On November 4, 2016 the Bureau of Labor Statistics (BLS) released the employment data for October 2016. Economists rely heavily on this data to help gauge the health of the economy. Investors believe the data provides valuable insight into the likelihood that the Federal Reserve adjusts monetary policy in the near future.
Due to its importance, we put together a series of charts to serve as a gauge of current employment conditions. Notice that many, but not all, of the post 2008/09 employment trends have stopped improving. While they are not necessarily reversing, consolidations in these trends have led to reversals and in many instances, recessions in the past.
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The unemployment rate generally trends higher or lower with short consolidation periods between trend changes. We’ve marked these consolidation periods in red below. Reversals of downward trends in the unemployment rate, followed soon thereafter by measurable increases in unemployment, have always occurred prior to recessions. Recessionary periods are marked by gray bars below.
According to Jeffrey Gundlach of DoubleLine,one should be on “recession alert” when the unemployment rate crosses above its 12-month moving average. That occurred in September 2016.
Further, he believes the unemployment rate crossing of the 36-month moving average to be a more durable recession indicator. Although this has yet to occur, a continued uptick in the unemployment rate would cause it to cross early next year.
The Labor Market Conditions Index (LMCI)
This Federal Reserve index, which was created by Janet Yellen, is an aggregation of 19 labor indicators. The series has been declining since 2014. Recently it has fallen below zero, which portends weakness in labor markets.
Average Duration of Unemployment
The average amount of time people are unemployed declines during periods of economic growth. Cessation and reversal of this trend has been a reliable predictor of past recessions.
The JOLTS job openings report from the BLS has been a favorite Federal Reserve leading indicator for the health of the employment market. Declines in job openings tend to portend increases in unemployment. The year over year change has been trending lower and is approaching zero.
NFIB Small Business Employment Survey
This diffusion index shows that the upward trend in the percentage of small businesses expecting to increase hiring has stalled and may have begun to reverse. The survey is highly correlated to changes in employment. Graph Courtesy Real Investment Advice –Lance Roberts
The Conference Board –Help-Wanted Online Index
Since February, the year over year change of this index has dropped below zero. For the last 5 months it has been 10% lower than at the same time last year.
Total Payrolls (annual % change)
The rate of change in payrolls tends to decline 1-3 years prior to recession. The current trend is starting to drift lower from the post-GFC peak. An acceleration of the trend would heighten recession concerns.
Despite all of the other data exhibiting potentially unfavorable trend changes in the labor market, jobless claims continue to decline toward levels last seen in the 1970’s. Jobless claims have been a reliable leading indicator of employment trends in the past. The current trend shown below would not seem to signify employment issues.
Wages and Hours Worked
Average hourly earnings continue to increase and, like jobless claims, represents healthy demand for labor. Hours worked have stabilized, after rising since 2009, but has not yet begun to decline as is typical preceding recessions.
C&I Delinquency Rates and Employment
The annual change in the delinquency rate on commercial and industrial corporate loans (C&I) is inversely correlated with annual changes in employment. Over the last year delinquency rates have spiked higher. Employment, shown inverted on the right axis, has yet to follow suit. (employment = 100 less the % change in year over year employment -therefore total payrolls would fall by approximately 3% if it responds to delinquency rates as it has in the past)
Capacity Utilization and Unemployment
Capacity utilization, or the percentage of resources used to produce goods, and employment are highly correlated. Recently, however, capacity utilization has declined yet unemployment (shown inverted on the y-axis as 100% minus the unemployment rate), has not followed.
NRA Restaurant Performance vs. Leisure Employment
The National Restaurant Association Performance Index measuring restaurant sales has declined to levels seen only in the prior two recessions. If employment in the leisure and hospitality industry remains correlated to the survey, approximately 225,000 jobs will be lost. As a point of reference, the entire economy has recently only added approximately 150,000 jobs per month. Employment in leisure and hospitality represent 11% of total employment.
S&P 500 and Unemployment
The trend of the unemployment rate and the S&P 500 are highly correlated. The right y-axis scale for the unemployment rate is inverted to better highlight this relationship.
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