June employment report: weakly positive headlines, and important negatives in hours and payrolls

 

 - by New Deal democrat

My Big Theme for the past few months has been that the AI Boom (or possibly bubble) is counterbalancing a stagnant or even shallowly recessionary rest of the economy. After three good reports in a row, the June employment report was very weak, and in some respects even negative.

Below is my in depth synopsis.

But first, because this report was release on a Thursday, let me note that initial jobless claims continued very low, unchanged at 215,000. The four week moving average declined -2,500 to 222,000. With the typical one week delay, continuing claims rose 2,000 to 1.814 million. More importantly, on a YoY basis, initial claims were down -6.9%, the four week average down -7.1%, and continuing claims down -7.2%. This series continues to be one of the two most positive short leading indicators for the economy, along with the stock market.

HEADLINES:

• 57,000 jobs gained, Private sector jobs increased 49,000, while government jobs added 8,000. The three month average rose declined to 111,000, about average for this year, and better than last year.
• The pattern of downward revisions to previous months completely resumed this month. April was revised lower by -31,000, and May was revised lower by -43,000, for a total decline of -74,000.
• The alternate, and more volatile measure in the household report, declined sharply, by -507,000 jobs. On a YoY basis, this series was negative for the fifth month in a row, now sharply down by -963,000 jobs, or over -80,000 per month
• The U3 unemployment rate declined -0.1% to 4.2%. 
• The U6 underemployment rate declined -0.2% to 7.9%.
• Further out on the spectrum, those who are not in the labor force but want a job now declined -142,000 to 6.085 million, in the average range for the past 12 months..

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 vs. rebounding. These were mixed.

• The average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, was unchanged at 41.6 hours, tied for the highest number in 5 years, equalling its 2021 peak.

• Manufacturing jobs rose 3,000, only the 3rd increase in the last 12 months.
• Truck driving continued its decline, by -1,300.
• Construction jobs rose +11,000.
• But Residential construction jobs, which are even more leading, declined -2,900, taking out their interim low from last April, and setting a new 3 year low.
• Goods producing jobs as a whole rose +10,000. 

• Temporary jobs, which declined by over -650,000 since late 2022, rose by 9,300, continuing to improve from their post-pandemic low set last October.
• The number of people unemployed for 5 weeks or less declined -28,000 to 2.182 million, about average for the past 12 months.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.07, or +0.2%, to $32.38, for a YoY gain of +3.4%, the lowest in 5 years low. This is also substantially lower than the 4.2% YoY inflation rate as of May.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers *declined* -0.4%, and is up 1.0% YoY, still a good comparison with the past 2 years.

• The index of aggregate payrolls for non-managerial workers also *declined* -0.1%, and is up 4.5% YoY, about average for the past 2 years, but only 0.3% above the YoY inflation rate through May.

Other significant data:

• Professional and business employment rose for the third month in a row, by +36,000. These tend to be well-paying jobs. This remains above its October low, and has finally turned higher YoY as well.
• The employment population ratio declined another -0.2% to 59.0%, vs. 61.1% in February 2020, and its lowest since October 2021.
• The Labor Force Participation Rate declilned -0.3% to 61.5% , vs. 63.4% in February 2020, and the lowest since February 2021. IMPORTANT: both the EPOP and LFPR are greatly affected by the retiring Boomer population. In the prime age 25-54 demographic, they are virtually unchanged.

SUMMARY

After three  good monthly reports in a row, this was a big stumble, although it remained mainly positive, with the major exception of hours and payrolls.

The positives included the declines in the unemployment and underemployment rates, the headline employment number, plus increases in the leading manufacturing, construction, and general goods producing sectors. Temporary help jobs and professional and business jobs increased. 

But there were important negatives as well, including the volatile monthly Household Survey employment number, as well as the leading sectors of residential construction and truck driving. But the most significant negatives were the YoY change in nonsupervisory hourly wages and the actual declines in both aggregate nonsupervisory hours and payrolls. The first two are almost certainly negative in real terms, once we find out what the June inflation number is, and the last one may have edged closer to flat YoY as well. This would mean that this very important short leading indicator will remain below its January peak for the 5th month in a row, which in the past has strongly suggested a recession is near.

Starting off the second half of 2026 (mainly) positive

 

 - by New Deal democrat

[Special programming note: Today we begin the second half of the year. On Friday there will be no data due to the federal holiday. Since I haven’t updated my overall nowcast and forecast for the economy, as well as how average Americans are doing economically, I plan to do so then.

Additionally, in observance of the 250th anniversary of American independence, over the weekend I plan on a Big Picture overview of what history suggests about the status of the Republic, and where it goes from here.]

In the meantime, with the beginning of the new month, we get important looks to two leading sectors of the economy; namely, manufacturing and construction. Additionally, yesterday snuck by without me taking a look at the May JOLTS report, so let me give a brief overview now.

The JOLTS Report

This report comes out one month after the jobs report, but parses the jobs market by hiring, firing, openings, and quits. With one exception, yesterday’s report showed a steady state.

Job openings (blue in the graph below) increased sharply in April, and maintained that high level in May, increasing 9,000 to 7.594 million annualized, the highest level in two years. Hires (red), on the contrary, declined -45,000 to 5.170 million, slightly below the average flat trend of the past two years. Voluntary quits (gold) increased 22,000 to 3.065 million, also slightly below its average flat trend for the past two years as well [Note; in the below graph, all three are normed to 100 as of their pre-pandemic levels]:

Most importantly, both hires and quits have been flat at about 88% of their pre-pandemic average over the past two years. Job openings have clearly increased recently, and are currently about 20% higher than their pre-pandemic level, but I regard that statistic as a “soft” one, vs. the other two.

The most significant number was the level of layoffs and discharges, which increased 41,000 to 1.708 million:

But most noteworthy is that the average level of layoffs declined sharply late last year, and with some noise, has remained at that low level, only about 85% of the already-low pre-pandemic level. This very much confirms what we have been seeing in initial jobless claims ever since 12 months ago.

In summary, the May JOLTS report shows that we have transitioned from a “low hire, low fire” economy to a “low hire, almost *no* fire” one.

ISM Manufacturing

The ISM manufacturing report is for June, the first economic report for that month. And it continued the string of positive reports we have seen here since the beginning of this year. The headline number declined -0.7 to 53.3, still expansionary:

The more leading new orders subindex declined -0.8 to 56.0, which is still strongly expansionary:

But the more important news this month was contained in two other subindexes. First, the employment subindex increased 1.1 to 49.7, virtually in equipoise for the first time in almost 18 months:

And the prices paid subindex showed a sharp deceleration in inflation pressures, down -9.1 to a still-high 73.0:

To minimize noise, I pay particular attention to the three month moving averages, especially of the headline number, which was 53.3, and the leading new orders subindex, which was 55.6.

This was a very positive report, showing expanding production which is likely to continue, a firming of employment, and while there are still inflationary pressures in the pipeline, they are less extreme than in the past few months.

Construction Spending

This report like the JOLTS report above, was also for May. It was much more of a mixed bag.

Total construction spending (blue) rose 0.1% for the month, but was lower -1.5% YoY. Spending in the important leading housing sector (red) rose 0.4%, and was 1.8% higher YoY. But since the price of construction materials (gold) rose 1.1% in the months, in real terms both headline and residential construction spending were down for the month. And since prices for construction materials were higher 5.6% YoY, both were also down YoY [Note: below graphs are normed to 100 as of just before the pandemic]:

Manufacturing construction also continued its slide, down -1.4% for the month, and down 21.9% YoY. The Boom set off by Biden’s infrastructure stimulus has clearly worn off:

The two sectors most closely associated with the AI data center Boom (or bubble) are water supply and power production. Spending for each declined -0.2% for the month. For the last 12 months, water supply construction has only increased 0.2%, and power production by 1.2%:

It may be that the bloom is coming off the rose, particularly when we adjust by the price of materials as noted above.

Finally, although I won’t bother with a graph, there are several other significant components of the headline numbers. Office construction was up 3.6% YoY, highway and street construction by 3.0%, and educational construction up 2.8%. But commercial construction was down -6.0%.

In short, nominally construction spending has increased this year, although interestingly not at all in the two subsectors most associated with AI data center construction. But in real terms, deflated by the cost of materials, all of the significant subsectors, as well as the headline, have declined.

Summary: The manufacturing sector of the economy continues its run of positive, expansionary numbers, while construction in real terms appears to be fading slightly. Meanwhile, job hiring is steady if low, while layoffs are extremely low. Overall the short leading and coincident aspects of these numbers are positive. We’ll see if that run continues in the jobs report tomorrow.

Repeat home sales continue to show almost no shelter inflation at all

 

 - by New Deal democrat

Besides affordability being of great importance for potential homebuyers, housing also forms about 1/3rd of the entire CPI. House prices are not a component of the CPI, but historically their trend has led the official component, “Owners’ Equivalent Rent,” by about 12 to 18 months. And for about the last year, I have been beating the drum that housing prices have ceased being an engine of inflation. In fact, changes in repeat home sales prices as measured by both the Case-Shiller National Index and the FHFA Purchase Only Index are at levels that with only one exception have been at levels typically only seen during or after recessions.

This month’s report for April continued that trend.

The seasonally adjusted Case-Shiller National index (blue in the graphs below) declined once again, this month by -0.1% for the three month period ending in April, and the FHFA index (red) had the identical -0.1% decline [Note: FRED has not yet updated the Case Shiller data]:

There is something of a divergence showing in the YoY comparisons of the two national indexes, however. The Case Shiller national index increased only 0.8% YoY, slightly more than the 0.7% YoY gain last month; while the FHFA Index rose 0.3% on a YoY basis to a 2.0% increase. Either way, as the graph below shows, outside of the Great Recession’s housing bust, the 1991 recession, and briefly in 2022, these remain among the lowest readings ever:

Given the lead time between house prices and the official CPI shelter component, here is an upate on the historical comparison [Note: CPI*2.5 for scale]:

Just as in the similar episode back in 1991, the trend in house prices has been continued slow disinflation. This has been complicated by the “shelter kludge” that the Census Bureau performed last November as a result of the government shutdown. Thus I suspect the CPI shelter readings from November through March may have been artificially low, and the April and May readings of +3.3% and +3.4% may be closer to the ground truth. Nevertheless this continues to show disinflation from the 3.6% reading immediately before the shutdown. Thus I continue to believe that the repeat sales indexes point to continued slow deceleration in the shelter inflation in the CPI.

In this regard, it’s worth noting that the median price for an existing home as most recently reported by Realtor.com was only higher by 1.3% YoY, and for new single family houses as reported by the Census Bureau there was no change whatsoever [Note: Realtor.com only allows FRED to post the last year of data]:

The good news is in the real world housing is barely contributing to inflation at all. The bad news, as shown in this final graph below, is that measured by prices housing continues to be more unaffordable than at any time before the pandemic, including during the bubble of 2001-05, currently 2.6% above that peak:

And that doen’t even take into account the increase in mortgage rates from 3% right after the pandemic to over 6% now.

Re-examing the long leading indicators: the effects of fiscal and commodity price shocks

 

 - by New Deal democrat

Several weeks ago, I wrote that “after 20 years, I think it’s time to examine whether the broad range of long leading indicators hold up.” This was primarily because, while when they have been positive the economy has followed suit 12 to 24 months later, several times they have been negative with no endogenous recession occurring thereafter: once in 2018-19 (COVID being the decisive external factor), and once in 2022-23. Historically they also had a false positive in 1966.

In that post I examined the 4 identified by Prof. Geoffrey Moore in the 1980s (and subequently used by ECRI), which were corporate bonds, corporate profits deflated by labor costs, real money supply, and housing permits; plus common measures of the yield curve, and also real retail sales per capita.

At the end of that post, I made mention of the impact of fiscal, i.e., government spending. In this post I want to take a more detailed look at the two exemplar misses: 1966 and 2022.

Here is what Prof. Moore’s four long leading indicators, plus the yield spread between the 10 year Treasury and the Fed Funds rate looked like in the 1960s, normed to 100 as of December 1965 (I’ve also inverted corporate bond yields, so that an increase shows as a negative, and recalibrated the scale of the yield curve so that an inverted curve shows below value “100”):

As you can see, in 1966 every long leading indicator turned negative with the exception of real money supply, which was flat. This was a very strong recessionary signal. And yet, among other things, neither real GDP nor employment turned down:

Additionally, while real retail sales turned negative YoY, real income less government transfers did not:

Similarly, in 2022, every indicator declined for almost the entire year. Thereafter, several turned neutral, while corporate profits rebounded beginning in 2023:

Again, this was a strong recessionary signal. But real GDP only declined slightly for one quarter at the beginning of 2022, was flat the next, and then recovered, while employment never declined at all:

In 2022-23, both real retail sales and real income less government transfers did briefly decline YoY, but not in sync:

So, what overcame these recessionary signals? It appears that two even more powerful forces were in play.

The first was a positive price shock in the form of declining producer prices. 

To put this in context, here is the long term historical look at the YoY% change in PPI for finished goods (red) vs. CPI (blue):

With the exception of 1970, the onset of every other recession since the end of World War II has featured producer prices increasing faster than consumer prices. How this affects the economy is fairly straightforward: if producer input prices cannot be passed through to consumers, corporate profits will suffer, and cutbacks in hours and employment will begin.

But especially since 2000, there have been times where PPI inflation has equalled or exceeded CPI inflation without any recession. The simple dynamic going on here has been the decline in the labor share of producer income generated:

Now let’s look at 1966. There was a surge in PPI vs. CPI during 1965-66, but thereafter the PPI index abated:

In fact, beginning in September 1966, producer prices declined -1.1% through April 1967, relieving the pressure on employers.

A similar dynamic played out in 2022-23. From July 2022 through December 2023, producer prices declined -4.7%:

Both of these were “positive” price shocks, enabling corporate profits to increase without cutbacks to employment or an ensuing recession.

The second commonality to both episodes was huge government stimulus. Once again, here is the long term historical look, in log scale:

It’s easy to see that the mid-1960s, plus the stimulus payments during the Great Recession and COVID have been the three biggest expansions in government expenditure during this entire 75 year period. 

In the 1960s, from the beginning of 1965 through the end of 1966, even accounting for inflation, there was a 25% increase in government spending per capita:

This was LBJ’s “guns and butter” spending on both the VIetnam War and Great Society domestic programs.

The COVID stimulus was even bigger, with the 2020 stimulus increasing real per capita government spending by over 80% and the 2021 stimulus by almost 70% compared with just before the pandemic:

As a result, in 2021 real spending was 15% higher than before the pandemic, while real income even without the stimulus payments was up about 4%. Although each of these declined at differing periods during 2022 and 2023, employment (gold) never caught up even to its pre-pandemic level until the middle of 2022:

In other words, there was still a huge shortfall in the number of employees needed to fulfill all the consumer spending that had been unleashed by the stimulus. 

Finally, it’s worth noting that we do have the contrary example, of a contraction in federal spending leading to a recession, in the -10% reduction in New Deal spending that took place in 1937 through to be primarily responsible for the deep recession of 1938:

Let’s put this all together: the long leading indicators have been reliable in forecasting continued expansion, but several times have suggested a recession was likely ahead, but none materialized. In each of those cases, however, the endogenous progression of the economic cycle has been overcome by both (1) a positive supply shock in the form of disinflating or even deflating commodity prices; and (2) huge government stimulus programs. 

Because we don’t have enough examples, it’s impossible to know which of these two factors was more important, or whether both were necessary. Additionally, because the former is an exogenous event and the latter is often geopolitical, it is very unlikely that they could be forecast. On the other hand, in both 1966 and 2022 the government stimulus programs were already in place, meaning they can be taken into account in long leading forecasting.

I still plan on doing some further re-examination, so stay tuned.

Weekly Indicators for June 22 - 26 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

Unsurprisingly, the most significant high frequency indicator of the week was the 10% YoY increase in consumer spending as measured by Redbook. Despite all of the chaos and own-goals emanating out of Washington, the economy is incredibly resilient - although I continue to worry that nearly the only driving force is what looks like a Bubble in construction of AI mega-scale data centers.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a little lunch money for curating the data for you.