Home Forex Is the labor market as strong as it seems?

Is the labor market as strong as it seems?

by SuperiorInvest

Friday's data for February delivered another bullish surprise, reaffirming the now-consensus view that the risk of recession is low for the US economy.

Hiring rose by 275,000 last month, beating expectations, well above the consensus forecast of around 200,000.

However, a closer look at the numbers shows a mixed picture. As The Wall Street Journal noted,

“Behind the headline figure were signs of a gradual slowdown.”

However, there are still strong reasons to expect the labor market to expand at a healthy, if slower, pace. But there are also signs that as the year progresses, barriers to hiring could rise, perhaps more than expected.

One possible early warning: The private sector component continues to underperform at the aggregate level, which includes government jobs.

The distinction is important because private companies are responsible for the overwhelming share of hiring (and firing). Companies are also sensitive to the economic cycle versus the relative immunity to government hiring.

In summary, measuring the difference in the year-on-year change in total employment versus its private counterpart is revealing. Most of the time, the year-over-year change in private hiring exceeds the hiring in total payrolls.

This is not surprising, as companies expand their payrolls in line with a growing economy (which tends to prevail most of the time) and pull back when economic headwinds increase.

While several key payroll indicators continue to reflect strength, the recent year-over-year decline in private payrolls compared to the aggregate number is concerning, as the chart below shows.

Payroll differential

A negative net reading usually coincides with a recession. The fact that this metric has been negative for 11 consecutive months through February raises a potential warning sign for the labor market and the economy.

The good news: This indicator, to the extent that it signals problems, tends to be early. Another hurdle is that several so-called reliable business cycle indicators have failed recently, so it's possible (likely?) that this warning applies here as well.

Modeling the outlook for year-over-year change in private payrolls with a different methodology suggests that the chart above is overstating the potential risk.

Using CapitalSpectator.com's joint model to project the 1-year trend, private payrolls continue to anticipate low risk to the labor market in the near term.

Annual changes in US private sector payroll

Annual changes in US private sector payroll

That is also the forecast implied by the low level of , which continues to record near multi-decade lows.

If this leading indicator begins to rise to a significant and sustained degree, that would confirm the warning sign in the first chart above.

For what it's worth, the relative weakness of private payrolls versus total payrolls tells us that jobless claims will soon increase, although it seems like a low probability event today.

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