is due to a simple fact: Those who are willing to work are already working multiple jobs. Moreover, according to the July CPI report, their wages aren’t keeping up with inflation and haven’t done so for more than 16 months.

If this keeps up, consumer spending will likely slow. That means, even if we’re not in recession now, we may soon tilt into one.

The Fed and the Bond Market Are in Disagreement

On the surface, we have good news: More people are working, and inflation is slowing down. But a deeper dive into the data suggests that inflation may be slowing because more people are being forced to work multiple jobs and their efforts are not paying off, which means they are spending less.

Of course, the bond market is expecting a continuation of the situation and an eventual resolution via a recession.

Consider this: Under normal circumstances, such a dramatic rise in new jobs would lead to a rise in bond yields. That’s because rapid growth in wages is inflationary.

Yet bond yields dropped after the latest employment news. Specifically, the U.S. Ten-Year Note yield (TNX) fell below 2.8%.

Moreover, yields seem to be falling further in response to the flattening out of the CPI numbers.

Even more interesting is the fact that bond yields topped out very close to the point where the divergence between the household and establishment surveys began to appear, which makes the bond market look pretty smart.

Now, since bond yields are tied to key commercial interest rates such as mortgages and car loans, the effect of this move remains hard to gauge at the moment. But I’m keeping a close eye on the most visible part of the stock market tied to bond yields, the homebuilders.

Remember, the bond market hates inflation. Yet a drop in yields suggests bond traders are expecting a significant economic slowdown. That’s in direct contrast to the Federal Reserve, which is clearly still in inflation-fighting mode.

But homebuilder stocks, such as those in the SPDR Homebuilders ETF (NYSE: XHB) are obviously attracting money. Note the bottom in this sector back in mid-June, a fact that I pointed out was possible in my June 23, 2022, Stocks to Watch article.

As of this writing, XHB is up over 27% from its bottom. Moreover, the bottom in XHB came just a couple of weeks after the top in TNX.

Bottom Line

The price action in homebuilder stocks and Treasury bond yields suggests that both the stock and the bond markets are expecting the Fed to end its tightening cycle sooner than it’s saying.

That’s because the CPI and Employment Situation reports suggest that inflation is slowing and that the labor force has reached its limit. If these trends continue, the odds of a real recession — not just a “technical” one — will rise.

Both the stock and bond markets are already factoring in a change in the higher trend for interest rates, because the Fed will eventually be forced to chuck its inflation fight to battle a recession.

Don’t expect the Fed to cave anytime soon, as it is always behind the curve. But don’t be surprised if it starts to soften its rhetoric much sooner than mid-2023, which is the consensus.

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