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US Jobs Report Review: July 2023
The great employment market moderation continues, but for how much longer?
The unemployment rate dipped for the second consecutive month in June, falling to 3.5%.
Nevertheless, nonfarm payroll growth continues to moderate, with 3-month moving average growth falling to 218k in July, the lowest since January 2021, while the 3-month annualised growth rate fell to 1.7%.
Lower nonfarm payrolls growth has been driven by private payrolls, with 6-month moving average growth in government payrolls coming off a post-COVID record in June.
After diverging over recent months, the household & establishment surveys largely converged in July — this came as a result of growth in the establishment survey falling towards the household survey.
For the second consecutive month, the Economics Uncovered Cyclical Employment Index was YoY negative, weakening to -0.5% in July — the index turned YoY negative four and five months before the 2001 recession and GFC, respectively.
Average weekly hours fell back down to the pre-COVID lower bound in July, with total private hours worked falling significantly.
Job openings continued to moderate, whilst the rate of both quits and hires also dropped in June.
With a relatively low unemployment rate, and employment metrics more broadly remaining at solid levels in spite of a general weakening, the moderation in the strength of the US employment market could be described as a type of “Great Moderation”, which is a key reason as to why more and more people are predicting a soft landing.
Though with the Economics Uncovered US Cyclical Employment Index turning YoY negative, the Fed’s aggressive tightening continuing, and the US M2 money supply recording its largest annual average decline since the Great Depression, history strongly warns against assuming that a recession will be avoided.
Indeed, given such an economic backdrop, the US employment market is likely to continue weakening over the months ahead. With cyclical employment turning YoY negative, history suggests that a more turbulent employment market and broader economic conditions, could only be a matter of months away.
The unemployment rate dips for a second consecutive month, to 3.5%
After rising to 3.7% in May, the unemployment rate dipped for the second consecutive month, falling to 3.5% in July. The unemployment rate hasn’t been above 3.7% since January 2022.
At 3.5%, the unemployment rate remains low by historical standards.
Nevertheless, growth in nonfarm payrolls continues to weaken
While the unemployment rate fell, growth in nonfarm payrolls continues to weaken, where for the second consecutive month, growth was below 190k.
On a 3-month average basis, nonfarm payroll growth fell to 218k in July, the weakest result since January 2021. This is consistent with growth rates that were seen pre-COVID.
The ongoing moderation in MoM growth has seen the annual growth rate of nonfarm payrolls fall to 2.1% in July, a notable decline from 2.4% in June, and down significantly from where it ended 2022 (3.1%).
Given that monthly job growth has recently seen a more significant tapering, the 3-month annualised growth rate is lower still, at 1.7%, down from 2.6% in January. This growth rate is now consistent with pre-COVID levels.
Private payrolls have seen a particular weakening, but government job growth has been moving in the other direction
The lower rate of job growth has been driven by private payrolls, with government payrolls instead seeing a material increase in 6-month moving average growth since 2022.
With June’s private payroll growth downwardly revised to just 128k, the 6-month moving average change in private payrolls has fallen to 181k in July. Since peaking in February 2022, the ongoing downtrend in growth is clear to see, with growth now back to levels that were seen pre-COVID.
In complete contrast to the moderation in private payroll growth, the 6-month moving average change in government payrolls has risen significantly since bottoming at -3k in February 2022, with 6-month average growth of 42k in July, coming off a post-COVID high of 59k in June.
Household & establishment surveys begin to converge as the latter weakens
In addition to analysing the establishment survey of nonfarm payrolls, it’s important to also monitor the household survey of employment, which takes a different approach to measuring employment, and can sometimes materially differ from the establishment survey of nonfarm payrolls — for more on the differences between these two reports, see my previous article here.
One reason that this is important to monitor, is that the establishment survey’s business net birth-death estimates can get thrown off course during significant economic turning points, such as if the economy is moving into a recession.
Sometimes, such as during much of 2013-14, the household survey, on account of its greater volatility, can be much weaker than the establishment survey, only to then correct back up to the rate of growth being recorded by the establishment survey.
Ultimately, periods of divergence can create some doubt as to which measure is giving a better underlying read of the employment market.
Since July 2022, a material gap had opened up between the establishment and household surveys, with annual household survey employment growth falling well below the growth rate recorded by the establishment survey. Such a shift increased concerns that the establishment survey could be overestimating job growth as the underlying economy weakened.
In July, the two indexes saw much of the convergence bridge. On this occasion, the convergence occurred after the establishment survey’s growth rate fell towards the household survey, acting to confirm the weaker read of US employment growth — perhaps the next key question, is will the same thing happen with GDP and GDI?
Cyclical employment continues to weaken — history suggests that a recession may not be far away
For the second consecutive month, the annual growth rate of the Economics Uncovered Cyclical Employment Index was negative, weakening to -0.5% in July.
This Index turned YoY negative four and five months before the 2001 recession and GFC, respectively. Should the Index provide a similar lead in the current cycle, this would suggest that the US economy enters a recession by November — though it is important to caveat this by noting that this dataset only gives an indicator for two pre-COVID recessions.
Finally, I note that last month I showed this Index as the Economics Uncovered US Cyclical Employment Ex-Manufacturing Index. I have since adjusted the composition of the standard Index to exclude manufacturing employment, on account of it remaining YoY negative throughout the economic expansion post the 2001 recession. This indicated a structural weakness in manufacturing employment, which if included, results in a much larger historical lead to the GFC, with the Index turning YoY negative 12 months earlier.
Annual employment growth generally turns negative after the recession
While the historical lag for a recession to begin has been as early as 4 months post the Economics Uncovered Cyclical Employment Index turning YoY negative, the length of time for overall nonfarm payrolls to turn YoY negative is longer.
The Economics Uncovered Cyclical Employment Index turned YoY negative in 2000 and 2007, 8 and 9 months ahead of overall nonfarm payroll employment, respectively.
In terms of the strength of the employment market when the Economics Uncovered US Cyclical Employment Index went negative in December 2000, annual nonfarm payroll growth was running at 1.5%.
When the Index went negative in August 2007, annual nonfarm payroll growth was running at 1.0%.
In June 2023, annual employment growth was running at 2.5%, meaning that this time around, overall employment growth is starting from a stronger starting point, indicating the potential for the lag to be somewhat longer this time — though it’s important to note that the recent trend of negative revisions may see the annual growth rate for June and July revised lower in the months ahead.
Hours worked see a material weakening in July
One reason for the relatively stronger annual growth rate of nonfarm payrolls during the current cycle versus when cyclical employment turned YoY negative in 2000 and 2007, is that employers are likely to be relatively more reluctant to layoff staff today. This is on account of the difficulties that many employers have had in achieving their desired staffing levels to meet an artificially induced post-COVID boom in economic activity.
This makes alternative employment market indicators, such as average hours worked, all the more important, as employers are relatively more likely to lean on actions like reducing hours, before cutting overall staffing levels.
For the second time in the past three months, average weekly hours for all private employees dipped to 34.3, again hitting the pre-COVID lower bound. Any further decline would be consistent with levels that were last seen during recessions.
With a reduction in average weekly hours combining with a moderation in private job growth, the annual growth rate of total private hours worked saw a significant moderation in July, falling to 1.3%, down from 1.8% in June, and 3.5% in January.
Job openings continue their moderation
In addition to the reduction in average weekly hours, job openings continue to moderate. This is not only indicated by the BLS’ JOLTS report, but also by the more timely Indeed Job Postings Index.
While the Indeed Job Postings Index was 28.2% above its 1 February 2020 level, as of 28 July, it was also 21.8% below the peak recorded on 31 December 2021.
The BLS’ measure of job openings continued to remain above Indeed’s measure, and was 37.0% above its February 2020 average in June, with the more timely Indeed Index suggesting that further downside pressure lies ahead for the BLS’ job openings metric in July.
Both quits and hires also drop in June
In addition to the BLS’ latest JOLTS report showing a decline in job openings, both quits and hires also moderated in the month of June (the JOLTS report is a month behind the monthly CES employment report).
Looking firstly at total quits, the rate fell from 2.6% in May, to 2.4% in June. This takes the rate back to levels that were seen in April and equal with the lowest level seen since February 2021.
Meanwhile, at 3.8%, the rate of hires fell to its lowest level since April 2020 in June.
Layoffs were flat at 1%, remaining at historically low levels.
The combination of falling rates of quits and hires, but layoffs that remain relatively low, show the duality of a moderation in the strength of the employment market, and employers that are relatively more reluctant to layoff staff versus prior cycles.
The great employment market moderation continues, but for how much longer?
For many months now, the US employment market has seen a clear trend of moderating strength. Nevertheless, the unemployment rate continues to remain low, and while moderating, most employment metrics remain at relatively solid historical levels. In many ways, this could be described as a type of “great moderation”, with the US employment market cooling significantly, but remaining strong enough to keep unemployment relatively low.
While this has led many to believe that a soft landing appears increasingly likely, with the Economics Uncovered US Cyclical Employment Index turning YoY negative, the Fed’s aggressive tightening continuing, and the US M2 money supply recording its largest annual average decline since the Great Depression, history strongly warns against assuming such an outcome.
Instead of the moderation in the employment market stopping in its tracks, such an economic backdrop suggests that the weakening in the US employment market is likely to continue. With the Economics Uncovered US Cyclical Employment Index turning YoY negative, as it showed in 2000 and 2007, a more turbulent employment market and broader economic conditions, could only be a matter of months away.
Thank you for reading my latest research piece — I hope it provided you with significant value.
Next up, is my US CPI Preview for July — stay tuned!
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