Slowing But Growing (With Some Cracks)

Table of Contents

In this report, we’ll review the most recent Employment Situation data and use our Leading and Coincident Employment Indexes, as well as the breakdown of Cyclical vs. Non-Cyclical jobs, to provide the clearest picture of the true labor market trends.

Starting with the headline, Nonfarm Payrolls increased by 209,000 in June. This 209k pace is the lowest since December 2020, when the economy lost jobs, so clearly, there is decelerating momentum in the headline figures.

Importantly, the last two months were revised lower, which means that all six months in 2023 have experienced downward revisions. The economy has added 1.669 million jobs YTD compared to the original estimate of 1.865 million, a more than 10% difference.
These downward revisions should not come as a surprise, and we should expect more of them in the future, as the net payroll revisions are completely cyclical. This chart shows the 12-month rolling average of net payroll revisions and the results are so cyclical they look like an economic indicator. This shows the BLS data on the first release is wildly inaccurate, specifically at economic turning points.
Rather than looking at one headline number, we always take our signals from our composite indicators and the breakdown of Cyclical vs. Non-Cyclical categories. The Coincident Employment Index, which is a basket of five variables, including the unemployment rate, nonfarm payrolls, and aggregate weekly hours, increased in June to a 3-month annualized growth rate of 0.3%.

The Coincident Employment Index has grinded down from a 3% growth rate at the start of 2022 to virtually stall speed but is refusing to break consistently into negative territory. This has been a frustrating period because the Coincident Index fell to a growth rate of 0.2% in October of last year, had a few fractional contractions in the following months, but then popped out of negative territory despite ongoing contractions in Leading Indicators.

On a longer time horizon, we can see that when the Coincident Employment Index moves into negative territory on a sustained basis, the economy is already in a recession. At present, the Coincident Employment Index is hovering just out of contractionary territory, which is why the economy has been in the imminent recession stage since last year.

The 3M annualized growth rate of the Leading Employment Index, a basket of six variables including weekly manufacturing hours, initial jobless claims, and the part-time ratio, continues to post contractions, but they are relatively mild so far.

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Eric Basmajian is an economic researcher focused on providing an advanced and comprehensive analysis of the business cycle.

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