March jobs report: possibly the last good report of the expansion

 

 - by New Deal democrat

My question over the past year has been whether “decleration” would turn into “deterioration.” For a “soft landing,” deceleration would need to end, and the numbers stabilize, vs. continuing to deteriorate towards an actual downturn. With the stupefying economic moves by the new Administration, looking for hard data indicating the onset of a recession must also be a top concern.

To put it simply, this month was probably the last good employment report.

Below is my in depth synopsis.

HEADLINES:

• 228,000 jobs added. Private sector jobs increased 209,000. Government jobs increased by 19,000. The three month average was an increase of +152,000, the lowest gain since last summer.
• The pattern of downward revisions to previous months continued this month. January was revised downward by -14,000, and February uary was revised downward  by -34,000, for a net decrease of -48,000.
• The alternate, and more volatile measure in the household report, increased by 201,000 jobs. On a YoY basis, this series increased 2,083,000 jobs, or an average of 174,000 monthly.
• The U3 unemployment rate rose another 0.1% to 4.2%. Since the three month average is 4.1% vs. a low of 3.5% for the three month average in the past 12 months, or an increase of 0.6%, this means the “Sahm rule” has been triggered once again. 
• The U6 underemployment rate declined -0.1%, to 7.9% from its 3+year high in February, which was its highest level since October 2021.
• Further out on the spectrum, those who are not in the labor force but want a job now also rose another 22,000 to 5.915 million, the highest number 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 almost all positive:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, rose 0.1 hours to 41.1 hours, This is the highest reading since May 2022, although it remains down -0.5 hours from its 2021 peak of 41.6 hours.

• Manufacturing jobs increased 1,000. This series has been firmly in decline, although it *may* have leveled off in the past six months. The three month average is only slightly above last month’s, which was the lowest since mid year 2022.
• Within that sector, motor vehicle manufacturing jobs fell -200.
• Truck driving rebounded sharply, up 9,600.
• Construction jobs increased another 13,000.
• Residential construction jobs, which are even more leading, rose by amother 3,100 to another new post-pandemic high.
• Goods producing jobs as a whole increased 12,000, and are at their highest level in 17 years! This is especially important, because these typically decline before any recession occurs. On a YoY% basis, these jobs are only up 0.3%, which is very anemic although not quite recessionary.

• Temporary jobs, which have declined by over -550,000 since late 2022, declined by another -6,400. Nevertheless this month remained above their October 2024 low, so this may still suggest that the bottom in this metric is in. 
• the number of people unemployed for 5 weeks or fewer rose another 25,000 to 2,362,000, vs. its 12 month high of 2,465,000 last August.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.05, or +0.2%, to $30.96, for a YoY gain of +3.9%, the lowest YoY% gain since spring of 2021. On the other hand, Importantly, this continues to be well above the 2.8% YoY inflation rate as of last month.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers rose a sharp 0.6% to a new record high. This measure is also up 1.1% YoY, right in line with its average for the past 12+ months. 

• The index of aggregate payrolls for non-managerial workers also rose a sharp 0.9%, and is up 5.1% YoY, slightly above its average YoY rate in the past 18 months. This series should also increase compared with inflation, indicating a continuation in the ability of households to increase consumption.

Other significant data:

• Professional and business employment increased 3,000. These tend to be well-paying jobs. This series has been down YoY since September 2023, and is now -0.2% YoY, which in the past 80+ years - until now - has almost *always* meant recession. On the other hand it has stabilized since last summer, vs. being down -0.9% YoY last April.
• The employment population ratio was unchanged at 59.9%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate increased 0.1% to 62.5%, vs. 63.4% in February 2020.

SUMMARY

Although there were some negatives, this was generally a good, positive report. The large majority of leading employment sectors showed an increase in employment. Aggregate hours and payrolls also rose sharply.

The weak spots were the new near four year low in YoY average hourly earnings, and an increase in the unemployment rate. But that was driven primarily by an increase in the labor force rather than by a decrease in employment. The number of persons not in the labor force but who want a job also increased. As I have written a number of times in the past year, this is likely heavily influenced by the surge in immigration since the pandemic. Jobs, hours, and pay continue to increase at a decent clip; but the raw number of persons seeking employment has increased even more.

So this was a good, positive report. Possibly the last one before the impact of the tariff disaster.

Economically weighted ISM manufacturing + services on the cusp on yellow caution flag

 

 - by New Deal democrat

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.

In March the expansionary headline and new orders readings in the ISM services report decelerated sharply, to 50.8 and 50.4, respectively. As 50 is the dividing line between expansion and contraction, these are just barely expansionary. The three month average of each also declined from 53.4 to 52.8 and from 52.6 to 51.3 respectively.

Here is a graph of both the headline number (blue) and the new orders subindex (gray) for the past year, showing that they are both now in clear downtrends:

More concerning is that these are now compared with contractionary readings from the manufacturing index.

For March alone, the economically weighted headline average was 50.4, but the new orders weighted average fell into contraction at 49.1. The three month economically weighted average for the manufacturing and non-manufacturing indexes combined is 51.8 for the headline, and 50.9 for new orders.

Because it is only one month in the new orders component that has fallen below 50, we aren’t quite in the yellow caution zone yet. But if next month’s readings duplicate this month’s, the new orders component will give at very merit the yellow caution flag.

Possibly not the best time to intentionally start a trade war.

Jobless claims continue tame

 

 - by New Deal democrat

This week initial jobless claims declined -6,000 to 219,000. The four week moving average declined -1,250 to 223,000. With the typical one week delay, continuing claims rose 56,000 to 1.903 million, the highest number since 2021:

Since last year this week there was something of an outlier to the upside, by comparison YoY claims were down by -1.8%. The four week moving average remained higher by 3.4%, and continuing claims were also higher by 6.4%:

As I normally state, it is the YoY% comparison which is more important for forecasting purposes, and these number continue to indicate expansion, albeit at a slow pace.

It is important to note that if the Administration’s total disruption of the economy is going to have a major effect, we should start to see it in new jobless claims very soon. But so far, pretty much nada.

Finally, let’s take our final look at what this bodes for the unemployment rate. Here’s the YoY% view, with claims averaged monthly:

Here’s the look in absolute numbers:

With claims hovering at the 4-5% range in the past few months, this forecasts the unemployment rate tending towards 4.0% (i.e., 3.8%*1.045).

“Those who cannot see must feel:” global trade and tariffs edition

 

 - by New Deal democrat

Before I get to today’s data, let me make this brief note on the tariffs that were announced late yesterday and the instant reaction overnight. As to the effect on the US and global economy, I really don’t have anything useful to add to the general consensus of economists and other financial types; namely, this will function as a tax increase on consumers, who must pay more for the imported goods and services. I doubt very much there will be an expansion of domestic employment in “re-shored” industries to make up for that loss.

Aside from the fact that the entire process was slapdash, including tariffs on uninhabited islands and a joint US/UK military base, and that the formula boils down to a grade-schooler’s understanding of trade as zero-sum, more importantly the idea is being sold as a “re-ordering” of “global fair trade,” which like so many other moves made by this Administration, is illegal. Congress sets the terms of trade, including tariffs. Congress gave Presidents an “emergency” exception. T—-p invented a “fentanyl” emergency on the border, which he has now used for an entire global undoing of decades of policy - patently beyond his authority as President.

Which returns us to a fundamental Constitutional defect. The only remedies for such an overreach are either a Supreme Court decision which the Court decides it has to power to make, and which the President obeys; or Impeachment and Removal by the Congress, which requires a 2/3’s majority vote of the Senate - in other words, a dead letter.

As my old German grandmother used to say, “Those who cannot see must feel.” Americans in particular are about to have a very heavy round of “feeling.”

February JOLTS report: “soft landing” so far, but indications of further weakness ahead

 

- by New Deal democrat

 Along with all the other reports, yesterday the JOLTS survey was updated for February. This survey decomposes the employment market into openings, hires, quits, and layoffs, and so gives a more granular view. The question over the past year has been whether they best describe a “soft landing,” or “hard” one ending in recession.

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

In February the news was mainly good, as most categories stabilized.

First, here are 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, remain above their pre-pandemic levels, but this is not terribly significant. Both hires and quits fell below their pre-pandemic levels at the beginning of last year. But the far right end of the graph suggests stabilization, which is even more apparent when we zoom in on the past 12 months:

Openings are virtually unchanged from their level 10 months ago. Hires have been very stable since last July, and Quits have been stable since August. In fact on a 3 month average basis, both Hires and Openings have remained within a 1% range.

This is good news. It says “soft landing” (barring political own-goals in Washington like massive tariff wars, of course).

One item of concern in the report was layoffs and discharges, which increased to their highest level in almost two years excluding last September:

This is of a piece with the uptick in new jobless claims (red, right scale) we have seen in February and March, which in turn suggests there may be some upward pressure on the unemployment rate in the coming months.

Finally, here is the update on the quits rate (right scale) vs. the YoY% change in average hourly wages for nonsupervisory workers (red, left scale):

While the quits rate has been stable since last August, it did downshift from earlier in 2024. Average hourly wages have not yet reflected that downshift, but the likelihood is that they will follow, down to a YoY growth rate of about 3.6%-3.7% in the coming months.

To sum up, the coincident reporting in the JOLTS data indicates “soft landing” so far, while the short leading components suggest weaker employment data in the next few months.

February construction spending: nominal vs. real makes all the difference

 

 - by New Deal democrat

Since the turn of the Millennium, a downturn in manufacturing has not been enough to tip the economy into recession. There must also be a decline in construction as well.

This morning’s construction spending report for February painted a substantially different picture depending on whether the data was looked at nominally or in real inflation adjusted terms.

Nominally total construction spending (blue in the graph below) rose 0.7% in the month to yet another new all-time record; while residential spending (red, right scale) rose a sharp 1.3%, close to a 12 month high:

But when we deflate by the cost of construction materials, the picture is not so rosy:

So adjusted, total spending actually declined -0.1%, and residential spending rose 0.4%. 

The picture for the leading residential sector is that spending has been trending sideways (much like permits, starts, and sales) for the past year, while total construction is slowing. In fact in real terms it has not advanced in four months.

Finally, the boom in manufacturing construction has also ended:

The overall picture for the entire goods producing sector of the US economy from this morning’s ISM and construction spending reports is that both manufacturing and construction are almost right at the juncture between expansion and contraction.

Heavy truck sales warrant a yellow caution flag

 

 - by New Deal democrat

After this morning’s contractionary ISM manufacturing report, it occurred to me to look at heavy truck sales to see if they confirmed the downturn. They did, but like the manufacturing index, 

While passenger vehicle sales are very noisy, heavy truck sales convey far more signal than noise, and usually turn down before car and light truck sales, as shown in the below historical graph (averaged quarterly for ease of viewing):

Here is the updated graph since the pandemic, monthly through the latest report from earlier this week for February:

Heavy truck sales were 438,000 annualized, the lowest monthly number since January 2022. The three month average, which does away with most of the noise, was 461,000 annualized, the lowest three months since spring of 2022.

When the three month average of heavy truck sales is down more than -10% from its peak, that has more often than not been a leading indicator of recessions within a year. But note the false positives in 1996, 2016, and 2022, so I am not at the point yet where I am sufficiently confident to say that they warrant a “recession watch,” just a yellow flag caution.

Typically auto and light truck sales have also declined before the onset of recessions, although as noted above they are much noisier. As late as December those made a 3+ year high. I would be looking for the three month average of those to fall below 15 million annualized as a confirmatory signal.

ISM manufacturing index returns to contraction as the front-running of tariffs has ended

 

 - by New Deal democrat

[Note: I’ll report separately on construction spending, also released this morning]

Although manufacturing is of diminishing importance to the economy, (it was in deep contraction both in 2015-16 and again in 2022 without any recession), the ISM manufacturing index remains an important indicator with a 75+ year history of accurately describing that sector and forecasting it over the short term. 

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

In the last few months, as most businesses likely figured that the new Administration would be laying more tariffs, it appears there was a rush to get their new orders in asap. That was confirmed by this morning’s report for March, in which the headline index declined -1.3 to 49.0, the lowest since November, and new orders declined -3.4 to 45.2, the lowest level since last June.

Here is a look at both the total index and new orders subindex since the Great Recession:

Including this month, here are the last six months of both the headline (left column) and new orders (right) numbers:

OCT 46.5. 47.1

NOV  48.4. 50.4

DEC 49.2. 52.1

JAN 50.9  55.1

FEB  50.3  48.6

MAR 49.0. 45.2

The current three month average for the total index is 50.1, and for the new orders subindex 49.6. While the headline number is similar to those of last summer and autumn, as noted above the new orders component is the lowest since last June. 

Last month I wrote that “The surge and then retreat in new orders in particular certainly looks like front-running potential tariffs.” This month’s further decline makes that look like almost a certainty. And the uncertainty about the level and extent of looming tariffs undoubtedly is also having an effect on new orders as well.

For the economy as a whole, the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. Since In February the ISM services index came in at 53.5, and the more leading new orders subindex at 52.2, and the three month weighted average of each was 53.4 and 52.6 respectively, it would take a very steep decline in that index to signal recession now.

In summary, as of now the combined indexes continue to suggest that the economy is growing, albeit slowly. The non-manufacturing index for March will be reported on Thursday.

Why I am not concerned by the February increase in core PCE inflation

 

 - by New Deal democrat

The deluge of new monthly data starts tomorrow. Today there’s no significant data, so let me follow up on a point from Friday’s personal income and spending report.

I never look to see what others are saying before I finish my own analysis, because I want to be as unbiased as possible. After that I may check other analyses, and usually they aren’t too different (except for the perma-DOOOMers, who always gotta perma-DOOOM).

Friday was different, because almost everybody else who looked at the personal income and spending report focused on a perceived renewed inflationary pulse. So let me explain in a couple of graphs why I arrived at a different perspective.

A good example of the concern in other quarters was this take by Harvard Econ Prof. Jason Furman:

Core PCE inflation came in a little above the already high expectations in Feb. The pattern is the opposite of what you want to see--the shorter the window the higher the annualized rate (and still high at 12 months):

1 month: 4.5% 3 months: 3.6% 6 months: 3.1% 12 months: 2.8%

And he supplied in support the following graph:

The three month change in particular looks very worrisome.

But notice something else in the graph. Specifically, notice that there was a similar - even bigger - spike in the 3 month average at the beginning of 2024. And in fact there were lots of inflationary concerns expressed back then as well.

And then they completely faded away in the spring and summer.

The reason is apparent when we look at the monthly readings starting back in October 2023, shown in the below graph for both headline (light blue) and core (dark blue) PCE inflation:

There was a big spike in the monthly readings from January through April of last year. Then it simply stopped.

Which has the following effect on the YoY% numbers:

At its low point in the past year, YoY core PCE inflation was 2.63%. As of Friday it was 2.79%. In other words, an increase of all of 0.16%.

So what we have is a repeat of the monthly spike we saw 12 months ago, that has had a very small effect on the YoY comparisons. And is very much in line with the likely unresolved seasonality we have seen in a number of indicators since COVID, including weekly jobless claims and personal spending.

If the monthly number don’t back off in a month or two, and the YoY comparisons get significantly higher than they were 12 months ago, I’ll be convinced that there is a real problem. Unless and until that happens, I am somewhat skeptical.