Employment Trends

Let’s take a look at some employment trends to see what they may be saying about recession possibilities:

Goods-Producing Employment — Rate of Change

Even though this is supposedly a “service economy,” every recession since 1948 (including the one in 2001) was marked by a drop below the 0% line in rate of change in goods-producing jobs. This is a 10-for-13 recession indicator, with three false positives (one barely) and no misses. The indicator right now is sitting on the line:

Financial Activities Employment — Rate of Change

In stark contrast to goods-producing employment, it is hard to make heads or tails out of financial activities employment. Those monitoring financial employment in this service economy may as well stop. The data, especially recent data, appear meaningless:

Professional and Business Services Employment — Rate of Change

This is an interesting chart. All 10 recessions since 1948 had annual rates of change on professional and business service employment falling below 2.5%. Seven of 10 started from higher levels. Using 2.5% as the indication line, there has not been a false positive recession signal by this measure since about 1963. The indicator is currently sitting on the recession trend line.

Construction Employment — Rate of Change

Ten of 10 recessions since 1948 were marked by annual rate of change in construction employment falling below the 0% line. There was only one false signal by this measure, in 1967. Some recessions started from much higher levels, but a cross of the 0% line has no misses and only one false positive. The indicator is sitting right on the recession trend line right now.

Housing Starts

Every recession since 1960 with the exception of 2001 (and just barely) was marked by a decline in housing starts below 1,500,000. I am not sure what is magic about this number (given population growth and immigration), but there it is in purple and blue and green and red (as opposed to black and white). This indicator has had three false positives, but the stunning factor is the closeness to the 1,500,000 line that the recessions started. Note that the threshold just broke. If the pattern holds, housing starts are going to fall to the range of 1,000,000-1,200,000. Rest assured that 200,000 houses represent a lot of jobs everywhere, in every sector from construction to appliances to trucking and even grass seed.

Housing Starts — Rate of Change

On a rate of change basis, recessions seem to be baked into the cake at a trend line of about -25%. Note, however, that recessions may start from much higher levels. The chart shows we are well into recession territory already. This next chart seems to be confirming what we see in the above chart:

Aggregate Weekly Hours

The above chart is crystal clear. There has been a turn down in average weekly hours in every recession since 1968. This makes a perfect six for six. One interesting factoid is that there was a sharp rebound in aggregate hours at the end of every recession except the last one. The big question is, “Are we topping now?” I think we are. The next chart provides the clue:

Aggregate Weekly Hours — Rate of Change

Six of the last six recessions started with a break of the 1% line in rate of change in private industries aggregate weekly hours. We are slightly above that trend line, but are most assuredly heading in that direction. Perhaps more interesting is how far things have to fall before a bottom is reached. In a country with consumers up to their eyeballs in debt, fewer hours (and smaller paychecks) are not exactly what anyone needs.

Participation Rate

A high participation rate means that a large proportion of the working age population is either employed or actively looking for work. Thus, the participation rate can be used to reflect optimism toward the availability of jobs. The above chart clearly shows that the participation rate is not a good recession indicator. However, one can look at the low official unemployment rate and make observations. Had the participation rate continued along the previous channel, the unemployment rate would be much higher.

Have we reached a plateau in participation rate? Should the participation rate decline, it will mask what would otherwise be rising unemployment.

Employment-Population Ratio

The employment-population ratio is the percentage of the working age population that is employed. A high employment-population ratio can mean that an economy is creating jobs and employing a large percentage of its working-age population. Like the participation rate, the employment-population ratio has broken a decade-long uptrend.

Is this chart and the preceding one related to the baby boom? It’s hard to see how that cannot be the case. A disturbing fact, however, is the number of baby boomers that are nowhere near prepared for retirement and are ill prepared for either a turn down in housing or the stock market. In that regard, “working age” is likely to be rising in practice, whether or not it is rising by bureaucratic measures.

Total Nonfarm Payrolls — Rate of Change

No matter how one slices or dices nonfarm payrolls, and regardless of what the cheerleaders on CNBC have to say, the above chart shows just how anemic this last recovery was.

Civilian Employment — Rate of Change

Civilian employment is a somewhat noisy indicator. Recessions often start with rates of change falling below the 2% trend line (nine times), but that indicator would also lead to seven false positives. Nonetheless, the chart shows we are stalled right on the trend line.

Unemployment Rate

The above chart shows that the unemployment rate is another noisy indicator with no clear trend line as to when a recession may occur. Perhaps that is because of manipulation of the official definition of “unemployed” over the years. If we calculated the unemployment rate as we used to or as Europe does now, it would be much higher. That said, it is clear we are on the bottom end of the range in which recessions occur.

In addition, employment tends to be a lagging indicator, and housing, goods-producing employment, professional services, and the inverted yield curve are all strongly suggesting a looming recession. For baby boomers nearing retirement, a recession along with falling home prices and declining equity prices could not come at a worse time. Yet in aggregate, that is the most likely interpretation of the above data.

Regards,
Mike Shedlock ~ “Mish”

March 12, 2007