Earnings compression is upon us.

For most of Q1, we’ve only had estimates. But now the Q4 2022 earnings actuals are in for the S &P 500.

And earnings are, in fact, negative.

22Q4 Earnings

In fact, 2/3rds of major business sectors reported negative earnings growth in Q4 2022.

Energy and utilities stayed positive, as did industrials and real estate.

But everything else was negative, including many of those that usually get hit hardest during earnings compression; consumers discretionary, financials and materials. 

S&P Earnings Growth

Given that corporate profits are shrinking, what’s the first thing companies will do?

Answer: cut expenses. And where do they usually start cutting?

You guessed it, their staff. We’ll talk more about the current employment landscape here.

PART 2

To discuss employment as an economic category, let’s first define the Sahm rule, the single most important employment-centric recession indicator.

The Sahm Rule is a heuristic measure used by the Federal Reserve for determining when an economy has entered a recession. This rule is useful in evaluating the business cycle in real time, where other indicators are not.

The rule is: When the three-month moving average of the national U3 unemployment rate rises by 0.5% or more relative to its low during the previous 12 months, it signals the start of a recession.

You can see the rule’s veracity if we look back over the last 9 recessions.

the last 9 recessions

Every red dot either precedes or coincides with a recession.

Meaning, every time the headline unemployment number rose 0.5% (or more) above its trailing 12-month low, we either had a bonafide recession shortly thereafter, or we were already in one and just didn’t know it.

And with 500K+ jobs created Jan (and 300K+ Feb), we’re actually moving in the opposite direction.

This is the “payrolls” indicator within the “Employment” category of our economic tracking framework.

And the January jobs report far surpassed economists’ expectations. Leisure and Hospitality sector was the big winner, as is often the case these days. Runner-up was Education and Health Services, and behind that, Information.

non-farm Payrolls
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