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Employment data in the US remains strong, clear skies ahead?
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Longtime readers will know I discuss the yield curve, government policies, savings rates, and other aspects of the economy regarding where we are headed. However, the ultimate arbiter of recessions is what happens with employment. The only problem is employment is the last domino to fall before a recession. By the time the unemployment rate rises, we are likely already in a recession. This is because employment tends to be a lagging indicator as companies are hesitant to fire labor that took so long to get or put so much effort into training.
This is the reason I focus so much on leading indicators and historical trends to give an idea of where we are in markets. Ideally, we want to be forward-looking and cautious rather than caught out and losing money when things go sideways.
Michael Kantro, CIO of Piper Sandler coined a market cycle framework that he calls HOPE, which is an acronym for housing, orders, profits, and employment. This sequential acronym guides us through the cycles of the economy in order. The housing market is the first to see signs of slowing or topping followed by company orders. After some time corporate profits will show signs of deterioration. Last but not least, employment returns center stage.
While readers may know that we are due for a recession based on indicators such as the yield curve. With the HOPE framework, the H, O, and P have already given their signals. The unemployment rate is the holdout and remains at extremely low levels as seen below. You can see how tricky this data is because everything looks fine until the unemployment rate starts rapidly increasing right as recessions (shaded grey) begin.
Some data points can give a sneak peek into whether unemployment/recession will be an issue. Multiple common employment metrics can expand our understanding. While initial and continuing jobless claims can give early signs of labor market weakness, the data is often choppy, and a trend must be observed before trusting the data. To make matters worse, jobless claims data is often a catalyst for markets, but to which direction is sometimes a contradiction.
Instead, let’s look under the hood a bit more and see what types of jobs are getting hired and who’s doing the hiring. For all of 2024, job reports came back strong, defying everyone who suspected recession, but where are these jobs coming from? On the net the jobs market is stable but full-time jobs are being replaced with part-time. Since 2023 full-time employment has been declining while part-time has made up the difference which means the unemployment rate has not changed. It may appear strong on the surface, but this is not a sign of health as full-time employment drives the economy. Typically declines like this happen before or during recessions.
Furthermore, we can look at which sectors are gaining and losing employment. Federal, state, and local government employment has been increasing, while private sector employment has been on a steep decline since June 2022. This is a glaring indicator of the real strength of the economy and historically is associated with slowdowns and recessions. Unlike the government, the private sector has to be successful to survive. A severe decline in private jobs shows where the underlying economy is and is only being masked by the pickup in hiring in government jobs.
The last domino to fall before we are in recession is employment. This lagging indicator can be extremely convincing that a recession is nowhere on the horizon. Today is no exception, with job numbers being held up by government hiring and part-time workers. Underneath the rosy job numbers, there is a different story. One of sharply declining private sector and full-time employment which are the foundation to a healthy economy. While the roaring stock market and the low unemployment rate can make cautious analysts look like fools for some time, the underlying data suggest we should remain vigilant with our jobs and investments. Until next week,
-Grayson
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Markets have long way to fall, almost time to place some shorts? Maybe after the Trump honeymoon fades a bit.