Good jobs data, weaker growth, and what connects them both

·Editor focused on markets and the economy

Fri, Oct 29, 2021, 12:06 PM4 min read

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Friday, October 29, 2021

Good and bad news, connected by worse news

In order, this week in the news cycle told us: 1) a couple of things we already knew; 2) confirmed something that we suspected but weren’t sure about and; 3) gave us more clarity on a more acute issue that we likely won’t fix before 2022.

The first category involves the labor market and third quarter earnings, both of which — until Thursday at least — were on an improbable hot streak. On Thursday, Starbucks (SBUX), Apple (AAPL) and Amazon (AMZN) broke the encouraging trend by reporting results that broadly missed Wall Street estimates, suggesting corporate America's gravity-defying act could be nearing its end.

Yet overall, Q3 results have been consistently more upbeat than many of the gloomiest predictions. Meanwhile, jobless claims hit yet another pandemic era trough, with the data series creeping closer to pre-COVID levels, showing how the labor recovery remains robust.

The second category is economic growth, which is feeling a definitive chill thanks to a couple of salient factors (more on that in a second), and fiscal stimulus that slowly but surely is wearing off. Advance Q3 gross domestic product checked in at a worse-than-expected pace of 2.0%. Although markets extended the week’s rally in expectations of better growth and stronger earnings, the disappointing results after-the-bell suggest the chickens are starting to come home to roost.

“Over the last 10 days the S&P 500 has broken out from its historical pattern and rallied a couple of weeks” ahead of what’s typically referred to as the markets' “Santa Claus rally” ahead of the holidays, wrote Jim Reid at Deutsche Bank, this week. Late October is usually the market’s strongest performance of the year, with lower volatility, he added.

“Earnings have helped and a reminder that U.S. reporting so far has been better than the long-term average in terms of beats but notably down from the hit rate of the extraordinary last four quarters, especially if you adjust for the release of loan loss provisions at banks,” he wrote (more on that in Wednesday’s Brief).

As you may have guessed, the third issue involves the worsening supply chain crisis — and that's the integument that binds the previous two.

Lower growth invariably leads to fewer jobs, and the economy can’t expand unless it’s able to satisfy existing demand in an adequate fashion. Some of that was reflected in Thursday's earnings letdown, with both Starbucks and Apple partly faulting supply woes for the quarter's underperformance.

Earlier this week, Yahoo Finance’s Dani Romero gave us a barn-burner dispatch from the front lines of Los Angeles’ clogged port, with insight into what truckers and dock workers are thinking about the issue. Meanwhile, Wall Street sees no relief on the horizon, and in fact thinks the problem will get worse before it gets better.

“The evidence keeps mounting that world trade is unable to rise any further from its elevated level,” Ariane Curtis, global economist at Capital Economics, wrote this week.

“And industrial supply and global logistics are likely to continue failing to keep up with demand in the coming months, even as the global recovery slows. Accordingly, port congestion and ultimately shipping costs should remain high well into 2022, posing upside risks to inflation, particularly in advanced economies,” Curtis added.

Although economists believe the pressure will ease after the holidays, the congestion is more than likely to persist until the middle of 2022.

Wait — it gets worse. Curtis pointed out that the supply chain-global demand imbalance that’s clogging seafaring arteries “is not going to resolve itself overnight” — and could soon manifest itself more dramatically in air shipping.

“In fact, just in recent weeks, global spot air freight rates have edged above their previous peak at the height of lockdowns in May of last year and are up by around 120% compared to their pre-pandemic average,” the economist added.

Which suggests that the now meme-worthy sight of ships idling in the Pacific could soon metastasize into cargo planes clogging tarmacs around the country. Don’t shoot the messenger.

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek