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  • Jonathan Wilmot

Not As Hot As It Feels

July's Non-Farm Payroll report suggests that the US labour market is still running hot, and that the hawks on the FOMC will get their way, meaning that policy rates will hit 3.5% or higher by year-end. But just beneath the surface the US jobs market looks like it is starting to roll over and is likely to weaken in coming months. As for the economy as a whole, it is subsiding towards stagnation with the goods sector already in recession, and services still growing, helped in part by what some people call "revenge" spending.


Employment - and especially payroll employment - is typically a lagging indicator of economic health. For example, payrolls troughed in January 2010, a full 10-months after the trough in industrial production and the stock market. Back in 1973/4, payrolls kept nudging higher for a full 12-months after the official beginning of recession and for 6 of those months payroll growth was robust.



But there are other labour market indicators which tend to lead payrolls, or at least lag the economy less. The 4-week moving average of initial unemployment claims is one. It has the interesting property that even a small change in trend has always been associated with the economy moving into recession. The 4-week average has moved up from 170,000 in early April to 274,000 at the end of July. A clear change in trend, albeit not quite big enough to signal recession just yet.



It is highly correlated with the Challenger Job Layoff count, which tends to surge higher in actual recessions, in sync with initial claims. The layoffs count has only just started to rise but many CEOs say they are now planning for a recession, which points to an acceleration in lay-off announcements not a reversal.


So far, the financial and tech sectors have dominated the layoff announcement league table and the shift in the mood of the tech sector is especially striking. Financing for new start-ups has all but dried up and employees at many household names in the tech sector report a dramatic rise in job insecurity. Altogether, around 75,000 jobs have been lost in the sector so far this year and according to a report by 'Blind', only 9% of tech workers now feel secure in their job.



Moreover, the household survey of employment suggests employment growth has stagnated over the last 5 months. The rule of thumb is to put more faith in the Household Survey trend than Payrolls at turning points in the economy. Given that reported Job Openings have started to decline (from an abnormally high level) in recent months, and given what is happening to the layoffs data, we think last Friday's very robust payrolls data should be treated with caution. In our view the jobs market is no longer red hot, has clearly become more mixed and is likely starting to roll over.


This is part of a more general pattern: leading indicators mostly suggest inflation has peaked and US growth is slow or slowing, while coincident and lagging indicators point to robust growth and persistent inflation. That's not unusual in the early phase of a slowdown but there are other contrasts that are virtually unprecedented. In figure 6 you can see that the current state of consumer expectations/sentiment is worse than in the GFC and much worse than during the COVID shock. And that the manufacturing PMI New Orders composite we follow has slipped into negative territory. Neither of these things would normally occur if the jobs market was as hot as the latest payroll report suggests.




A big part of the confused debate about recession or not is that the US economy is in a highly unusual state. On the demand side it is caught between a goods sector recession as spending normalises from the COVID-related binge that peaked in March 2021, and a service sector recovery that has yet to see spending return to its pre-COVID trend. Net net consumer spending, for example, is back to its pre-COVID trend but at risk of slipping below trend in coming months.


Real disposable income - normally a sure fire guide to the direction of consumer spending - is down roughly 4% over the past year, but the two big COVID stimulus bills left (middle-class) consumers with a big reservoir of savings. And consumer expectations for the economy are at record lows, but expectations for their own finances are much more stable.

This no boom, but nor is it a full scale recession. And Google trends data tells you that consumers are behaving as you might expect in these circumstances: they are becoming much more value conscious and picky about how they spend and on what.

So of course the the whole of the US economy is not in recession, but we do think the economy is subsiding into stagnation – which makes it very improbable that the latest payroll report really is the shape of things to come.


So critics could argue that the FOMC hawks are driving with their eyes fixed on the rear-view mirror rather than looking at the road ahead. To some extent that is always true: bureaucratic decision making tends to put more weight on backward looking data (which is uncontroversial) than it does on forecasts (which are always uncertain). but by the time of the next FOMC meeting at the end of September the data will feel very different and the most recent payroll report will be long forgotten. And the economy in the rear view mirror just wont' look the same.

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