US unemployment rate jumps

The BLS (Bureau of Labour Statistics) has produced new estimates for labour market data for November.  Because of the government close-down, there are no October numbers, so I have interpolated the gap.

This is the unemployment rate:

Observe how the unemployment was rising (in other words, the economy was weakening), then started to fall in the second half of 2024, before rebounding again after January.  The last time it was this high was in 2021 as the economy recovered from Covid.

If you take the change in the unemployment rate, it is strongly negatively correlated with the state of the economy: when the economy advances, the unemployment rate falls, and vice versa.  The chart below shows the change in the unemployment rate, inverted, so the line in the chart falls when unemployment is worsening, and rises when it is improving.  I have done this so it is consistent with the direction the overall economy is moving in.  

So, through 2023 and the first half of 2024, we can deduce that the economy was deteriorating, then it started to improve, before once again worsening after Trump's tariff débâcle. 

How does this look compared with a completely different indicator of the economy?  I have used the whole-economy ISM (service plus manufacturing) as a good proxy to the state of the economy, and put the change in the unemployment rate and the ISM on the same chart.   Note how the whole-economy ISM slightly leads the change in the unemployment rate.

The ISM has had a small rebound since June, but looks as if it might have peaked.  This means that the change in the unemployment rate might also have peaked, temporarily.  That does not mean that the unemployment rate will start falling--it may well just go sideways for a couple of months.

Indicator after indicator gives us the same pattern:  a nascent recovery as the economy shrugs off the previous rise in interest rates, and starts to respond to their fall; a recovery which aborts as Trump's tariff mess cuts economic activity and reduces confidence.

The chart below shows this pattern too.  It is my private sector data index, which I constructed when official government data were not being produced, but which I have found useful even now that data are being made available again.  The chart shows the year-on-year change in this index.  Note the peak in late 2024, and the slump since then.

The data are unambiguous:  the US economy is slowing.  Whether it goes back into recession isn't clear, but at the least there will be stagnation.   The markets are convinced that the Fed will cut rates again, which I think is very likely.  However, this market belief is not leading to falling bond yields and rising stock markets as it normally would, but instead to a falling US dollar and surging precious metal (gold, silver, platinum and palladium) prices, suggesting that the markets also think that inflation is going to be trending up.  In a word: stagflation.

US private data index suggest ongoing weakness

 I've updated my US private data index, originally created to fill the gap caused in public data by the prolonged shutdown.  I've also added another constituent time series, the "optimism" index from Real Clear Markets, and I've extended the calculation back to 2010.  

Note how the index plunges after the Fed raised interest rates, then started a recovery in late 2023, and fell sharply after Trump came to office.  It's still falling.

Doesn't look as if employment will be growing fast any time soon.

And this is what the year-on-year change in the index looks like.   One struggles to describe this as a "strong economy".

Observe that all the trends are still down.  

The chart below shows the sub-indices in the ISM whole economy index, for prices paid and employment. The surge in inflation appears to be over, but the ISM employment data suggest that employment is weakening.  Again, note how it had started picking up only to fall in a heap since January

US stagflation?

 I've talked before about my composite index made up of private sector time series.   The aim was to provide some sort of indicator while official government data were not being produced due to the shut-down.

Now that the shut-down is over, the BLS has released payrolls data for September, and I've also updated my index with NFIB (small business) components.  The next update will be in the first week of December, when more of the component series are released.

The chart below shows my index versus the 3-month change in non-agricultural payrolls.   I have only shown the data from the beginning of 2022 onwards, to exclude the huge swings caused by Covid.

I wouldn't be surprised if payrolls continue to barely grow, or even go negative.  This is consistent with the steady rise in the unemployment rate.  Will this be combined with rising inflation, too?  I suspect the answer is yes.  That's called "stagflation", and the public doesn't like it (bad for Trump and the Republicans); the markets don't like it (bad news when share markets are so over-extended) and it makes the Fed's job very difficult (easier to make a mistake).

My private sector index looks ..... terrible

I've updated my composite index of private sector data sources.  They now are (equal weights):

1. The whole-economy ISM index
2. The whole-economy PMI index
3. The University of Michigan consumer sentiment index
4. The Conference Board's consumer confidence index
5. The LMI logistics index
6. ADP's monthly job change
7. Challenger's monthly job losses
8. "Jobs easy to fill", from the NFIB survey (data only through September; October values out this week)
9. "Jobs are plentiful" from the Conference Board survey

I've plotted the resulting index after extreme-adjusting it, mainly to remove the massive down-spike during the Covid Crash. 

It looks more bearish than my previous index.  In fact, it looks terrible.

[Here is my first piece about my private sector data index]

For the data nerds among you, here's the chart of the index before and after extreme-adjustment: