One more time: bifurcation in the jobs report, as Establishment Survey shows continued jobs growth, while Household Survey comes close to triggering the “Sahm Rule”

 

 - by New Deal democrat

In the past few months, my focus has been on whether jobs gains are most consistent with a “soft landing,” i.e., no further deterioration, or whether deceleration is ongoing. In particular: 

Last month I wrote that “There is a common thread in the above answers: the three good results all came from the Establishment Survey, which as we’ll see below, was very strong. The one very poor result came from the Household Survey, which for the third time in four months was frankly recessionary.”

Importantly, since then I wrote at length about the issue created by the surge in immigration since 2020. To summarize, “The cause of the underestimate of growth in the Household Survey seems most likely to be a big undercount of post-pandemic immigration…. In the past two years through May, according to the Census Bureau, the US population has grown by a little over 1%. But according to the Congressional Budget Office, it has grown slightly over 2%. That’s over a 3,000,000 difference!

….

“If we make the reasonable assumptions that this big surge of immigrants has been from Latin America, and much more closely resembles the prime working age demographic of 25-54 years than the native population, applying those adjustments yields an estimate of an additional 2,000,000 employed through May 2024 vs. official Household Survey numbers.”

“But as the economy has cooled from “white hot” in 2021-22 to memerly “hot, “*new* entrants to the labor force who fail to find their first job will not show up in unemployment claims; but they will show up in the unemployment rate.”

I think that explains most of what we have seen this morning as well.

Below is my in depth synopsis.

HEADLINES:

• 206,000 jobs added. Private sector jobs increased 134,000. Government jobs increased by 70,000. 
• April  was revised downward by -57,000, and May was revised downward by -54,000, for a net decline of -111,000. This continues the pattern from nearly every month in the past 18 months of a steady drumbeat of downward net revisions.
• The alternate, and more volatile measure in the household report, showed an increase of 190,000 jobs. On a YoY basis, in this series only 195,000 jobs, or 0.1%, have been gained. This is not just the lowest YoY increase since the pandemic lockdowns, but with rare exception, it has always and only occurred during recessions.
• The U3 unemployment rate rose 0.1% to 4.1%, another new 2+ year high. That’s because while employment rose, as per the above, but the number unemployed also rose, by 162,000.
• The U6 underemployment rate was unchanged at 7.4%, 0.9% above its low of December 2022.
• Further out on the spectrum, those who are not in the labor force but want a job now declined -483,000 to 5.234 million, vs. its post-pandemic low of 4.925 million in early 2023.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn. These were more  positive than negative:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, rose 0.1 hours to 41.0 hours, but is still down -0.5 hours from its February 2022 peak of 41.5 hours.

• Manufacturing jobs declined -8,000.
• Within that sector, motor vehicle manufacturing jobs declined -100. 
• Truck driving declilned -100.
• Construction jobs increased 27,000.
• Residential construction jobs, which are even more leading, rose by 3,100 to another new post-pandemic high.
• Goods producing jobs as a whole rose 19,000 to another new expansion high. These should decline before any recession occurs.

• Temporary jobs, which have generally been declining late 2022, fell by another -48,900, and are down about -500,000 since their peak in March 2022. This appears to be not just cyclical, but a secular change in trend.
• the number of people unemployed for 5 weeks or fewer declined -181,000 to 2,128,000.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.10, or +0.3%, to $30.05, for a YoY gain of +4.0%. This continues the decelerating trend in YoY growth in wages since their post pandemic peak of 7.0% in March 2022. Keep in mind that this is still significantly higher than the inflation rate YoY as of last month.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers declined -0.2%, and is up 1.3% YoY, basically in trend for the past 12+ months.

•  the index of aggregate payrolls for non-managerial workers rose 0.2%, and is up 5.3% YoY. These have been slowly decelerating since the end of the pandemic lockdowns. But with the latest YoY consumer inflation reading of 3.3%, this remains powerful evidence that average working families have continued to see gains in “real” spending money.

Other significant data:

• Professional and business employment declined -17,000. These tend to be well-paying jobs. This series had generally been declining since May 2023, but earlier this year had resumed increasing again. As of this month, they are only higher YoY by 0.3% - a very low increase that has *only* happened in the past 80+ years immediately before, during, or after recessions.
• The employment population ratio remained steady at 60.1%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate increased +0.1% to 62.6%, vs. 63.4% in February 2020. It had been growing sharply from late 2021 through 2023, but has completely stalled this year.

SUMMARY

This month’s report continued the theme of much of this year: a fairly strong Establishment Survey, and a weak Household Survey. Turning to the latter first, there was yet another uptick in the unemployment rate, and the pathetic YoY growth in the number of employed as noted above was also consistent with an imminent or even ongoing recession. 

But the Estabslishment Survey remained generally strong, although there were some more cracks in it this month. Aside from the headline growth, most of the leading sectors, as well as manufacturing hours, also showed growth. The nominal gain in average hourly earnings and aggregate payrolls was also decent. The aforesaid “cracks” included a pronounced problem in the (non-)growth in professional and business jobs, the continued decline in temporary help, and the small declines in motor vehicle manufacturing and trucking employment.

There will probably be lots of chatter in the next few days as to whether the “Sahm Rule” has been triggered. It has not, because the 3 month average in the unemployment rate is 4.0%, and the lowest 3 month average in the last year is 3.6%. Additionally, Claudia Sahm herself has indicated that the same immigration issue I have highlighted may also make her metric signal a false positive this time.

Unless there are very large downward benchmark revisions in the Establishment Survey, what I see is continued if less strong growth in the number of jobs, but with fewer new entrants successfully landing those jobs, and several important weak spots, particularly in professional and business employment.