These ISM sub-indices give implicit forecasts of the direction of prices and employment.
Thanks to the Iran War, prices (red line) are heading higher, and employment (blue line) lower.
The shift in just one month (March) is obvious. The longer this continues, the worse it'll get.
The BLS labour market data for December were released overnight (my time zone).
Payrolls continue to slide.
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| The ADP data only cover the private sector |
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.
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.
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.
The latest data from Challenger show that layoffs fell in November, after a spike in October. These data are not seasonally adjusted, and also show large month to month "spikes". So I have fitted a centred 5-month moving average to the data. This moving average (see chart below) points to a big jump in layoffs after Trump's election, an improvement up to July and deterioration since then. I have estimated a provisional seasonally-adjusted version of the Challenger layoff data, and it produces the same pattern. [Why not a final seasonally adjusted series? Because I want to run some statistical tests, to confirm seasonality, and it's late at night, so that will have to wait for tomorrow. Meanwhile .....]
If you look at the average of the unadjusted data over the last 12 months, the last time layoffs were this high was during the Covid Crash, and the time before that was during the GFC in 2009!
Don't be misled by one month's improvement. The trend is still bad: layoffs are rising, despite the apparent drop in November.
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| Note inverted scale for job cuts |
In this piece, I discussed a few indicators of the US labour market from surveys not carried out by the BLS (Bureau of labour statistics). I said I would combine them into a composite indicator. This is a partial result. I say partial, because I want to do a bit more research.
The labour indicator is a composite of the 'jobs plentiful' and 'jobs hard to get' (inverted), from the Conference Board's consumer confidence survey, and the National Federation of Independent Business's small business 'hiring intentions' and 'jobs hard to fill' questions. I extreme-adjusted each series before combining it into the composite indicator.
There is an excellent long-term correlation between the indicator and the unemployment rate (plotted inverted in the charts.) If anything, the chart suggests that my labour indicator sometimes leads by a few months, which means that it should start rising before the unemployment rate starts to fall, i.e., before the economy picks up. Note how the gap has widened over the last year, which could point to bigger rises in unemployment than we have seen.
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.
On Friday, the US labour market statistics for August were released. The data confirm my bearish view of US economic growth.
The chart below shows the change in non-agricultural payrolls over 3 months, per month. Growth in employment fell steadily until mid-2024 (a lagged response to the rise in the Fed Funds rates in 2023), then began to rise. A renewed (global) recovery had begun. Then Trump's tariffs stopped this recovery in its tracks. Employment is barely growing now, and will prolly go negative in the next couple of months.
A similar story is revealed by the unemployment rate. Observe how the unemployment rate rose steadily, but stopped rising in mid-24, as the economy re-accelerated, and then started to fall, reaching a low point in January 2025. Since then, it's been rising.
And this chart shows the dilemma the Fed faces. The data come from the ISM (Institute of Supply Management) surveys. They show the average for manufacturing and services indices for prices paid, and employment. Notice how the average employment index, like the payrolls data, started to rise in mid-24, peaked in January 2025, and has been falling since. It's now below the 50% level, which means that the majority of respondents are cutting employment.
The other line on the chart is the "prices paid" index, again, an average of the manufacturing and services ISM indices. See how it's jumped since January 2025? The "prices paid" data tend to lead consumer price inflation, so the rise in CPI inflation that will prolly result from the jump in prices manufacturing and services industries are paying will only start showing up in consumer prices from now on.
Rising inflation will lead to falling real incomes, which, combined with increasing uncertainty, will mean that consumer spending (~70% of GDP) will falter. Consumers already judge that jobs are "harder to find" (from the Conference Board survey; see below), and they're right. But combine a faltering labour market with falling real incomes, and it's hard to see how this gathering storm will be stopped without the Fed cutting the Fed funds rate.
Will the Fed "look through" the jump in inflation, arguing that it's transitory? To me, it's not clear that the inflation increase will be short-lived. Companies will take advantage of the huge tariff increases to up their own prices, even as the prices they pay will also soar. Plus we're seeing plenty of anecdotal evidence that food prices are jumping, because they are picked and packed by immigrant labour. There is no sign that Trump or his lackeys will reverse policy.
But then I'm not in any way linked to the Fed. I will say that the senior Fed economists and analysts I have met over the years have been formidably intelligent and well-educated. (Though how much longer that will last is unclear). The costs of a mistaken forecast will be significant. If inflation is transitory, cutting the Fed funds rate will be the right policy. If not, the Fed risks higher inflation becoming embedded in the economy.
The markets are convinced the Fed will cut rates later this month. Bond yields have fallen, and the dollar is taking a hammering. But equities have been more cautious. Shares are substantially overvalued, and the rise in share markets has been primarily driven by AI/tech companies. I deeply mistrust the AI bubble. It reminds me of the dot com bubble, and when that burst, there followed a 50% decline in the S&P 500 over the next 2 years. The combination of stagflation and overvaluation could be lethal for shares.
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| Once again, a recovery from mid-2024 is derailed by Trump's tariffs in 2025 |
From Fight for a Union
There are now more unemployed people than job openings for the first time since COVID. Buckle up. The trajectory ain’t good.
The US whole-economy PMI fell in February (provisional data). The fall was confined to services; the manufacturing PMI actually rose. Unlike manufactures, services don't have long order books, which take time to adjust. If people start to be concerned about the economy, they can immediately cut spending. Manufacturing takes longer to come to a grinding halt. So the fall in services (to below 50%!) is very significant. It suggests that the public sees Trump policies as bad for their financial prospects, which is borne out by the plunge in his ratings on the economy. Of course, just as spending can decline, so it can rise. A reversal of trade wars, and an ending to DOGE could see a rebound. But the longer uncertainty continues, the deeper the downturn, and the slower the reversal.
I personally don't see Trump changing direction, which means inflation and unemployment will rise from here.
It's striking that among the worst are the two Anglophone countries (UK, USA) which have embraced neo-liberalism.
From Visual Capitalist
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.
There are random fluctuations in any time series, which can cloud one's perception of the current status quo. The old "signal-to-noise" problem.
It seems to me, though, that the change in employment is accelerating, while the change in unemployment (inverted because it is inversely related to economic activity) is still improving, despite February's jump in the unemployment rate (which, remember, is shown as a fall because it's plotted inverted).
Overtime hours (very sensitive to the cycle) are rising, in line with the QCI (my monthly GDP proxy).
Latest datum for each time series is February, except for the QCI which is January.
My conclusion: despite the fall in the ISM in February, the other "early indicators" (including the PMI) all point up.
If you look just at surveys such as the PMI or ISM, the US economy looks as if it has stopped falling and might even be about to turn up. There is one indicator, however, which points towards recession, and that is the unemployment rate. Now, the unemployment rate is a lagging indicator, inversely related to the economic cycle. So, on the face of it, not a particularly useful guide to the current state of the economy. But .... its change over three or six months is a coinciding indicator which tells you what's happening to the economy right now.
The chart below shows the six-month change in the US unemployment rate, plotted inversely. It is consistent with deepening recession, after the "blip" earlier this year. You can see the business cycles of the past clearly outlined: the double-dip, deep recessions of 1980 to 1984; the 1990 recession; the 2001/02 recession; the GFC in 2009; the covid crash in 2020, with its rebound in 2021, as well as the peak in late 2021/early 2022 as the economy responded to zero interest rates and massive fiscal stimulus. [On a personal note, I lived through them all, as I have been in investments/economics since 1975, and that is how long I have been forecasting the US and world economies.]
Some of the rise in the unemployment rate is due to strikes in the latest month. But only some. This indicator points unambiguously to recession. Which is very interesting indeed.
Unemployment is a lagging indicator. It starts to rise after the economy starts to slow, and starts to fall after the economy turns up.
It's still falling, for now, even though the world economy has started to slow.
Note: the data are not extreme-adjusted.
Traded markets (shares, bonds, commodities and currencies) tend to be moved by the latest data. This is, in a way, logical, because new data can make you re-assess your positions. Was the latest data point stronger than you expected. Yes? No? The market adjusts its expectations, and so it increases or decreases its weightings allocated towards (long) or against (short) certain assets.
So, a stronger than expected rise in US payrolls employment in May suggested that the economy was strong, and so company profits would be better. But, wait a bit, wouldn't a stronger economy make it more likely that the Fed would raise rates? Except, the unemployment rate went up, so maybe that would make the Fed more cautious. There was something for everyone in the jobs report. The share market duly spiked up, the US dollar rose, as did bond yields and commodity prices.
I prefer to look at trends, rather than the latest monthly movements. What are they?
An interesting statistic, a complement to the payrolls data out Friday (US time). From TradingEconomics.
US-based employers announced 102.943K job cuts in January of 2023, the most since September of 2020, and compared to 43.651K in December. It is also the highest January total since 2009, when 241.749K were announced, as companies are preparing for an economic slowdown, cutting workers and slowing hiring. The technology sector announced the most cuts with 41.829K, 41% of all cuts, and the second highest on record. Retailers announced the second-most cuts with 13K; real estate 2.191K as housing demand and prices fall. Meanwhile, employers announced plans to hire 32.764K workers, primarily in entertainment/leisure. This is down 58% from a year earlier and 37% from December 2022.
This is the unemployment rate I've calculated for the big 8 economies (US, Europe, UK, Japan, China, Russia, Brazil, India) These economies make up ±75% of the world economy by PPP-weighted GDP.
The thing is, how much of this low unemployment is because of long Covid? I saw a report (somewhere!) which estimated that in the UK, 3.5% of the labour force is effectively out of the labour force because of long Covid. If this is true across most economies, even if the numbers differ in each one, the remarkable decline in the unemployment rate to 40-year lows is not so wonderful after all.
Over the last week or so, the financial markets have worked themselves into a tizzy about how the Fed is going to "pivot", and stop raising rates. Share prices rose, the US dollar fell, bond yields fell.
But the labour market data out Friday morning US time ended this brief burst of euphoria. Actually, it was never terribly plausible that the Fed was going to "pivot". The Fed will prolly not stop raising rates until core inflation has fallen from the current 7-ish per cent to much closer to 2 per cent. Inflation is a lagging indicator. It responds to economic activity with a one-year lag, though the lag can vary. So, even if core inflation peaks, it's not likely to get back to the Fed's target until the economic growth has actually gone negative, or at least, fallen a lot. In other words, job growth needs to be low or zero or even negative. And that hasn't happened yet. Job growth (smoothed out) is still above 350,000 per month.
Because the real economy lags monetary policy changes, the risk remains very high that the Fed will over-tighten and push the economy into a recession while it tries to push the inflation genie back into its bottle.
My calculation of unemployment for the 'Big 8' (US, Europe, UK, China, Japan, India, Brazil, Russia ― about 75% of the world economy) shows that unemployment has fallen to lows not seen for 40 years. Part of that is a consequence of the 'sugar hit' of massive fiscal and monetary stimulus, part is because the labour force has contracted because of Covid.
From The Conversation
For decades it was conventional wisdom in the field of economics that a higher minimum wage results in fewer jobs.In Australia, the Reserve Bank of Australia (RBA) has done a study which concludes that a rise in the minimum wage (Australia has an extensive system of minimum wages) has no effect on employment or hours worked. This is a particularly interesting study because it looks at each level of minimum wages (there are several) which have in the past had different percentage increases. Those with higher percentage increases should have had higher rates of employment/hours worked losses. And they did not. Fascinating.
In part, that’s because it’s based on the law of supply and demand, one of the most well-known ideas in economics. Despite it being called a “law,” it’s actually two theories that suggest if the price of something goes up – wages, for example – demand will fall – in this case, for workers. Meanwhile, their supply will rise. Thus an introduction of a high minimum wage would cause the supply of labor to exceed demand, resulting in unemployment.
But this is just a theory with many built-in assumptions.
Then, in 1994, David Card, an economist at the University of California, Berkeley, and one of this year’s Nobel winners, and the late Alan Krueger used a natural experiment to show that, in the real world, this doesn’t actually happen. In 1992, New Jersey increased its minimum wage while neighboring Pennsylvania did not. Yet there was little change in employment.
Economics studies the production, distribution and consumption of goods and services. And so, like other social sciences, economics is fundamentally interested in human behavior.
But humans behave in a wide variety of often hard-to-predict ways, with countless complications. As a result, economists rely on abstraction and theory to create models in hopes of representing and explaining the complex world that they are studying. This emphasis on complicated mathematical models, theory and abstraction has made economics a lot less accessible to the general public than other social sciences, such as psychology or sociology.
Economists also use these models to answer important questions, such as “Does a minimum wage cause unemployment?” In fact, this is one of the most studied questions in all of economics since at least 1912, when Massachusetts became the first state to create a minimum wage. The federal wage floor came in 1938 with the passage of the Fair Labor Standards Act.
And it’s been controversial ever since. Proponents argue that a higher minimum wage helps create jobs, grow the economy, fight poverty and reduce wage inequality.
Critics stress that minimum wages cause unemployment, hurt the economy and actually harm the low-income people that were supposed to be helped.
Most students in my introductory microeconomics class can easily show, using the standard supply and demand model, that an increase in the minimum wage above the level that the market sets on its own should drive up unemployment. In fact, this is one of the most commonly used examples in introductory economics textbooks.
However, this result assumes a perfectly competitive labor market in which workers and employers are abundant and employees can change jobs with ease. This is rarely the case in the real world, where a few companies frequently dominate in what are known as monopsonies.
And so others theorized that because monopsonistic companies had the power to set wages artificially low, a higher minimum wage could, perhaps counterintuitively, prompt companies to hire more workers in order to recover some of their lost profitability as a result of the increased labor costs.
How can economists tell which of these two theories may be right? They need data.
Studying the real world is difficult, and it’s constantly changing, so it is not easy to obtain all the relevant evidence.
Unlike in medicine or other sciences, economists cannot conduct rigidly controlled clinical trials, a method vacinologists used to test the efficacy of COVID-19 vaccines. Due to financial, ethical or practical constraints, we cannot easily split people into treatment or control groups – as is common in psychology. And we cannot randomly assign a higher minimum wage to some and not others and observe what will happen, which is how a biomedical scientist might study the impact of various treatments on human health.
And in studying the minimum wage, we cannot simply look at past times when it was increased and check what happened to unemployment a few weeks or months later. There are many other factors that affect the labor market, such as outsourcing and immigration, and it’s virtually impossible to isolate and pin down one factor such as a minimum wage hike as the cause.
This is where the pioneering work of natural experiments like the ones Card and Krueger have used over the years to study the effects of raising the minimum wage and other policy changes comes in. It began with their 1994 paper, but they’ve replicated the findings with other studies that have deepened the amount of data that shows the original theory about the minimum wage causing job losses is likely wrong.
Their approach isn’t without flaws – mostly technical ones –- and in fact economists still don’t have a clear answer to the question about the minimum wage that I posed earlier in this article. But because of Card, Krueger and their research, the debate over the minimum wage has gotten a lot less theoretical and much more empirical.
Only by studying how humans actually behave can economics hope to make meaningful predictions about how a policy change like increasing the minimum wage is likely to affect the behavior of the economy and the people living in it.
