A Downshift In Employment Growth
The employment situation report for August confirmed that the US economy has downshifted, experiencing decelerating rates of growth, which has translated to a significant slowdown in labor market growth.
Not only did the latest preliminary employment benchmark revision suggest that employment is significantly weaker than previously estimated, but the growth rate of total employment slowed to 1.39%, a 96-month low.
Total Employment Growth Year over Year:
Source: BLS, EPB Macro Research
Private employment growth slipped to 1.56% year over year, a 102-month low. Coincident employment data is showing nearly the weakest growth rate of this economic cycle.
Employment moves in cycles. There has been a clear deceleration or a downshift in growth in the labor market.
Private Employment Growth Year over Year:
Source: BLS, EPB Macro Research
The growth rate of our leading employment index, which peaked in April of 2018, nine months prior to the peak in total nonfarm payrolls growth, shifted lower once more to the lowest growth rate of this economic cycle.
This suggests the bias for the growth rate in nonfarm payrolls is lower.
EPB Macro Research Leading Employment Index Year over Year (%):
Source: BLS, EPB Macro Research
Put another way, in the middle of 2018, the labor market was adding an average of 220,000 jobs per month. Towards the end of the year, given the pivot in the leading employment index, we suggested that employment growth was the next sector to slow and also the sector that could tip the economy into a vulnerable economic window.
Today, average employment gains have slowed to roughly 140,000 over the past six months.
Based on the growth rate in the leading employment index falling further, the bias is that job growth will continue slowing.
Employment growth that slows any further would make the growth in the employment market near the weakest of this economic cycle, removing yet another narrative from the bull thesis.
Average Employment Gains (6-Months):
Source: BLS, EPB Macro Research
Looking into all the major sub-components shows the deceleration to be broad-based. Construction employment growth fell to 2.41% year over year from 5.02%, marking a 79-month low.
Construction Employment Growth Year over Year:
Source: BLS, EPB Macro Research
Manufacturing employment growth, one of the most cyclical areas of job growth, decelerated to 1.09% year over year.
Manufacturing Employment Growth Year over Year:
Source: BLS, EPB Macro Research
Positively, the combination of hours worked and overtime hours worked for manufacturing production workers ticked higher month over month. The trend in hours worked remains lower which suggests manufacturing activity is subdued.
Manufacturing hours worked is a component to many economic leading indicators, including the original Conference Board Leading Economic Index due to the cyclical nature of the manufacturing sector and the leading nature of hours worked relative to employment.
Manufacturing Hours Worked (Hours + OT Hours) Production Workers:
Source: BLS, EPB Macro Research
As the leading index of employment properly forecast, the growth rate in the employment market has cooled significantly. The pace of job gains is likely to remain in a downtrend, albeit with monthly volatility, pushing the year over year growth rate of employment near the weakest of the economic cycle.
As the labor market cools and the economic slowdown spreads, the risk of a recession continues to increase.
