Assessing the Pulse: The Strength of The Labor Market

A recent article titled "How Strong is the Labor Market?" From First Trust Chief Investment Strategist Brian S. Wesbury presents a nuanced view of the current job market, highlighting several discrepancies and unusual trends in the data. The tone of the article poses that a recession may be closer than many people think. Here is a summary of my three key takeaways from the article:

First , Overall Job Growth has been positive but there is a wide discrepancy between reports, meaning that the truth is likely somewhere in between.

There are two primary reports that we look to for determining the health of employment in our economy: nonfarm payrolls and civilian employment. The Non-Farms payroll report is from data provided by a survey of employers, whether they are hiring or laying off and the civilian employment report is from a survey of households asking whether people are employed or not. Usually the reports show similar statistics.

Both nonfarm payrolls and civilian employment indicate job growth over the past year, however Nonfarm Payrolls shows a staggering increase of 2.6 million jobs over the past year compared to the Civilian Employment report which shows an increase of a meager 195,000 in the same period. This is a more than ten fold discrepancy.

Although the discrepancy between nonfarm payrolls and civilian employment is unusually large, it is not unprecedented. We saw similarly wide discrepancies in the mid-1980s during the period of high inflation, the late 1990s with the technology bubble, in 2013  where the discrepancy between non-farm payroll and civilian employment reports was a result of the slow recovery from the 2008 financial crisis. It also reflected  declining labor force participation and a shift towards part-time employment. The most recent wide discrepancy between non-farm payroll and civilian employment occurred in 2020-2021 during the COVID period.

It's possible that one of the major reasons for this gap is the recent surge in immigration. Immigrants who get jobs at one of the companies included in the non-farms payroll survey should be counted because it is filled out by employers.  But the civilian employment figures (the weak one) are based on a survey of individual households and it’s hard to survey households in the US that are brand new or that are skittish about filling out a survey sent by the government, particularly if they are here illegally.

A Second key take away from the article is that over the last few years there have been more downward revisions in payroll data than usual . This seems to indicate a consistent trend of overestimation by initial reports. Even more disturbing is the size of the downward revisions. 

For example the average payroll reduction in 2022 was only 6000 less than the initial report. In 2023 the downward revisions averaged minus 30,000 per quarter and so far in 2024 the revisions have averaged -minus 49,000 per quarter suggesting increasing overestimation and optimism. Negative revisions are typically more common around recessions, raising concerns about potential economic weakness that is yet going un noticed.

Third, another significant oddity is the gap between full-time and part-time jobs. 

The civilian employment report shows full-time jobs down 1.6 million in the past year while part-time is up 1.8 million.  That kind of loss of full-time positions is normally linked to a recession and declining payrolls, not continued strong economic growth.

The author concludes that while there is no clear evidence of an imminent recession, the conflicting data and unusual trends suggest early signs of a slowdown. The job market appears to be somewhere between the robust picture painted by nonfarm payrolls and the softer picture from civilian employment reports. They argue that while anomalies exist, it is premature to accuse the government of manipulating the data. Instead, the discrepancies might be attributed to factors like immigration, survey response rates, and the natural variability in economic data reporting.

As always, we are keeping our eyes on the economic data and market conditions and managing our portfolios accordingly. Thank you for the trust and confidence that you have placed in me and my team.