Post-pandemic Latin American immigration and the unemployment rate (and it’s implications for the economy)

 

 - by New Deal democrat

One week ago, in analyzing the jobs report, I noted the continuing severe disconnect between the Establishment Survey, which continues to show strong growth, and the Household Survey, which has been downright recessionary.

I expanded on that analysis Monday and Tuesday, noting that “ At the end of Q4 2022, the Establishment Survey showed gains of 3.0% YoY. By the end of 2023, that had declined to 2.0%. Meanwhile, over the same period the YoY gains in the Household Survey had declined from 2.0% to 1.2%.” Meanwhile, the comprehensive QCEW, showed a YoY deceleration from 2.8% in Q4 2022 to 1.5% at the end of Q4 2023.

In other words, the Establishment Survey may have been overstating growth, while the Household Survey was likely understating it.

The cause of the underestimate of growth in the Household Survey seems most likely to be a big undercount of post-pandemic immigration. Here’s the math I wrote up on Tuesday: “ In the past two years through May, according to the Census Bureau, the US population has grown by a little over 1%. But according to the Congressional Budget Office, it has grown slightly over 2%. That’s over a 3,000,000 difference!”

If we make the reasonable assumptions that this big surge of immigrants has been from Latin America, and much more closely resembles the prime working age demographic of 25-54 years than the native population, applying those adjustments yields an estimate of an additional 2,000,000 employed through May 2024 vs. official Household Survey numbers.

That left one important caveat, namely: “if the Household Survey has been underestimating prime working age population growth, adjusting for that solves most of the discrepancy with the Establishment Survey. But note that the above analysis only addresses *employment,* and not the unemployment rate.” That’s what I want to take a look at now.

Let me start by reiterating that initial jobless claims have had a 60 year history of leading the unemployment rate. Here’s the historical look from the 1960s until just before the pandemic:

In the first several years after the pandemic, that relationship held true. But over the past six months or so, the unemployment rate has continued to drift up even as initial claims declined from last summer through April, and continuing claims stabilized:

It is interesting that something similar happened during the two “jobless” recoveries following the 1991 and 2001 recessions. The unemployment rate continued to rise for an extended period after both initial and continuing jobless claims declined.

The most likely explanation for an increasing number of unemployed is that their jobless benefits expired. Thus they were no longer counted as “continuing claims” but continued to be jobless. No such lackluster recovery has been in evidence post-pandemic.

But a similar dynamic may be in play. That’s because *new* entrants to the labor force who fail to find their first job will not show up in unemployment claims; but they will show up in the unemployment rate. There is a big historical precedent for this involving the Baby Boom which I’ll save for another day. 

But for now, consider that if, properly adjusted, the unemployment rate has not risen, because Latin American immigrants are filling all the jobs that native born workers are not, then we should see that their unemployment rate will remain constant, vs. that for White or Black native born populations.

But that’s not what we see. The unemployment rates for Whites, Blacks, and Latin Americans have all risen. For Whites it has risen from 3.1% to 3.5%, for Blacks from 4.8% to 6.1%, and for Latin Americans from 3.9% to 5.0%:

Indeed the decline in the unemployment rate for Latin Americans was especially sharp in 2021 and 2022, suggesting that they were filling a disproportionate number of the openings advertised by the ubiquitous “help wanted” signs during that time.

That the unemployment rate for this ethnic group, which presumably includes the vast majority of recent immigrants, has risen much more sharply than for Whites, and almost as sharply as for Blacks, implies that a small but increasing percentage of these new immigrants are not finding employment. These unemployed recent immigrants did not previously hold a job in the US, and so do not show up in jobless claims - but do show up in the Household Survey’s unemployment rate.

This in turn has implications for whether the economy is as close as the Household Survey suggests to recession or not. Because the picture it paints is that of an economy that is still growing, perhaps even strongly, but not quite as strongly as before, and so not as able to absorb the full influx of 6,000,000 (!) immigrants in two years.

For that reason, I think it is fair to continue to put more weight on the Establishment Survey’s showing of continued growth in the economy.

Finally, here is the graph of the long term growth in the Hispanic or Latino population:

Notice the big bumps after the 1990 and 2000 Censuses? That corrected for a chronic undercount during both of those decades. Indeed it was the subject of a Fed white paper about an undercount in the Household Survey in 1999. But there was no such bump in the immediate aftermath of the “Great Recession,” which put a damper on immigration. Similarly, the post-pandemic increase in immigration did not occur until after the 2020 Census took place. In other words, the chronic undercount of recent Latin American immigrants in the workforce may continue all the way up until the 2030 Census.

Initial jobless claims now in a clear uptrend - but is it unresolved post-pandemic seasonality?

 

 - by New Deal democrat

Initial jobless claims rose significantly last week, up 13,000 to 242,000, the highest level since last August. The four week moving average rose 4,750 to 227,000, the highest level since last September. And with the usual one week delay, continuing claims rose 30,000 to 1.820 million, the highest since this January:

There is no doubt at this point that jobless claims are in a significant uptrend. But note from the graph that there was a very similar increase last spring and summer, which is why as I have been reporting on these numbers for the past month that I have cautioned that there may be some unresolved post-pandemic seasonality in play.

This shows up even more clearly when we look at the YoY% changes, those most important for forecasting purposes. YoY initial claims are nevertheless *down* -10.2%, and the four week average down -6.7%. Both of these comparisons are the lowest in 16 months except for a few weeks in February and March in the case of the former, and only one week in March in the case of the latter. And while continuing claims remain higher YoY by 4.4%, that comparison remains lower than at any point in the past 15 months except this April and May:

So the bottom line is, claims are clearly in an uptrend, but it is less of an uptrend than occurred at this very same time last year - an indication that unresolved seasonality may be at work. And because initial claims are down YoY, they are not recessionary but rather consistent with a continuing expansion.

Finally, here is the update on initial and continuing claims vs. the Sahm Rule:

As I have noted many times, there is nearly a 60 year history of the former leading the latter. There have been only a few other occasions during that history when the unemployment rate drifted higher in similar circumstances. Because that is best examined in the course of the discussion I started in Monday and Tuesday’s posts about a likely large population undercount in the Household Survey having to do with immigration, I will look at this issue in more detail in that context, hopefully (if I am industrious) tomorrow.

May CPI continued to be all about shelter

 

 - by New Deal democrat

Consumer prices in May showed no inflation at all, as a decline in gas prices helped the headline number come in unchanged. YoY inflation decelerated -0.1% to 3.3% - continuing in the narrow 3.0%-3.4% range it has been in for the last year.

The bottom line remains that almost the entire inflation “problem” is with shelter, which increased 0.4% again, while the YoY rate continued its snail pace of deceleration, down -0.1% to 5.4% - still the lowest increase in 2 years. 

For the record, here is the month over month change in headline inflation (blue) vs. “core” inflation less food and energy:

More importantly, all items except shelter were unchanged for the month, and are only up 2.1% YoY - the 13th month in a row they have been up less than 2.5% YoY. Meanwhile, with the -2.0% decline in energy costs in May, CPI less energy was up less than 0.2% for the month - the lowest increase in over 3 years - and up 3.2% YoY:

Focusing on shelter, it has continued to behave as I expected. Here is an update to the 12-18 month leading relationship between house prices (as measured by the FHFA) and Owners’ Equivalent Rent in the CPI:

House prices are currently increasing a little higher than their average pre-pandemic rate (because, ironically, the Fed’s rate hikes have exacerbated a shortage in housing supply, thereby driving up its price), which has translated to OER and the other measures of shelter inflation to continue to decelerate YoY, but at a much slower pace than their initial rapid decline. I expect this trend to continue in the coming months.

Turning to our recent and former problem children; first, although I won’t bother with a graph, new and used vehicle prices continued to indicate that they have reached a new equilibrium. Used car prices rose 0.6% in May, but have declined -9.3%YoY. New car prices declined -0.5% in May, and are down -0.8% YoY.

Here’s what happened with the remaining problem areas of inflation:

  (1) food away from home (fading), which peaked at 8.8% YoY over one year ago, increased 0.4% in May, but decelerated -0.1% ona YoY basis to a 4.0% increase, gradually getting closer to its pre-pandemic average of 2.5%-3.0%;

 

 (2) electricity, which has followed gas prices higher, was unchanged for the month, but has risen from 2.2% YoY last August to an 11 month high of 5.9% in May; and 

 (3) transportation services - mainly car repairs (up 0.3% for the month, but down from 7.6% YoY in April to 7.2%) and insurance (down -0.1% for the month and up 20.3% YoY - still down from last month’s 22.6% YoY gain) - declined -0.5% for the month. It had rocketed from its pre-pandemic range of 2.5%-5.0% to as high as 15.2% in October 2022, and is now still up 10.5% YoY, a -0.7% deceleration from April.

Based on the past inflationary period of 1966-82, it is clear that transportation services lags increases in vehicle prices by 1-2 years and even more, sometimes increasing right through recessions

Finally, the CPI report enables us to update real aggregate nonsupervisory payrolls. Last Friday we saw that nominally they rose 0.9%, which with today’s unchanged prices, is their “real” gain as well:

This made a new high, showing that average American working families had significantly more to spend in May, and negativing any recession for the next few months.

To summarize: if we exclude the well-documented historically lagging sectors of shelter prices (and motor vehicle insurance), consumer inflation continues to be well behaved, up only 2.1% YoY. If gas prices continue to be well-behaved, headline inflation should go below 3%

What would adjusting the Household jobs Survey for immigration driven population growth do?

 

 - by New Deal democrat

This is a continuation of my post from yesterday discussing the large divergences between the Household and Establishment jobs surveys.

A big current issue with the Household Survey is whether, by relying on Census estimates, it has substantially underestimated population growth, and in particular immigration-driven growth, in the past two years. Here’s a graph from Wolf Street, the source material of which I have verified, that sums it up:

In the past two years through May, according to the Census Bureau, the US population has grown by a little over 1%. But according to the Congressional Budget Office, it has grown slightly over 2%. That’s over a 3,000,000 difference!

If the Household Survey data were normed to the CBO estimates, what would it look like? A couple of basic assumptions should give us a good back-of-the-envelope estimate. Those two assumptions are; (1) the immigration is from Latin America; and (2) it is younger, in the prime working age demographic, plus their children, vs. the native born population.

Here’s the difference those two assumptions make. First, here is the difference between growth in the native-born population vs. foreign born population:

The total US population is about 336,000,000. Since the beginning of 2022, the native born population has only grown by less than 1.4 million, or only 0.6%; while the foreign born population has grown by 3.7 million, or 8.3% - and remember, these are the Census Bureau numbers, which the CBO data indicates sharply underestimate immigration during that time.

Now, here’s the employment/population ratio for the US population as a whole, vs. the Hispanic or Latino segment (gold), as well as the prime working age component (red) in the past 2+ years:

Now let’s crunch some numbers based on the CBO estimates, and making use of the assumptions above.

Cumulatively since March 2022 the CBO estimates show an additional 1% growth in population, or roughly 3.36 million, vs. the Census Bureau.

Further, the overall employment/population ratio over the past two years is roughly 60%, vs. 64% for the Latin American ethnic group. (I’m being conservative here, assuming working age immigrants have been bringing their children, who obviously are not in the 25-54 demographic).

A 64% employment ratio for an additional 3.36 million people generates an additional 2 million+ employees vs. using the Census Bureau estimates.

Now let’s show that in graphs. Through the magic of algebra, here is what the adjusted Household Survey would look like if an additional 2 million jobs were gradually added over the past two years (blue) vs. the Establishment Survey (red):

And here is what the YoY% growth would look like:

There is, as per usual, additional noise, but the adjusted Household Survey would show almost as many jobs as the Establishment Survey through the end of last year, before performing poorly (so far!) this year - but still within the range of noise.

Additionally, with the adjusted Household Survey growing 1.8% YoY in 2023 (vs. 2.0% for the Establishment Survey, it is closer to the QCEW census of 1.5% growth as of its last update.

In short, if the Household Survey has been underestimating prime working age population growth, adjusting for that solves most of the discrepancy with the Establishment Survey. But note that the above analysis only addresses *employment,* and not the unemployment rate. That analysis will be the basis of yet another post. 

The recessionary Household Jobs Survey is not confirmed by other comprehensive hard data

 

 - by New Deal democrat

As per usual, the Monday after jobs report Friday does not update any significant data.

So let me return to the deep divergence between the Household and Establishment Surveys in the jobs report. With Friday’s data for May, the two have now diverged 1.9% over the past year, adjusted for the size of the prime working age population:

This big a divergence has only happened previously twice in the 1960s, and one month each during the pandemic and the 1980s. There is clearly a big issue going on. Either the data in one or both series is simply wrong, or the implications of the data in one or both series is incorrect. I spent a fair amount of time during the weekend poking around all sorts of data, and I think I can shed some light on that, but it will take much more than one post.

Let me just begin by restating that the Household Survey for May was simply recessionary. The “real time” Sahm Rule as of May is at .37. The below graph subtracts that amount and shows the entire historical record before the pandemic:

The only times this reading has not meant recession was twice in the 1960s, once in the 1970s, and for several months in 2003.

I’ll spare you the additional graphs, but the same is apparent with the YoY changes in the unemployment and underemployment rates.

And total employment is only up 0.2% YoY. Here’s what a historical graph of that looks like pre-pandemic:

With the exception of two solitary months in 2003 and 2013, there has never been a time since the 1960s when such a paltry YoY increase has not meant recession.

But the Household and Establishment Surveys are not the only official data of employment. The Quarterly Census of Employment and Wages (QCEW) is a comprehensive accounting of the same, covering over 95% of all businesses. It’s one big drawback is that there is no seasonal adjustment, so we have to look at it YoY. It also lags badly, so the most recent update is for Q4 of last year, and further, all of last year’s data is still preliminary and subject to revision.

Nevertheless, let’s compare that with the YoY% changes in employment in the two jobs surveys, through the end of last year:

At the end of Q4 2022, the Establishment Survey showed gains of 3.0% YoY. By the end of 2023, that had declined to 2.0%. Meanwhile, over the same period the YoY gains in the Household Survey had declined from 2.0% to 1.2%.

Although FRED doesn’t have graphs for the QCEW, here are the YoY% gains shown in that Census as of the end of each quarter from Q4 2022 through Q4 2023:

2.8%, 2.5%, 2.5%, 1.7%, 1.5%

Through the end of Q2, the QCEW is in good agreement with the updated Establishment Survey. But in Q3 and Q4, there is a subtantial (as, 0.3% and 0.5%) variance, suggesting that upcoming benchmark revisions to the Establishment Survey will reduce those levels by about 700,000.

For 2024, we can’t rely on the QCEW. But we do have the comprehensive daily update of all withholding taxes paid to the government. The one caution here is that such taxes are paid on things like the vesting of stock options, and not just wages. This is important, because a huge amount of stock options vested and were cashed in at the end of 2022.

With that caveat, here is what the 1 month and 3 month moving average of the YoY% change in withholding taxes paid look like beginning last December through the end of May:

DEC 23. -11.2%. -0.8%

JAN 24. +5.7%. -0.8%

FEB 24.  +8.3%. +0.1%

MAR 24. +2.2%. +5.3%

APR 24. +17.1%. +9.0%

MAY 24. +2.5%. +6.7%

The monthly totals are somewhat volatile, as you can see. But once we smooth the data out over three months, and once the December 2022 stock options drop out of the picture, all of the comparisons are positive. 

The bottom line is that neither of our two comprehensive comparative data - the QCEW and withholding taxes paid - look recessionary at all. In other words, while the unrevised Establishment Survey readings might be too high, the Household Survey readings on the change in employment look much too low.

But is there reason to believe that the Sahm rule might not be flashing recessionary warnings after all? More on that in another post.

Weekly Indicators for June 3 - 7 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha. 

The stock market was conflicted by yesterday’s jobs report, but the bond market’s verdict was unequivocal: ignore the unemployment rate; it was a strong report which will stay the Fed’s hand from raising rates. 

Meanwhile, coincident economic data in particular continues to look very expansionary. And the long leading indicator of corporate profits turned positive, as Q2 earnings are expected to be sharply higher.

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

Houston, we have a serious problem: the two job surveys show two completely opposed economies

 

 - by New Deal democrat



In the past few months, my focus has been on whether jobs gains are most consistent with a “soft landing,” i.e., no further deterioration, or whether deceleration is ongoing. In particular: 

• Yesterday I wrote that “I will be most interested to see if declines in manufacturing and housing under construction translate into a stall or even downturn in goods-producing employment, which has held up surprisingly well in the past year.”  - This month they again increased, with no indication of any slowdown in trend.
• Whether there is further deceleration in jobs gains compared with the last 6 month average, vs. a “soft landing” stabilization, and even whether the recent increase in monthly jobs numbers signifies a re-strengthening. - This was also answered plainly with no further deceleration at all. A look back shows average jobs gains holding basically steady, with the exception of last summer, for over 1 year.

• Based on the leading relationship of initial and continuing jobless claims, whether the unemployment rate is neutral or decreasing; or whether there is further weakness. - This month’s increase completely contradicted both initial and continuing jobless claims, the unemployment rate increased again. 
• Based on the leading relationship of the quits rate to average hourly earnings, whether YoY wage growth would stabilize, or decline further. - This month they increased from April’s 3 year low.

There is a common thread in the above answers: the three good results all came from the Establishment Survey, which as we’ll see below, was very strong. The one very poor result came from the Household Survey, which for the third time in four months was frankly recessionary.

Here’s my in depth synopsis.

HEADLINES:

• 272,000 jobs added. Private sector jobs increased 229,000. Government jobs increased by 43,000. 
• March was revised downward by -5,000, and April was revised downward by -10,000, for a net decline of -15,000. This continues the pattern from nearly every month in the past 18 months of a steady drumbeat of downward net revisions.
• The alternate, and more volatile measure in the household report, showed an outright *decline* of -408,000 jobs. On a YoY basis, in this series only 376,000 jobs, or 0.2%, have been gained. This is not just the lowest YoY increase since the pandemic lockdowns, but with rare exception, it has always and only occurred during recessions.
• The U3 unemployment rate rose 0.1% to 4.0%, a new 2+ year high. Not only did the number of people employed decline, per the above, but the number unemployed rose by 157,000.
• The U6 underemployment rate was unchanged at 7.4%, 0.9% above its low of December 2022.
• Further out on the spectrum, those who are not in the labor force but want a job now rose 80,000 to 5.717 million, vs. its post-pandemic low of 4.925 million in early 2023.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn. These were generally positive:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, rose 0.2 hours to 40.8 hours, but is still down -0.7 hours from its February 2022 peak of 41.5 hours.

• Manufacturing jobs rose 8,000.
• Within that sector, motor vehicle manufacturing jobs rose 3,500. 
• Truck driving declilned -5,400.
• Construction jobs increased 21,000.
• Residential construction jobs, which are even more leading, rose by 3,500 to another new post-pandemic high.
• Goods producing jobs as a whole rose 25,000 to another new expansion high. These should decline before any recession occurs.

• Temporary jobs, which have generally been declining late 2022, fell by another -14,100, and are down about -450,000 since their peak in March 2022. This appears to be not just cyclical, but a secular change in trend.
• the number of people unemployed for 5 weeks or fewer rose 47,000 to 2,309,000.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.14, or +0.5%, to $29.99, for a YoY gain of +4.2%. This breaks, at least for this month, the pattern that YoY growth in wages have been sliding since their post pandemic peak of 7.0% in March 2022.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers rose 0.4%, and is up 1.6% YoY.

•  the index of aggregate payrolls for non-managerial workers rose 0.9%, and is up 5.8% YoY. These had been decelerating since the end of the pandemic lockdowns, but have stabilized so far this year, and are close to their highest YoY pace since last September. With the latest YoY consumer inflation reading of 3.4%, this remains powerful evidence that average working families have continue to see gains in “real” spending money.

Other significant data:

• Professional and business employment rose 33,000. These tend to be well-paying jobs. This series had generally been declining since last May, but in 4 of the last 5 months have resumed their increase.
• The employment population ratio declined -0.1% to 60.1%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate declilned -0.2% to 62.5%, vs. 63.4% in February 2020.

SUMMARY

This month’s report marked perhaps the strongest bifurcation yet between the Establishment and Household Surveys. Frequently they diverge, but this as if they were describing two diametrically opposed economies. 

The Establishment Survey was excellent. Not only were there top-line gains, but almost all of the leading sectors of employment - construction, manufacturing, goods production generally, and even the recent laggard of professional and business jobs - all rose significantly. Aggregate hours and payrolls also rose sharply. Wage growth improved. If anything, even beyond stabilization, there appears to have been some re-acceleration in job gains in recent months compared with late last year. Only temporary jobs - which appear to be undergoing a secular change - continued to decline.

But then we turn to the Household Survey. The number employed was down, the number of unemployed up, resulting in the highest unemployment rate in over 2 years (although it has not triggered the “Sahm rule”). The number of recent job-losers also increased to a 2+ year high, but for one month (February). Both the employment population ratio and the labor force participation rate declined further. In fact, in this report employment has only grown 1.8% since March 2022 (vs. 4.8% in the Establishment Survey), and has been in a slowly *declining* trend since last summer. 

At this point it is nearly certain that one of these two surveys is seriously in error. Normally that would be the Household Survey, which is much smaller and noisier. That at this point it is flatly contradicting the weekly jobless claims numbers - which are not surveys, but actual totals collected from all 50 States - also suggests that it is the Household Survey which is in error. But then we have the QCEW, which is also not a survey, but rather a census of almost all employers in the country, telling us that through Q3 of last year (its most recent report) the Establishment Survey was seriously overestimating job gains. And then we have withholding tax receipts - also not a survey, but an actual nationwide total - which over 8 months into this fiscal year are only 4.2% higher (and that’s nominal, before taking wage gains into account) than last year at the same time. 

Ultimately the data in the Establishment and Household Surveys are going to resolve. That is likely to occur when some fairly massive revisions in one or the other take place. It could be a big population revision in the Household Survey, or it could be that the QCEW is going to show more substantial weakness in Q4 of last year and/or Q1 of this year, which will then be incorporated into revisions in the Establishment Survey.

I wish I could tell you that I knew. But I am afraid that we are simply going to have to wait.

Initial jobless claims now in a confirmed seasonal uptrend, but still positive for the economy

 

 - by New Deal democrat

My “quick and dirty” economic status indicator is the stock market (still making new all-time highs) and initial jobless claims, which are also still positive for the economy despite being in an apparent uptrend.

Last week initial claims rose 8,000 to 229,000, their second highest level in the past 9 months. The four week moving average declined -750 to 222,250, just below its own 9 month high of the week prior. With the usual one week delay, continuing claims rose 2,000 to 1.792 million, right about in the middle of their 10 month range:

Some of this, as I have speculated in the past month, may be some residual post pandemic seasonality that has not been worked out, given last year’s similar increase.

As per usual, the YoY change is what is most important for forecasting purposes. And there the news is considerably better, as initial claims were down -10.2%, and the four week moving average down -5.2%. Continuing claims were up 4.2%, which is a negative, but on the other hand, as noted above, these have been in a tight range for the past 10 months, so I do not believe they are much of an issue:

The bottom line is that the initial claims indicator remains positive for the economy as to the next few months.

Finally, as we await tomorrow’s jobs report, here is our last update as to the May Sahm rule indicator:

Because initial claims lead the Sahm rule by several months at least, the May upturn in initial claims does not put any upward pressure on the unemployment rate, and indeed the late winter and early spring downturn in claims should still be feeding through. Nor are continuing claims, which have a more slight lead, putting any upward pressure on the unemployment rate. In short, there is no support for the “Sahm rule” being triggered.

So tomorrow I am looking for no increase, and a possible decrease, in the unemployment rate. Per my discussion of the JOLTS report, I am looking for stabilitzation or no more than a slight deceleration in average hourly earnings gains. And I will be most interested to see if declines in manufacturing and housing under construction translate into a stall or even downturn in goods-producing employment, which has held up surprisingly well in the past year.

ISM weighted manufacturing + services indexes signal continued expansion

 

 - by New Deal democrat

I never used to pay much attention to the ISM non-manufacturing report. That is partly because it only has a 20 year history, and partly because it seems to be more coincident than leading:

But because manufacturing has faded so much as a share of the US economy, with at least two false recession signal in the past 10 years (2015-16 and 2022-23):

there is no choice but to pay more attention.

In particular, it does seem that when we include this as part of a weighted average (75%) along with the ISM manufacturing index (25%), it has generated a much more reliable, and still timely, reading over this Millennium (note: graph ends last summer):

On Monday, the ISM manufacturing index, and its more leading new orders component, came in poor. But the non-manufacturing index this morning completely outweighed that in its strength. Here are the last five months of both the manufacturing (left column) and non-manufacturing index (center) numbers, and their weighted average (right):

JAN 49.1. 53.4. 52.3

FEB 47.8  52.6. 51.4

MAR 50.3. 51.4. 51.1

APR 49.2  49.4.  49.3 

MAY 48.9. 53.8. 52.5

And here is the same data for the new orders components:

JAN 52.5. 55.0. 54.4

FEB 49.2  56.1. 54.4

MAR 51.4. 54.4. 53.6

APR 49.1. 52.2. 51.4

MAY 45.4. 54.1. 51.9

Only the weighted average for the total indexes for one month, April, comes in below 50. To generate a reliable signal, we would need the 3 month average to be below 50, which it clearly is not. The new orders weighted average for all months is unambiguously positive.

The signal for the combined weighted ISM indexes remains expansionary in its forecast for the next few months.

One more thing about the April JOLTS report: hiring and quitting remain very, very good

 

 - by New Deal democrat

I’ll write about today’s ISM non-manufacturing report later, but first I wanted to follow up with several more graphs based on yesterday’s JOLTS labor report for April. Basically, I didn’t want to leave the impression that the labor market was in any way sub-par based on those numbers.

With that in mind, below are two graphs. Both show the entire history of hires (red) and quits (gold) normed to 100 as of the yesterday’s report. Both show that, in raw numbers, only 2018-19 were stronger than even yesterday, let alone earlier in the post-pandemic recovery.

In this first graph I also show the civilian labor force (number of people employed + unemployed) (blue), also normed to 100 as of yesterday. Where the blue line is lower than the red and yellow lines, the *rate* of persons being hired or voluntarily quitting is higher now. Where the blue line is higher, the current rate of hiring and quitting is lower:

As you can see, the current pace of voluntary quits remains higher than at any time except 2018-19 and the tail end of the 1990’s tech boom (when the data series began). Hires are kind of “meh” - not bad, but not good either.

I’m not totally satisfied with that, because the strength of the jobs market also has an effect on people choosing to enter or leave it. So this second graph substitutes the prime age population, ages 25-54 (blue), again normed to 100 as of yesterday’s data:

As a share of the prime working age population, quits are as high as they ever were before the pandemic, and hiring was only better in 2000 and 2018-19.

In other words, this paints a picture of a labor market that has cooled from White Hot Boom levels to merely very, very good.

April JOLTS report: firming in hires, quits, and a (good) decline in layoffs, while fictitious job openings continue their slide

 

 - by New Deal democrat

The JOLTS report for April showed most metrics rebounding slightly from March lows, with the exception of the “soft data” job openings. The overall picture is that hiring is weak relative to the past five years, but so are layoffs, and voluntary quits are equally relatively strong, balancing them out.



To wit: job openings (blue in the graph below), a soft statistic that is polluted by imaginary, permanent, and trolling listings, declined -another 296,000, form a downwardly revised March, to yet another three year low of 8.059 million (vs. a pre-pandemic peak of 7.594 million). Actual hires (red) rose 23,000 from an upwardly revised March to 5.640 million (vs. a pre-pandemic peak of 6.0 million). Voluntary quits (gold) rose 98,000 from an upwardly revised March to 3.507 million. In the below graph, they are all normed to a level of 100 as of just before the pandemic:

As has been the case for the past nine months, hires are below the level they were at just in early 2020 just before the pandemic hit. Meanwhile, quits are essentially equal to their pre-pandemic level.

The above situation has been considerably helped by layoffs and discharges (blue in the graph below), which made a sixteen month low, and continue to run roughly 20% below the level they had been at *any* point before the pandemic:

As with last month, the more leading weekly initial jobless claims (red) suggest that layoffs and discharges will remain close to this range at least for several more months.

Finally, the quits rate was unchanged at 2.2% for the sixth month in a row, after an upward revision from March. Since, as I have noted for a number of months now, the quits rate (blue in the graph below, right scale) tends to lead average hourly earnings (red) [and here’s the long-term view]:

This suggests that the deceleration in wage growth will probably not decelerate much further in upcoming months, as shown in the below post-pandemic close-up:

My big concern over the past year has been if a further deceleration in wage growth were to coincide with an upturn in inflation, because that would likely cause a decline in real consumer income and spending. While there is no reason in today’s numbers to discount the longer term post-pandemic trend of deceleration, there was no further deceleration in April.

May new manufacturing orders slide, truck sales rise, construction spending close to unchanged

 

 - by New Deal democrat

As usual, the month starts out with important data on manufacturing and construction. The news was mixed this month, and weighted more to the downside in my opinion.

First, the ISM report on manufacturing declined again slightly to 48.7. This is the second month in a row that this index has been under the equipoise point of 50. More importantly, the more leading new orders subindex declined sharply to 45.4, the lowest reading since last May:

The silver lining here is that manufacturing is not nearly so important to the overall economy as it was in the 50 years after World War 2, so a negative reading like this - similar to what we had in 2022-23 - does not necessarily mean recession. But it does mean that the ISM services index, which will be released on Wednesday, and declilned below 50 for the first time last month, assumes extra importance. That’s because in the 20 years since the latter index has been in existence, when the weighted average of the two indexes has been below 50, that did mean recession.

Another leading sub sector in manufacturing is heavy truck production and sales. These were released for April at the end of last week, and there the news was good, as truck sales rebounded 13.5% in the month, and are only down -3.6% YoY:

Heavy truck sales lead light vehicle sales to the downside, but generally must be below peak by 20% to be consistent with a recession. Their three month moving average is about 13% off peak, which still indicates weakness, but no recession signal.

Turning to construction, total nominal spending declined -0.1% in April, but is higher 10.0% YoY. The more leading residential sector showed a 0.1% increase, and only a -0.1% YoY decline:

Since producer prices for construction materials declined -0.4% in April and are down -0.3% YoY, the “real” residential construction numbers are more positive:

Finally, the Inflation Reduction Act, which conferred favorable tax benefits for “restoring,” led to a sharp increase in manufacturing construction spending, which increased 0.9% for the month to another new record, up 17.3% YoY:

Again, altogether these paint a very mixed picture, but with new manufacturing orders declining significantly, and total and residential construction spending more or less flat for the past half year, I believe there is more weight to the downside.