US employment market: weakening but still relatively robust

While the US employment market continues to weaken, the latest BLS data shows that as it currently stands, it remains relatively robust.
Steven Anastasiou

Economics Uncovered

While the US jobs market continues to be in a weakening trend, May’s BLS employment data continues to show an employment market that remains relatively robust.

Though given the Fed's aggressive tightening, a further material weakening is expected to lie ahead - let's unpack the details.

Beginning with the unemployment rate, we can see that a 3.7%, it remains historically low.

Though zooming in to analyse more recent trends, shows that May's increase in the unemployment rate took it to its highest level since October 2022.

In order to prompt more concern from the Fed, and an impetus for a more nuanced approach to its monetary policy, the unemployment rate will likely need to show signs of a clear uptrend and break above 4%.

May's increase in the unemployment rate came as the household survey of employment recorded a decline of 310k - the largest monthly fall since April 2022.

In contrast to the more volatile household survey, the establishment survey of employment recorded strong growth, rising by 339k in May.

Given the monthly volatility of jobs data, it's better to look at changes on a 3- or 6-month moving average basis.

Here, we can see that nonfarm payroll growth continues to remain in a downtrend. Though as opposed to signalling major weakness, nonfarm payroll growth still remains above pre-COVID levels.

A more significant weakening has been seen in private payrolls, where growth has largely fallen back to levels that were seen pre-COVID.

Given that overall nonfarm payroll growth continues to be noticeably above its historical average, payroll strength is instead coming from government payrolls, which on a 6-month moving average basis, are above peak COVID rehiring levels.

A weakening in private job growth is also being indicated by the BLS' private employment diffusion index, which has fallen back to its historical 2011-19 range, and continues to remain in a clear downtrend.

Turning towards average weekly hours, we can see that a more significant weakening has taken place, with average weekly hours dropping to 34.3 in May - the lowest level since April 2020.

A break below 34.2, would see hours worked hit lows that were seen during the GFC and subsequent economic recovery.

The average weekly hours metric is likely to prove particularly important during the current economic cycle, as measures of employment are likely to be particularly lagging.

The reason for this, is that many employers are likely to be particularly reluctant to layoff staff after having significant difficulty in finding enough staff to meet the prior surge in demand (which was artificially induced by an enormous increase in the M2 money supply).

Looking at more cyclical categories of employment, manufacturing employment declined for the second time in the past three months. 3-month moving average growth is now negative.

Temporary help services employment recorded annual growth of -2.6% in May.

The Economics Uncovered Cyclical Employment index, which combines a number of leading categories of establishment survey employment, shows annual growth moderating to just 0.6% in May.

With cyclical employment indicators weakening significantly, the rate of quits has also fallen.

This indicates that 1) individuals are less confident of finding better work elsewhere; and 2) that there's less competition between firms to poach staff.

This is being corroborated by a decline in hiring rates.

Though despite the moderation, quits remain at a relatively elevated level, while the hiring rate hasn't fallen far enough to indicate a major deterioration in the employment market.

The relative robustness of quits and hires data is supported by layoff rates, which remain historically low.

Though remember, layoffs are likely to be a particularly lagging indicator during the current economic cycle, given the prior difficulties that employers had in reaching desired staffing levels.

Putting it all together...

shows that there are clear signs of a weakening US employment market:

1) 6-month moving average nonfarm payroll growth remains in a downtrend;

2) private payroll growth has moderated even more significantly;

3) cyclical employment industries have seen growth turn negative/moderate very significantly; and

4) the rate of quits and hires continues to moderate.

Though despite the many indications of a weakening jobs market, overall, its current position remains relatively robust.

Unemployment remains relatively low. While decelerating, 3- and 6-month moving average nonfarm payroll growth remains at historically robust levels. The same is true for the rate of quits and hires.

Where to from here

In order to understand where the US employment market is likely to head from here, some broader context is needed. The most important context, is the Fed's policy position.

As is well known, the Fed has undertaken an aggressive tightening campaign, which has seen the federal funds rate increase by 500bps, and the M2 money supply record its largest declines since the Great Depression.

As history shows, this means that much higher unemployment is likely to lie ahead.

As opposed to suggesting that this time is different, low unemployment isn't a bug - it's a feature of most business cycles before the bust.

It's what prompts Fed tightening.

The bust follows with a lag.


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Important disclaimer—this may affect your legal rights: This report is an economics research publication and is not investment advice. This economics research represents my own analysis, opinions and views, is general in nature, and does not constitute personal advice to any person. While this research utilises data which is considered to be reliable, I have not independently verified the accuracy of the data utilised in this research. While I have taken care to try and ensure that the figures, data and information presented in this research are accurate and free of errors, I am not perfect, and the report may contain errors or omissions that may become apparent after this research has been published. I do not represent, warrant or guarantee expressly or impliedly, that the data and information contained in this research is complete or accurate. I do not accept any responsibility to inform you of any matter that subsequently comes to my attention, which may affect any of the information contained in this research. I do not accept any obligation to correct or update the information or opinions contained in this research. I do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omissions in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person.

Steven Anastasiou
Economist
Economics Uncovered

Publishing independent, institutional grade economics research at Economics Uncovered: economicsuncoveredresearch.com Follow me here on Livewire & on Twitter (twitter.com/steveanastasiou) to keep up-to-date with my latest thoughts & analysis.

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