- by New Deal democrat
Most of the commentary about Friday’s jobs report for November was positive. By contrast, my summary - in which I averaged the two last reports to take into account the hurricane whipsaw - was much more cautious, as were the takes by a few other commentators I respect, like Ernie Tedeschi.
In this post I am going to delve into more detail into why I believe it is now prudent to raise the yellow caution flag about employment.
Let’s start with the totals. For many months I and many others have written that the trend in the Household Survey (red in the graph below) has been frankly recessionary - but is probably skewed to the downside by failing to take into account the surge in new jobs entrants caused by the post-pandemic immigration spike. On a YoY% basis, for the second time in three months, the Household Survey recorded a net *decrease* in jobs.
Meanwhile the Establishment Survey (blue) has been much more positive, showing jobs gains in every single month. As of November, the YoY% growth rate was 1.45%. The below long term graph subtracts 1.45% from the Establishment number and adds 0.4% to the Household number to show both current YoY levels at the zero line:
Unsurprisingly, with the exception of one month in 1952, any time the YoY change in jobs in the Household Report has been this low, it has been because of a recession.
What is more concerning is that, with the exception of 1952 and a number of months in the decade before the pandemic, the same has been true of gains of only 1.45% YoY in the Establishment Survey as well. Here’s a close-up of that decade:
YoY employment gains of the current magnitude or less were only measured for one month in 2013, several months near the end of 2017, and during 2019 when contemporaneously I was worried about whether a recession was in the offing.
One important consideration is population growth over this long period of time. A gain of 100,000 jobs in a month now is likely very different than a 100,000 gain back when the US population was half of what it is now.
The next graph corrects for that, subtracting the YoY% gain in the prime working at population from the YoY% in job growth. The result is the net YoY% gain over and above the prime working age population for the period:
Except during the 1970s and 1980s, when women were entering the labor force by the millions, a 0.9% YoY net gain has almost always meant a recession. Even during the 10 years before the pandemic, there were only 4 months during 2018 when the YoY gain was so low.
If that weren’t concerning enough, there is good reason to believe that job gains in the Establishment Survey are going to be revised lower for 2024. That’s because the QCEW, which is not a sample but an actual census of about 95% of all firms, and to which the jobs survey is benchmarked twice a year, has shown a great deal more slowing in the past 18 months. Here’s Prof. Menzie Chinn’s most recent update from Econbrowser:
The QCEW unfortunately is not seasonally adjusted, so the best way to compare that and the 2024 payrolls numbers is YoY. This shows a stark difference.
In June 2023, the QCEW showed a 2.5% job gain. As benchmarked, nonfarm payrolls show a 2.4% gain. But the latest QCEW report through June 2024 shows only a 0.8% YoY job gain, vs. 1.6% for payrolls through that month. If nonfarm payrolls are similarly re-benchmarked, then the *only* month going back 75 years when such a meager gain did not coincide with a recession was one month in 1952.
Further, every month I update the leading components of the jobs report, which mainly are manufacturing and components of construction jobs, as well as goods-producing jobs as a whole. And for the first time during this recovery, goods-producing jobs as a whole have stopped growing over the last two months. Here’s what they look like post-pandemic:
Since July, only 7,000 goods producing jobs have been added, or only a .03% increase. In the past 8 months, only 39,000 goods producing jobs have been added, an increase of .18%. That isn’t necessarily recessionary. As the longer-term graph below shows, there have been similar stalls in 1995, 1999, and 2016 without recessions following:
But on the other hand, outright declines in goods producing jobs have occurred for at least six months, and sometimes over a year, before about 3/4’s of all recessions going back 75 years:
Indeed, even the current 0.7% YoY gain has almost always in the past meant a recession (blue in the graphs below):
The exception is the 10 years before the pandemic:
Further, if we simply continue the trend growth for the last eight months, that would be a 0.27% job gain in goods producing jobs YoY by March 2025, which would be lower than at any point in the 10 years before the pandemic.
But as the graphs just above also show, job growth in services remains robust, at present up 1.57% YoY. While up until 2000 even that would have typically only occurred in recessions, it has been an average rate of growth since throughout the expansions as well.
Finally, the stalling out in goods-producing jobs has been exclusively a manufacturing story. As the below graph shows, job gains in construction (dark red, right scale) and residential construction (light red, right scale, *8 for scale) continue:
As I have pointed out many times in discussing housing, residential construction jobs have almost always turned down well in advance of recessions. While housing units under construction are down -15% or so, which typically in the past has coincided with layoffs in residential construction, as of now they certainly have not.
In conclusion, there is sufficient cause for concern to raise a yellow caution flag about the trend in employment growth. But there are nowhere near sufficient reasons to hoist a red warning flag.
