US labour market still weak

 The BLS labour market data for December were released overnight (my time zone).  

Payrolls continue to slide.

The ADP data only cover the private sector

The estimate for the unemployment rate for November was revised down slightly, and in December, it was estimated to have fallen.  But remember, economic time series data always get revised.  I wouldn't get too excited about this (but see the second last chart, below)

The change in the unemployment rate over 6 months correlates well with the cycle.  I've plotted it inverted, as unemployment goes up when the economy is weak, and down when it's strong.  So far, it looks as if it's still weakening, i.e., the trend in unemployment is still up.

The "Jobs hard to find" component of the University of Michigan consumer confidence survey is continuing to surge.  Not a good sign.

However, the whole-economy ISM (the unweighted average of manufacturing and services ISM indices) is rising.   It leads the change in the unemployment rate by a couple of months.  So it is possible that the unemployment rate may have stopped rising.

Overall conclusion:  not recession, but most likely stagnation.   

The chart below shows the whole-economy PMI for the last 40 years.  Notice that in every previous cycle, when this time series turns up, it keeps going.  Over the last two years, it's just phaffed around and is no higher than it was in 2022, and continues to zig-zag around the 50% "recession line".  In a word: stagnation.

Has it turned up for this cycle?  Perhaps.  But uncertainty is always a killer for economic growth.  If you have lots of questions about economic and political policy, you spend less, you hire fewer people, you don't invest in plant and equipment, and you postpone decisions.  There's nothing to suggest that this environment has changed.  Who knows where tariffs are going?  Who knows just how badly consumer spending will be affected by the removal of health-care subsidies?  Who knows how much inflation will rise because of tariffs and the deportation of agricultural workers?  Caution, right now, is good policy.  Incidentally, that also implies that labour lay-offs will also be limited.   Firms won't hire or fire.  (Exception: small companies, which right now are firing)  The time to panic will be if/when lay-offs start rising.

Other labour market stats also deteriorating

 Most analysts of the US share and bond markets watch the payrolls employment data to decide what's happening to the labour market, and by inference, the economy.

But there are other statistical series, from different sources, which give an interesting insight into what's happening right now.  

First, two surveys which produce similar results (and have done for more than 30 years), the results of "jobs hard to fill" question by the NFIB (National Federation of Independent Businesses), and, the results of the "jobs plentiful" question asked by the Conference Board for its survey of consumer confidence.  Both are declining, an indication that the labour market is loosening, i.e., that employment is decreasing.

The second pair are from official sources:  the "quit rate" and the level of vacancies.  The "quit rate" asks employers how many of their employees resign of their own accord.  Obviously, the lower it is, the worse the job market is.   

All of these indicators point to, at worst, a levelling off of the economic decline from the middle of last year, and possibly, the beginnings of an economic recovery, but also suggest a slowdown since early this year.  

A similar conclusion can be drawn from other indicators, which I haven't listed. "Jobs hard to find" (from the Conference board), which fell until January this year, and has risen sharply since; small business hirings, which rose until January and have fallen  since; and job openings (from the BLS) which peaked in November, and have been trending down since.

One indicator which has risen over the last couple of months is overtime hours in manufacturing.  This would suggest that employers are reluctant to hire more workers because of the uncertainty, and are working existing workers for longer hours.  Interesting.

I'll combine all these indicators into a composite index, and will share it with you shortly.

 In the meanwhile, my conclusion holds.  The US started a recovery in the middle of last year, and that ended early this year.  The next lower turning point is prolly several months away.

Clear evidence of US recession

I haven't commented before now on the US labour market stats which came out a week ago---I've been kept busy with changing my data sources and rewriting my programs to work with these new formats.  Plus other software improvements, as well.

First, non-agricultural employment.  Note how employment growth started to pick up in the second half of last year, and has been falling since the beginning of this year.  Employment growth is still positive, but only just.  Ignoring the Covid Crash, it hasn't been this weak since coming out of the GFC, 15 years ago.

Second, unemployment.  This comes from a different survey to the payrolls data.  The BLS gets the payrolls data by asking companies how many people they employ.   They get estimates for unemployment by asking a random sample of households whether they are employed or unemployed.

If these two different surveys, drawn from different samples populations, show the same thing, we can be more confident about what's happening.   And they do.

The unemployment rate is usually regarded as an indicator which lags the cycle, i.e., it turns up or down after the economy does.   However, its change over 6 months coincides quite well with the cycle, except it is inversely correlated---it rises when the economy falls.  So in the chart below, I have plotted the six-month change inverted.  A falling line with this indicator thus indicates a slow-down or a recession.

Observe how unemployment had started falling (shown as a rising line in the chart) in the second half of last year, showing that an economic recovery was getting underway, and how this recovery has reversed since January.

Another data series from the household survey is total employment.  Because this comes from the survey of households, not employers, it shows a slightly different picture to the payrolls chart.  But not that different.  And it also points to a very rapid slowdown in jobs since January---the largest fall since the GFC, if we exclude the Covid Crash.  Note that because the household survey draws on a smaller proportion relative to its sample population than the payrolls survey, its random month-to-month fluctuations are larger.   So I have used a six-month average change to smooth this.

Like the ISM surveys, all three charts show that a recovery in the economy had begun, and this recovery was aborted by Trump's tariff imbroglio.

I see no reason for this to change direction over the next 6 months, because we will now be seeing the inflation effect of the huge jump in tariffs.  This will reduce real incomes, and therefore expenditures.

Will the Fed cut rates to save the day?  No.  Not until it's sure that the rise in inflation from tariffs is transitory.  And even if it does, interest rate changes take many months to increase economic activity.

There will be random month-to-month zigs and zags, but I expect US economic data to worsen inexorably for the next few months.

July labour stats in the USA

 I talked about the blip in the US PMI/ISM data here.

These charts show the labour force data.  The first one shows the change in payrolls, the second (from a different survey), the change in the unemployment rate (inverted, because unemployment goes up in recessions and down in recoveries)  In each chart, they are compared with the average of the manufacturing and services ISM surveys, extreme-adjusted.

You can clearly see the post-covid economic recovery in 2021, and then the gradual subsidence as fiscal stimulus wears off, high interest rates take effect, and the post-covid "revenge buying" in services slows.

Will the US go back into recession?  I don't think it will, because recessions occur when there is excess---excess debt, excess inflation, a property crisis, fierce response by central banks, a collapse in consumer and/or business confidence.  But it's relatively easy for slowdowns to happen.   In an uptrend, the economy can advance more or less rapidly, producing mini-cycles.  In recessions, mini-cycles are much rarer.  When the economy plunges, it doesn't pause to take its breath.  

The bottom chart shows the rate of change in my own US leading index, designed to give forward indication of changes in direction in the economy, compared with the year-on-year change in real GDP.   As you can see, the rise in the rate of change of the leading index should be consistent with a rise in GDP growth.  And it is.  Although it is showing a small downturn, indicating a slowing in GDP growth in 2025, it's not pointing towards an imminent recession.  

But my leading index doesn't include any measures of fiscal stimulus.  And that is tailing off:  if you look at the change in the Federal deficit, the IRA led to a big increase in the deficit in 2022, and a modest retracement in 2023.   That would have provided fiscal stimulus in 2022, and fiscal contraction in 2023.  Enough to cause a recession?  No.  But enough to take the shine off the growth numbers.

So, not a recession, but very likely a sluggish recovery, with a short-term blip.

US Labour mkt also points to an upturn

The chart below shows the change in the unemployment rate, inverted (because it goes up when the economy falls, and vice versa) compared with the whole-economy ISM (Institute for Supply Management)  extreme-adjusted index,   I had thought that the rise in the unemployment rate to 4% was a sign that the economy might be slowing, but the graph doesn't show that.  True, it doesn't show a strong upswing either (remember, up = falling unemployment)

The chart below shows the three-month change in total non-agricultural employment.  In this case, it doesn't need to be inverted, because employment rises when the economy strengthens and falls in slowdowns.  

Both charts confirm that the US economy is not dropping into recession.  However, its recovery is also, for the time being, muted.  That augurs well for falling inflation and therefore falling interest rates.  

All good news for the Biden/Democratic Party campaigns.

US Labour mkt loosening

 We'll get payrolls and employment data overnight.  Meanwhile, two surveys suggest that the broad trend in the labour market is loosening.  A tight labour market is one where it is easy to find jobs, but hard to find employees.  

The "jobs hard to fill" data come from the NFIB (National Federation of Independent (i.e., small) Business).  As you can see, it was harder to fill jobs in 2021 and 2022 than it is now.  Note however that this index is still higher than it's been for most of the last 25 years.  Implication:  wages are likely to continue to drift higher, but more slowly.

The "jobs plentiful" data come from the Conference Board's consumer confidence survey.  Consumers feel that fewer jobs are available, than was the case 2 years ago.  This index is back at pre-covid and 1998–1999 levels.  In 1999, wage inflation was around 3.8%, whereas now it's around 4.5%.  So this indicator suggests that wage inflation will drift lower from here.  Since consumer price inflation will also be falling, that suggests real wages will continue rising, or will stay where they are, at around 1.5% per annum.  This is still too low, but is an improvement of the situation one and two years ago.  A rise in the minimum wage would help lift the whole spectrum of employee remuneration.   A Democrat Party win in November would help bring this about.

As long as the economic recovery deepens and strengthens, the decline in the indicators shown in the chart below, will be slow.  In fact, the "jobs plentiful" survey has shown an interesting uptick over the last few months.  We'll see whether that continues.

Meanwhile, we await the official labour market data, to be released overnight.

US Job offers slide

 Job offers fell by 632K to the lowest level since May 21.  They're still higher than they were pre-pandemic, but are sliding steadily as the US economy slows.   These data obviously have some bearing on Friday's (US time) payrolls and unemployment release, and the share market fell on the news.  

I remain convinced that the US economy will continue to slow.

Source: Trading Economics

The missing workers who are never coming back

From Axios

Federal Reserve chair Jerome Powell struck a particularly somber note at his press conference earlier this week when he mentioned that one reason the labor market is so tight right now is that many workers died from COVID-19.

The big picture: Economists have theorized for a while about the impact of COVID deaths on the labor market. Now, research has started to emerge and key public figures like Powell are starting to talk about it explicitly."Close to a half a million who would have been working ... died from COVID," Powell said while talking about the U.S. labor shortage.
Go deeper: In a footnote to a speech he gave on Nov. 30, Powell estimates that 400,000 working-age Americans died in excess of what was anticipated pre-pandemic.

State of play: Compared to pre-pandemic projections, there are around 3.5 million people effectively missing from the American workforce, as Powell explained in that speech at the Brookings Institution.This number includes older workers who left the labor force earlier than expected. "These excess retirements might now account for more than 2 million of the ... shortfall," he said.
The other 1.5 million comes from a decline in immigration and "a surge in deaths."
Overall, 1.09 million Americans lost their lives to COVID-19, according to Johns Hopkins data.

💭 Our thought bubble: The role these deaths play in the economy often gets overlooked, possibly because it's so devastating to contemplate.But when considering the state of the U.S. workplace, it's worth remembering that many Americans lost colleagues, friends and loved ones over the past few years. It's a toll that will take many years to understand and lifetimes to grieve.


Read more: Jay Powell explains America's worker shortage

More on the US's August Labour market data

Traditionally, unemployment and the unemployment rate are seen as lagging indicators.   For example, even after the economy bottoms, the unemployment rate can continue to climb.  It takes a while before businesses and government become confident that the economy has turned and start hiring again.   But the change in unemployment isn't a lagging indicator.   It coincides quite well with the business cycle, except of course that it is inverted: unemployment falls when the economy strengthens and rises when it weakens.

The chart below shows the three-month change in the US unemployment rate, inverted (so a data point above zero shows a decline in the unemployment rate) compared with the whole-economy ISM (Institute for Supply Management) index, which is a simple average of the manufacturing and non-manufacturing survey headline figures after extreme-adjustment.   As can be seen, over the last few months, the decline in the unemployment rate has been getting smaller and smaller, and the most recent data point (August), unemployment in fact rose.  Just a little, but enough to extend the declining trend.

See also:

US payroll growth still strong --- but slowing

US overtime starts to slide

US overtime starts to slide

Although the US payrolls employment data remain robust, some straws in the wind suggest an imminent turning point.  The unemployment rate has stopped falling, and overtime hours in manufacturing have started to decline.  

The chart below compares the ISM (Institute for Supply Management) survey results for the whole economy (manufacturing and non-manufacturing) and overtime hours, both extreme-adjusted.  Manufacturing overtime hours is a sensitive (slightly leading) indicator of overall economic activity.  The fact that it's falling suggests that the US economy is slowing or will soon slow, despite the relatively robust employment data.

This does not mean that the Fed will stop raising rates, or, at least, it doesn't directly imply that.  When the slowing economy reduces core inflation, the Fed will stop this current rate cycle.  But that could be a few months away.  Inflation lags economic activity, though the lag varies from cycle to cycle.

Payrolls—or will the Fed cut soon?

The chart above shows the month-on-month change in US non agricultural payrolls.  Note how volatile it is.  The 3 month change in the 7 month moving average is much clearer.  (The old story of the signal to noise ratio). 

Now I believe the Fed will only cut when payrolls start falling, or, at best, when the rise drops below 50,000 per month.  If you look at the month-to-month fluctuations, you can see that as often as not, a "zig" is followed by a "zag".   May's decline in the monthly increase was bigger than the markets thought it would be, which persuaded some that a cut in the Fed Funds rate was imminent.

But after the small increase in May, it is entirely possible that there will be a bigger increase in June, on the principle that zigs follow zags and vice versa.  If, however, the increase in payrolls slips again, then a Fed Funds rate cut will be very close.  And that will be because it will indicate an imminent recession—at turning points, the random fluctuations do tend to be in one direction*.  Zigs or zags one after the other, as it were.  A weak payrolls report would be consistent with the survey data from the regional Feds and with the ISM & PMI surveys, so it might provide enough confirmation to the Fed to cut rates.

If, however, the rise in payrolls in June improves, to say +150 or +200K, the Fed will postpone any rate cuts until it has more information.  After all, if GDP is still positive, and employment is still growing respectably, they could only justify rate cuts on the precautionary principle.  And a couple of times in this cycle, the economy has spontaneously picked up, making shifts in monetary policy unnecessary.

For what it's worth (and it isn't worth very much—look again at the size of the random fluctuations in payrolls in the chart above) I don't think we will get a weak payrolls number tomorrow (Friday USA, Saturday Australia)  I'm certain, though, that the trend will still be down. My guess is that we won't see falling payrolls for another three or four months.  So, to answer my question, the likelihood of near-term rate cuts by the Fed is low, even if in the medium term it approaches certainty.



*Which means they're not random, but we won't go there.

US labour market data confirm slowdown

Key US employment data were published yesterday—unemployment, employment, overtime hours, and wages.  The data suggest that the US economy is continuing to slow after the fading of the tax cut "sugar hit".

The markets don't pay much attention to the household employment survey which is very "spiky".  However, it's often quicker to pick cyclical downturns and upturns than the payrolls survey, precisely because it's based on individuals not companies, where the sample survey decays between censuses (censi?).  It's fallen sharply over the last couple of months.

A composite index of employment indicators (total employment payrolls and household surveys, change in unemployment rate inverted, overtime hours) suggests an imminent slowdown.

And a composite index of indicators released soon after the month end also points to an imminent slowdown.

Will the Fed cut rates soon?  I think they will wait for a bit more data. In the past they've waited until payrolls turn negative, which hasn't happened yet but prolly will in the next few months.   After all, this may just be another random dip which might be soon reversed.  I don't think it is, but I may be wrong.  And the thing is, the labour market is very tight, with wages at last starting to respond as they normally do.   This may inhibit the Fed's willingness to cut rates.

The Fed seldom cuts rates when wage inflation is accelerating.  They need convincing evidence of significant economic slowdown.  Which they haven't yet got. 

 But even if they do start cutting rates in the next couple of months, that will be too late to stop a recession.  Trade wars aren't helping nor is the fading of the fiscal sugar hit, which usually ends in a hangover.  My index of longer-leading indicators has turned, but the economy looks likely to contract through the middle of 2020.

US Labour Market Data

Quite strong numbers, especially the fall in the unemployment rate.

[click to get bigger picture; shading shows periods of US recessions]

The chart below shows the same data for just the last few years.  US recovery continues apace.

US December Labour Market Data

Some of the US labour market stats were "strong"; other "weak".  So what I did was create a labour market composite index of the labour market variables I consider key.

The chart below (click on it to get it full size; and apologies for its less-than-satisfactory readability --- I'm still working on the program which I wrote to create graphs and indices) shows the year on year % change in real GDP and my index.  Consider this a work in progress, which it (especially the plotting program) is.  The shaded areas show the periods of NBER-determined US recessions.  Note how the labour market index starts turning down before the recession and turns up slightly before or coincident with the beginning of recovery.  Key point: note that there are no signs of an impending downturn.

The chart below shows the same series for a shorter period. The conclusion is clear. Remember that GDP "data" tend to get revised a lot, especially for recent years.