Scenes from the October jobs report: Slowing and worsening, but no signs of a slowdown

by a New Deal Democrat

No notable economic news today or tomorrow, apart from the (very late) Q3 senior credit report this afternoon, which will tell us about the state of credit, but is expected in a much more timely manner – ie. weekly – way from the Chicago Fed Index of financial conditions.

So let’s take a look at some notable items from last Friday’s jobs report.

Since I headlined my announcement on Friday, this report continued the delay process. In fact, we had the lowest job growth since the pandemic lockdown except for December 2020:

And to repeat for the umpteenth time, consumption leads to jobs. A good point I’ve seen others make that has been well received is that this year consumption has shifted from goods (Amazon, etc. delivering to your door) to services. Here’s a look at the two, normalized to 100 just before the pandemic hit:

You can see that retail spending has been booming, especially since the 2021 stimulus, and has eased somewhat since then, while the broader measure of consumer spending continues to increase, at a slower pace.

Since real personal consumer spending is the flip side of the coin to real retail sales, but more broadly includes spending on services, here’s a historical look at the year-over-year change in that (/2 scale) relative to wages:

Just like real retail sales, it did a good job predicting near-term changes in job growth.

Here’s the same measure of real retail sales (blue), real personal consumer spending (gold) and jobs (red) just before the pandemic:

As noted in the first chart above, job growth is slowing but not yet catching up to any of the consumption indicators. But it’s slowly getting there.

Another point I made several times last week is that jobless claims drive the unemployment rate. Here’s the updated chart of that relationship with Friday’s jobless increase added:

We are probably now at the unemployment level that is most consistent with the recent slight increase in jobless claims.

There are several other leading indicators in the jobs report. One is a temporary hire:

In the past, the decline began several months before each recession. Not so here at all.

Another leading indicator is the number of hours in the average work week in production. Production tends to stop before services, and hours are usually cut before layoffs occur. Historically, the recession threshold has been a decline of -0.6 hours on an annual basis:

It’s currently down -0.4h and currently -0.2h, so not quite at the level indicating an impending recession:

Moving from leading indicators to inflation concerns, ie. wage growth, it also slowed. Below I show the monthly % change in wages (blue) versus the year-over-year change (red) for non-supervisory workers:

Wage growth continues, but at a steady pace for nearly a year. In comparison, in 2018 and 2019, wage growth averaged 3.3% annually, versus 5.5% over the past 12 months versus a peak of 6.7% last May.

Finally, real aggregate payroll for nonsupervisory workers (essentially total real compensation for the working and middle classes) is an excellent proxy for the onset of recession. Here is the historical record for the last almost 60 years:

This is almost a perfect indicator. No false positives, except possibly the double dip in 2002-03. And no false negatives either. In other words, if the annualized rate of inflation starts to exceed the annualized rate of aggregate wage growth, you’re within a month or two before or after the start of a recession, period.

As of September, wage growth exceeded inflation by 1.1%. We know that wage growth slowed in October. We’ll find out about inflation later this week.

To recap: I wrote on Friday that the jobs report showed a slowdown and deterioration, which it certainly did. On the other hand, slowing down and getting worse doesn’t mean an actual decline – and we’re not there at this point. But the long leading indicators, as well as consumption, have been screaming for months to expect more deterioration, and they should.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *