May jobs report: about as poor as an expansiony report could be

 

 - by New Deal democrat



Even before the new Administration took office in Washington, my focus had been on whether the economy would have a “soft” or “hard” landing, i.e., recession. That has only intensified by the utter chaos of tariff-palooza! So my focus now is looking for “hard” vs.”soft” data indicating its impact.

This month’s employment report was ambiguous on that score, but otherwise was about as poor as a jobs report could be and still be expansionary.

Below is my in depth synopsis.

HEADLINES:

• 139,000 jobs added. Private sector jobs increased 140,000. Government jobs declined by -1,000. The three month average was an increase of +135,000, about average for this year, but above the lowest average last summer.
• The pattern of downward revisions to previous months continued this month. March was revised downward by another -65,000, and April was revised downward  by -30,000, for a net decrease of -95,000.
• The alternate, and more volatile measure in the household report, declined by -696,000 jobs. On a YoY basis, this series increased 2,109,000 jobs, or an average of 176,000 monthly.
• The U3 unemployment rate was unchanged at its repeated 12 month high of 4.2%. Since the three month average is 4.2% vs. a low of 3.933% for the three month average in the past 12 months, or an increase of 0.267%, this means the “Sahm rule” remains un-triggered. 
• The U6 underemployment rate was unchanged at 7.8%, down -0.2% from its 3+year high in February.
• Further out on the spectrum, those who are not in the labor force but want a job now rose sharply by 319,000 to 5.991 million, its highest level since July 2021.

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. This month they were mainly negative:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, rose 0.1 hour to 41.0 hours, but remains down -0.6 hours from its 2021 peak of 41.6 hours.

• Manufacturing jobs decreased by -8,000. This series had been  in sharp decline, but even with this month’s decline it has generally leveled off in the past eight months.
• Within that sector, motor vehicle manufacturing jobs rose 400.
• Truck driving ended its two month rebound, declining -900.
• Construction jobs increased another 4,000.
• Residential construction jobs, which are even more leading, rose 3,600 to yet another post-pandemic high.
• Goods producing jobs as a whole declined -5,000 from their 17 year high set last month.  These jobs typically decline before any recession occurs. But on a YoY% basis, these jobs are only 0.2%, which is very anemic although not necesarily recessionary.

• Temporary jobs, which have declined by over -550,000 since late 2022, declilned again this month, by -20,200, setting a new post-pandemic low.
• the number of people unemployed for 5 weeks or fewer increased 264,000 to 2,451,000, just below its 12 month high of 2,465,000 last August.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.12, or +0.4%, to $31.18, for a YoY gain of +4.0%, which is an average YoY gain for the past 12 months. Importantly, this continues to be well above the 2.3% YoY inflation rate as of last month.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers rose a small 0.1% to a new record high. This measure is also up 1.1% YoY, about average for the past two years.

• The index of aggregate payrolls for non-managerial workers also rose 0.5%, and is up 5.2% YoY, about average for the past 12 months. This is also well above the inflation rate, meaning a continuation in the ability of households to increase consumption.

Other significant data:

• Professional and business employment declined -18,000. These tend to be well-paying jobs. This series peaked in May 2023, bottomed in October 2024, and is up less than 0.2% since then. It remains lower YoY by -0.4%, which in the past 80+ years - until now - has almost *always* meant recession. This is vs.  last spring when it was down -0.9% YoY.
• The employment population ratio declined -0.3% to 59.7%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate declined -0.2% to 62.4%, vs. 63.4% in February 2020.

SUMMARY

Although the headline numbers were positive to neutral, this was about as poor a report as could be during an expansion. 

To begin with, the only reason the unemployment and underemployment rates did not go up was that the labor force participation declined significantly. The employment/population ratio also declined. Further out on the spectrum, those not in the labor force but who want a job increased to over a 3 year high. And the number of those laid off for fewer than 5 weeks also increased.

Additionally, most leading sectors declined, including manufacturing, trucking, temporary help, and even goods-producing jobs as a whole. Professional and business employment also declined, as did government employment. The pattern of downward revisions to previous months also continued.

Aside from the headline jobs number, the only bright spots were the slight increase in the manufacturing work week, and the continued rise in construction, and specifically residential construction jobs. Average and aggregate earnings for nonsupervisory workers also held up well.

It continues to be very surprising how well construction employment is holding up. If those turn down in sync with manufacturing, and real aggregate payrolls stall, almost all the ducks would be lined up to signal a recession is likely in the next few months.

YoY jobless claims still rangebound, but continuing claims at 3.5 year high

 

 - by New Deal democrat

Let’s take our weekly look at jobless claims, particularly since it is one of two “quick and dirty” elements that will indicate whether the “recession watch” I inaugurated yesterday will need to be upgraded to a “warning.”

Initial claims rose 8,000 last week to 247,000, while the four week moving average increased 4,500 to 235,000. Meanwhile continuing claims, with the typical one week delay, declined -3,000 to 1. 904 million:

Both initial claims metrics are at 7 month highs, while continuing claims are just below 3.5 year highs. Since there appears to be unresolved post-covid seasonality at work especially with initial claims - which for the last several years have risen into the summer months and then declined into the winter months - I am taking those numbers with several grains of salt. But the continued elevation in continuing claims strongly suggests that laid off workers are having a harder time finding new employment.

As usual, the YoY% changes are more important for forecasting purposes, and there the trend of the last 8 months remains intact, as all three metrics hover in the +5% YoY range:

Initial claims are up 7.9% YoY, the four week average up 5.9%, and continuing claims up 5.2%. These won’t even raise a yellow flag for a recession watch unless and until they are up at minimum 10%. 

In other words, jobless claims continue to indicate a slowly growing economy in the immediate future.

Finally, since jobless claims lead the unemployment rate, let’s take our last look before tomorrow’s jobs report - and here, this week’s new data makes a difference:

With the additional data, it now appears that there is some upward pressure on the unemployment rate going forward for the next few months, as initial + continuing claims together were at new highs. While a decline in the unemployment rate to 4.1% cannot be ruled out, an increase to 4.3% this or next month is very possible as well.

Economically weighted ISM services + manufacturing warrant Recession Watch

 

 - by New Deal democrat

Last month I concluded my report on the economically weighted ISM manufacturing and services indexes by writing “new orders for the entire economy are tight on the cusp of tipping into contraction.”

This month, they did, warranting a “Recession Watch.”

To recap, because manufacturing is much less important to the economy than in the decades before the Millennium, the economically weighted average of the ISM services index (75%) as well as manufacturing (25%), especially over a three month period, has been much more accurate since 2000.

On Monday the ISM manufacturing index came in at 48.5, and its three month average was 48.7. The new orders subindex came in at 47.6, and its three month average was 46.7. I wrote then that “ Thus, to signal economic contraction, this month’s numbers in the non-manufacturing report, which will be reported on Wednesday, must be 49.8 and 49.5, respectively.”

This morning the non-manufacturing index was reported at 49.9, just 0.1 above that threshold. But the new orders index was reported at 46.4, well below the tipping point.

Here the three months in the headline numbers (first line) and the three month average for services, plus the same as to the new orders services subindex (second line):

50.8, 51.6, 49.9 —> 50.8

50.4, 52.3, 46.4 —> 49.7  

Below are comparisons of the headline manufacturing and services indexes:

And for the manufacturing and services new orders indexes:

While we came close last summer, at no point did either of the three month economically weighted averages tip into contraction. In May the three month economically weighted average of the headline indexes was 50.3. But the three month economically weighted average of the more leading new orders subindexes was 49.0. This raises a red flag.

In short, new orders for the economy as a whole contracted in May. This is enough to warrant a “recession watch.” Should the headline numbers follow, that would warrant a “recession warning.”

As I’ve said in the past, treat the terms “watch” and “warning” the way you would for weather. A “watch” means that conditions are right, and the economy is at significantly heightened risk of a recession starting in the next few months. A “warning” would mean that a recession is likely, and almost imminently.

In the meantime, watch to see if the remaining short leading indicators to fall into place, most notably new jobless claims, consumer retail spending, employment in the goods-producing sectors, at very least a stalling in aggregate real payroll growth, and a new decline in the stock market.

April job openings, hires, quits, and layoffs: possibly the last month before the effects of Tariff-palooza! are felt

 

 - by New Deal democrat

The JOLTS survey, which decomposes the employment market into openings, hires, quits, and layoffs, was reported this morning for April. In 2024 the data were most consistent with a “soft landing,” but the actions of the new Administration, especially on trade, have exacerbated the fear that this might transform into a “hard” landing, a/k/a a recession.

In April the news was mixed.

Let’s start with job openings, hires, and quits all normed to 100 as of just before the pandemic:

Openings, which are “soft” data and have generally uptrended going all the way back to the turn of the Millennium, have remained above their pre-pandemic levels, and this month improved by 391,000 to 7.391 million. Hires also increased by 169,000 to 5.573 million, but remain below their pre-pandemic levels. Meanwhile quits declined another -150,000 to 3.194 million, significantly below their pre-pandemic levels, but above their level through much of last year. 

Focusing on the past 12 months of data continues to show stabilization - a plus sign for the continuation of the “soft landing” scenario:

Several components are slight leading indicators for jobless claims, unemployment and wage growth.

Recently one item of concern has been layoffs and discharges, which generally have averaged higher since last July. This weakness continued in April, as they increased by 196,000 to 1.796 million, their highest level in two years except for last September and October:

This is consistent with the increase in the unemployment rate (red, right scale) to new levels in the past year, as well as the recent trends in new and continuing jobless claims (not shown), both of which typically follow with a short lag.

Additionally, the quits rate (left scale) typically leads the YoY% change in average hourly wages for nonsupervisory workers (red, right scale):

In April the quits rate fell back -0.1% to 2.0%. Although in the past few months the trend has been a slight improvement, this is still below any post-pandemic reading before last September. This downshift has not yet been reflected in average hourly wages, which tend to follow with a lag. Thus the likelihood remains that wage growth will decelerate further on a YoY basis over the next few months.

The message of this morning’s JOLTS report, like last month’s is that the “soft landing” was intact through April, although future wage gains are likely to be further attenuated. Unfortunately, of course, this was almost certainly one of the last reports - if not *the* last report - not to be affected by Tariff-palooza.

April construction spending continues slightly declining trend

 

 - by New Deal democrat

Let’s take a look now at construction spending for April. To cut to the chase, in all respects there was a continued decline.

In nominal terms, total construction spending declined -0.4%, while the more leading residential construction spending declined -0.9%, the third straight month for declines in both measures:

Total nominal construction spending is down -1.9% since January, while residential spending is down -3.9%. But as the below graph shows, over the past 25 years there have been other, steeper declines without a recession occurring. In 2007, the respective declines were -8.5% and -28.1% before the Great Recession actually started (graph is in log scale better to show the magnitude of declines):

Because the cost of construction materials rose 0.7% in April, real total construction spending declined -1.1% for the month, while real residential construction spending declined -1.6%. Again, as you can see in the below graph also set to log scale, there have been several steeper declines in the past 10 years without a recession occurring:

Of note, both total and manufacturing industrial production are down slightly from their last peaks in January and February, respectively:

Putting this report together with this morning’s other report on manufacturing from ISM, it appears the goods-producing part of the economy as a whole is very slightly contracting. It will be interesting to see if this is reflected in a decline in goods-producing jobs in Friday’s report. But as I indicated in my earlier note this morning, the US economy is so heavily weighted towards services that I would need to see those turn down as well, at least slightly, to warrant a recession watch.

May ISM manufacturing report shows continuing sectoral contraction, but still signals slow economic growth

 

 - by New Deal democrat

As usual, we started out the month with reports on both manufacturing and construction. I am posting separately on the two this month. So let’s start with the ISM manufacturing report, a recognized leading indicator for the past 60+ years, although of diminished importance since the turn of the Millennium (it was in deep contraction both in 2015-16 and again in 2022 without a recession occurring).

To recap briefly, any number below 50 indicates contraction. The ISM itself indicates that the number must be 42.5 or less to signal recession. For forecasting purposes, I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively.

In this morning’s report, the headline number for May declined -0.2 to 48.5, the third straight month of contraction, while the more leading new orders subindex rose +0.4 to 47.6. As per the above, both indicate continued contraction.

Here is a look at both the total index (gray) and new orders subindex (blue) for the past ten years:

Note that both remain better than they were in 2022-23.

Hare the last six months of both the headline (left column) and new orders (right) numbers:

DEC 49.2. 52.1

JAN 50.9  55.1

FEB  50.3  48.6

MAR 49.0. 45.2

APR 48.7. 47.2

MAY 48.5. 47.6

The current three month average for the total index is 48.7, and for the new orders subindex 46.7. 

As I indicated above, for the economy as a whole the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. In the non-manufacturing report, the average of the last two months for the headline and new orders numbers has been 51.2 and 51.4, respectively. Thus, to signal economic contraction, this month’s numbers in the non-manufacturing report, which will be reported on Wednesday, must be 49.8 and 49.5, respectively. Or, more generally, if the non-manufacturing numbers on Wednesday show continued growth, the economy as a whole is not in recession now nor will be in the next several months.

In any event, as of today, the forecast signal remains a very slowly growing economy.