Wednesday, April 4, 2018

Why I'm expecting a good employment report on Friday

 - by New Deal democrat

ADP reported private payroll growth of 241,000 this morning, which prompted me to recall that two other short leading indicators of employment also suggest that we'll get another good employment report on Friday.

First, consumer spending leads employment. I began tracking this nearly 10 years ago during the Great Recession. In autumn 2008 real retail sales fell off a cliff, but when they landed with a ker-SPLATT!!! a few months later and stopped falling, it was a signal that economic growth would probably follow in a few more months - and it did. I have continued to note this occasionally during the last nearly 9 years of expansion.

Well, a few months ago -- probably due to repairs necessitated by the hurricanes, and the fires in California -- there was a surge in consumer spending. The below graph compares YoY real consumer expenditure growth (blue) vs. jobs growth (red):

You can see that consumer spending leads employment by generally 3-6 months.  Here's a closeup of the last several years:

You can see the bump last autumn in spending. That ought to still be feeding through to some extra growth now.

Second, the unemployment rate is likely to decrease as well. This is because initial jobless claims lead the unemployment rate by about 1-3 months, as shown in the graph below (and although I won't bother showing this time, the relationship goes back 50 years!):

In the last two months, initial claims have dropped to yet more 45 year lows. The unemployment rate should be following.

While this doesn't change the longer term trend that we are in the decelerating part of the expansion, and the signs are that consumer spending growth has paused again in Q1 2018, in the short term of the next couple of months the jobs reports should be bearing good news.