Wednesday, April 6, 2016

JOLTS, Labor Market Conditions Index give different clues to job growth

 - by New Deal democrat

After a blizzard of data last Friday, this week is pretty desolate.  But we do have two follow-up reports on the labor market: the Labor Market Conditions Index, and the JOLTS report.

Let's start with the LMCI.  As I have previously noted, the LMCI shows promise as a long leading indicator, as 40 years worth of data shows it turning negative usually a year or more before the onset of a recession:

As you can see, it also does a good job forecasting the YoY direction of job growth.

This month's report was the third in a row that was negative.  This is another small addition to the evidence that 2017 might be a poor year.  It also suggests that monthly job gains, currently averaging just under 225,000, will continue to decelerate.

Now let's turn to the JOLTS report.  While it is an extremely useful dissection of the labor market,  it has only existed for 15 years, and thus includes only one full expansion.  Comparing this month's report with those of a few months ago shows why trends in the report must be taken with many grains of salt.

For the last year I was unimpressed with the report.  True, job openings (blue in the graph below) were soaring to new heights, but actual hires (red) stalled -- the same pattern as in 2005-06. late in the last cycle.  Two months ago openings decreased significantly - something which happened just before the 2007 recession started.  Here is the complete series, including yesterday's report for February:

The pattern from the last expansion was: first, hires peak.  Then, openings peak.

Here is a YoY look at the same data:

Openings had been rising faster than hires, which are have been barely positive.  Until two months ago, when hires soared to a new all-time high, as shown in the first graph above at far right.  Since then, the upward trend in hires has remained.

Some more good news was contained in the quits rate, which also continued in an uptrend, if not quite at their record of two months ago (red in the graph below):

This means that workers were confident enough in their prospects to voluntarily leave their jo bs.  Note that layoffs (blue) remained low.  Needless to say, the increase in voluntary quits is a significant positive.

Further, last month  Dean Baker made a point that there is "pent up damend" for quits, and therefore they should continue to all time record highs. Here's a link to a graph of the U6 underemployment rate (inverted) vs. Quits:

For every level of underemployment over the last 3 years or so, there have been more Quits than occurred during the last cycle -- supporting the  hypothesis of "pent up demand."

So, while the LMCI continues to suggest a maturing expansion, this month's very positive JOLTS report - if the trends from the last expansion repeat themselves - suggests that job growth has a ways to go.