Issue 14: US Labor Market Still Hot… But How Long?

US Labor Market Still Hot…But for How Long?

Tech layoffs not enough to weaken job market
After a year of labor market strength and despite restrictive policies from the Fed and concerns over an economic slowdown, hiring was still tight heading into 2023. Meanwhile, wage growth hasn’t shown any meaningful signs of slowing and we have witnessed more workers quitting jobs to take new ones, as companies offer higher pay to attract staff. While those reading headlines will have noted high-profile layoffs—like those announced by Meta, Amazon, and Twitter in November—these cuts have largely come in the tech sector, where the jobs being slashed paid extremely well. According to a recent survey of new hires by ZipRecruiter, nearly 80% of recent tech layoffs landed a new job within three months of starting their search. Because highly educated technology staff have more transferable skills, this is not surprising. Fed tightening has so far failed to hit less glamorous industries where lower-skill middle-income workers are still in very high demand.

Headline employment metrics are deceptive
With everyone watching jobs numbers for signs that Fed policy is finally making a dent, it’s worth asking: Does the US labor market really remain as healthy as the numbers suggest? Going back to the basics and considering how the unemployment rate is calculated, we know we’re dividing the number of Americans unemployed into the size of the total labor force. Unfortunately, this most frequently cited measure of unemployment (called the “U-3” rate) fails to capture workers who have lost hours (underestimating the numerator) and those discouraged workers who want a job but give up on finding one (which impacts the denominator). Moreover, the sudden shock of COVID complicated job reporting to the point that the Bureau of Labor Statistics (BLS) actually changed its procedures, adopting a broader measure of temporary layoffs, while those exiting the workforce to care for sick family members or because pandemic weirdness induced them to move forward their retirement artificially dragged down labor force participation. Thus, although many observers are fixated on the headline unemployment rate, there is clearly some noise in that measure, and it definitely underestimates the hardship facing those who have seen their hours shrink or gotten fed up and exited the workforce.

Looking for labor’s leading indicators
So, where might we see cleaner—and earlier—indications of an impending slowdown in the labor market? In a typical economic downturn, employers tended to first let go of temporary workers before they begin cutting permanent staff. Accordingly, in the last few recessions, a significant drawdown in temporary help jobs has served reasonably well as an early warning for the onset of recession. Data from the BLS (see below) show that temporary help services jobs seem to have peaked earlier in 2022, although they remain historically high. While a small decline over the last two quarters doesn’t signal imminent recession, it does suggest a moderation in hiring, though the softening is clearly marginal and much slower than the Fed anticipated. Before the US labor market settles down to a point that would make Powell and his colleagues comfortable, we expect components—including leading ones, like the temp jobs number here—to show a much more significant decline.

Unpacking the BREIT Debacle

What happened at Blackstone?
In the real estate space, Blackstone made big news over recent months and frustrated many high net worth investors, as its $70 billion Blackstone Real Estate Income Trust (BREIT) portfolio limited withdrawals among a wave of redemptions on concerns that rising rates would hit the property underlying Blackstone’s portfolio. Despite this “gate” on withdrawals being quite transparent—and, indeed, touted before the fact as a product feature, intended to ensure reasonable liquidity of the fund despite its underlying holdings being characteristically illiquid—the restriction still triggered bad memories on the part of survivors of the last real estate market crash, wary of “fire sale” risk. As a result of these caps, Blackstone has incurred significant reputational damage, while the incident has brought more attention to specialty funds like BREIT and the increasing gap between performance of such private strategies, which are up 9% this year, and publicly listed real estate trusts, down almost 30% in 2022. Most recently, in a vote of confidence (and potential source of liquidity for those looking to exit BREIT), University of California invested $4 billion of its endowment in the fund, lured by Blackstone’s promise of a minimum annual return of 11.25% for six years (with Blackstone pledging $1 billion to secure the guarantee).

A widening gap between public and private valuations
Events at Blackstone speak to a broader trend within private investments typical of high net worth investors’ portfolios. Take the venture capital (VC) space, for example. At the end of June, when Cambridge Associates’ US Venture Capital Index was last recorded, it was down only 12.5%; at that time, the tech-heavy NASDAQ was trading off its highs by a whopping 30%. This gap between private and public market valuations is presently at its widest since the dotcom bubble, reflecting a growing disconnect between prices in relatively opaque and infrequently traded vehicles, which hold essentially the same underlying assets as their transparent and highly liquid counterparts. Cynically, we imagine that it is at least in part the perceived exclusiveness of the former type of asset that has lured private clients to make allocations to things like VC, which has boomed in recent years alongside investments in private equity, private credit, and private real estate funds like BREIT.

Broader lessons for private fund investors
Institutional investors also often prefer private funds, due to the promise—or at least the appearance—of low volatility, which generates a better risk-adjusted return and allows private fund managers to use leverage to juice performance (and charge bigger fees). But those benefits come at a price. Allowing asset managers to set valuations on illiquid assets in their own portfolios naturally distorts prices. That becomes brutally apparent in an environment like this: Warren Buffett’s frequently cited “low tide,” which reveals those funds that were “swimming naked.” At this point in the cycle, the practical implication is that private strategies riding an exuberant wave during the boom finally show one of the principal downsides of private investing, routinely glossed over in the prospectus, as too many holders rush for the exit and redemption caps kick in. At best, this means investors are forced to extend their holding period, though such lockups may also precede a string of portfolio markdowns hitting captive investors, who finally experience the risk underlying that “illiquidity premium” they’ve been earning on paper for so many years.