- by New Deal democrat
We’ve settled back in to our typical post-employment week lack of new data, so today is a good day to update the leading indicators from the employment report, especially in view of their important contribution to why I went on “recession watch” yesterday.
As you probably already know, because I harp on it all the time, service sector spending frequently powers right through recessions. It is a downturn in the broad goods-producing sector which is a leading indicator.
In the past few months, there have been a few signs that goods-producing jobs were topping, but they were ambiguous. With the revisions last Friday that ambiguity seems to have been resolved. Below is a graph of employment in manufacturing (gold), total construction (red), residential building construction (orange) and goods-producing as a whole (blue), all normed to 100 as of April with the exception of residential construction, which peaked in March:
Only total construction jobs (including lagging sectors like nonresidential construction) have not turned down, with a 0.1% increase in the past three months. Manufacturing employment and residential construction employment are both down -0.3%. Goods-producing employment as a whole is down -0.2%.
Another leading indicator in the jobs report is the number of short-term unemployed. These are people who have been unemployed less than 5 weeks. This metric is somewhat noisy, but generally accords with initial jobless claims.
Here is the historical record from 1990 until the Great Recession (unsurprisingly the series did not turn up before the pandemic, which is why I have not included the 2010’s):
Note that while there is considerable month to month noise, on a quarterly basis the signal comes through.
Here is the post-pandemic record:
With the exception of last autumn, there has been a significant uptrend in this metric.
Next let’s take an updated look at real aggregate nonsupervisory payrolls. Recall that this is an excellent “fundamental” indicator, tellling us how much average American working families in total have to spend in real terms. When that turns down, so does spending, and a recession almost always quickly follows. This has been stagnating this year:
Since March there has been only one new high, by 0.1%, in May. On Friday *nominal* aggregate pay was up 0.6%. We won’t have the “real” figure until next Tuesday’s CPI report, but even if CPI is relatively tame, it is unlikely real aggregate payrolls will be higher than May by more than 0.1%, for a 0.2% over four months - which would be a very lackluster increase.
Finally, the one leading indicator in the employment report which did not turn down was the average manufacturing workweek, which held steady at 41.0 hours:
This series has generally tracked with manufacturers’ new orders, which also declined into 2023, but then improved in 2024. This series has been generally steady for the past five months.
In yesterday’s post I noted that the three month averages of both the manufacturing and services surveys from the ISM showed a contraction in new orders for the last three months in a row. So it would not be a surprise if hours worked in manufacturing were to decline as well in coming months. Additionally, I’ve been pounding the fact that residential construction jobs turn down after the number of housing units under construction does — and that metric is currently down about -20%, so I see no reason why those jobs won’t continue to decline.
In other words, all of the leading metrics in the jobs reports that I have been waiting to turn down are presently either flat or have indeed turned down. Hence their contribution to the “recession watch.”
