Real aggregate nonsupervisory payrolls have continued to increase, negativing recession. Here’s why

 

 - by New Deal democrat

There’s no major economic news today, so let me take this opportunity in view of last week’s update to the CPI, to update one of my favorite labor market indicators: real aggregate nonsupervisory payrolls.

As a brief refresher, over the past 60 years this has been a very good and reliable “real” economic indicator. Basically, so long as average American households’ income is rising in real terms, they can sustain and expand their consumption, which largely drives the economic expansion. When it declines, usually households have to pull in their horns, triggering Keynes’ “paradox of saving.” What is good for the individual household causes an aggregate decline in consumption, followed by an economic contraction.

Let’s start with the absolute value of this indicator through February:

Although there were several stalls or near-stalls last year, the general trend was increasing. The gap is due to the omission of CPI reports for the period of the government shutdown. Although there was an assist from the way the Census Bureau kludged shelter costs during the shutdown, evne if they had not done so, the subsequent months would still show an increase.

So the bottom line is that, before the Iran war this indicator did not suggest a recession was imminent.

But let me break down the components of this index to show why that is. Real aggregate nonsupervisory payrolls is calculated by taking average hourly nonsupervisory wages (blue in the graphs below) x the number of hours worked (green teal), and then normalizing by dividing by the CPI (red). Below I show each of them on a YoY% change basis.

First, here is the period from the inception of the data series in 1964 through 1986:

And here is the subsequent period up until the pandemic:

There was a consistent pattern of each of the three measures during this entire 50+ year period. The inflation rate increased in roughly the year prior to the onset of each recession. Almost simultaneously, the number of hours worked started decelerating precipitously in the months before the onset of the recessions, frequently turning negative shortly after the recession began. Meanwhile average hourly wages remained steady or even increased a little on a YoY basis going into the recessions. It was only after the onset of recessions that wage increases were trimmed back.

So, what we are looking for is an uptick in inflation, and a downtrend in hours worked. With that in mind, here is the post-pandemic record:

Hours worked did gradually decelerate through 2023 and 2024, even turning negative for several months in 2025 before rebounding slightly. if you go back to the pre-pandemic graphs, a 1% YoY increase in hours worked was pretty pathetic. But there was no precipitous decline post-pandemic. Meanwhile, assisted by the disinflation in shelter costs as measured by the CPI, YoY inflation was also gradually decreasing. Note that *this* measure was affected by the shelter kludge after the government shutdown; without it there would have been no further deceleration in the CPI thereafter.

Finally, we see that while wage growth has also been gradually decelerating, it remains higher than the YoY inflation rate. If you go back and look at the pre-pandemic cycles, inflation (red) almost always exceeded wage growth (blue) YoY in the months before the beginning of recessions, although there were several exceptions, notably 2000-01, but also several occasions when inflation grew more than wages for several years late in expansions. This was due to the general deceleration of wage growth as the huge Boomer generation, and women, entered the labor force, which together held down wage growth even as two-income *household* income increased.

Of course, it could be that “this time it’s different,” like 2000-01, although I would still expect to see aggregate hours decline YoY. Additionally, it could be that the Iran war will finally cause a spike in consumer inflation that will result in it being higher than YoY wage growth.

But the bottom line is, through February the consumer economy has surprisingly been aided by an increase in real aggregate nonsupervisory payrolls. And very low new weekly jobless claims suggest that has not changed. At least not yet.

Industrial production increases again in February, but ex-AI related utilities has made little progress since last July

 

 - by New Deal democrat

Probably my biggest theme right now is that most of the economy is either recessionary or at least on the cusp of recessionary. But this has been counterbalanced by AI data center- related spending, and the stock market boom and wealth effect it gave rise to. 

Last month I highlighted how that had shown up in the utilities portion of industrial production, which is extremely noisy month over month, but in the longer perspective was increasing much more than other production. There was more of both indications this month.

Industrial production as a whole rounded up from +0.151% to 0.2% in February (blue in the graph below), and to a lesser extent so did manufacturing production, also up 0.2% (red). I also show production less utility production (gold), to show how that is in accord with both other metrics:

Now let’s take a look at utilities production (orange) vs. industrial production less utilities (gold) since just before the pandemic:

It’s easy to see how sharply utilities production has pulled away from everything else, albeit with a huge amount of month to month noise. This month’s -06% decline barely registers on the trend.

Note that the significantly increasing trend from the middle of 2024 in industrial production is also apparent in the graph of durable goods orders (blue) and core capital goods orders (red) over the same time period:

The front-loading of orders before “Liberation Day” last year is also apparent.

Finally, I’ve noted a number of times how most coincident indicators have stalled since the middle of last year, and there may have been a “mini-recession” during the government shutdown last autumn. The below graph demonstrates how industrial production ex-utilities (gold) fits into that (all series normed to 100 as of last July):

Ex-AI related production, just like real sales (blue) and nonfarm payrolls (red), as well as real personal income less government transfers (not shown) has barely budged during the eight months since then.

And of course, all of this data is from the “before times” that do not include the war with Iran and the oil shock that has been developing since.

Weekly Indicators for March 9 - 13 at Seeking Alpha

 

 - by New Deal democrat

I neglected to post this over the weekend, so let’s get it out of the way now: my “Weekly Indicators” post is up at Seeking Alpha.

Unsurprisingly, the big news of the week was the continuing spike in oil prices, that spread to gas prices, that caused a selloff in the stock market. A little more surprisingly, the “flight to safety” trade towards the US$ is very intact.

As usual, clicking over and reading will bring you up to the moment as to the state of the economy, and reward me a little bit for bringing it to you.