Does the release of nonfarm payrolls every month by the Bureau of Labor Statistics to deliver a snapshot of US job growth show proof that the economy is on track? What else is worth weighing to gauge the health of the market?
To grasp the relationship between job growth and the business cycle, one must first step back and truly understand the definition of a recession. The publicly recognized definition of two consecutive quarters of negative gross domestic product growth is not fully accurate. Don’t worry, we have been guilty of saying that as well. The National Bureau of Economic Research (NBER), the organization that officially calls the turn in the economy, defines a recession as:
A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
To make matters more confusing, NBER called the official start of the Great Recession at the same time employment peaked in 2007. This makes using employment growth as a leading indicator difficult. The jobs report will always be a key piece of economic data, but keep these things in mind when using it to influence your business decisions:
Don’t expect the economy to shed jobs. Companies historically were not shedding jobs en masse before the official start of a recession. Of the past five cycles, only two had any spell of negative job growth in the six months before the start of the downturn. Furthermore, during the same six-month period, every cycle had at least one month where 100K jobs were added; two of the five posted job growth of 300K+ just before a recession.
Look for volatility. Instead of looking for an economy losing jobs, watch for heightened volatility. Employment growth during past cycles shows volatility six to twelve months ahead of a contractionary period. The choppiness does not give a clear warning but should raise a flag.
Growth is likely to slow. Along with the choppiness,watch for a slowing trend. The 12-month average just before a recession historically has slowed compared to the 12 months before that for all of the past five downturns. Note, however, in three of the past five cycles, the average job growth twelve months before a recession was 150K+, which is generally considered a steady pace. In today’s economy, the most recent 12-month average is 31% higher than the prior 12. When the next report gets released, remember a good jobs numbers suggests a recession is unlikely in the next two quarters, but the data is not a good forecaster beyond that. We suggest using a combination of other leading indicators to understand common trends in the economy.
When the next report gets released, remember a good jobs numbers suggests a recession is unlikely in the next two quarters, but the data is not a good forecaster beyond that. We suggest using a combination of other leading indicators to understand common trends in the economy.
Contact us to discuss how we can help identify the best indicators to track and understand future growth.