Analyzing The Employment Report

The employment situation report was a disappointment relative to expectations but more importantly, showed a deceleration in year over year growth rate terms across many key metrics making this report an objectively weak report. 

The slowdown in employment growth was predicted by the sharp deceleration in the growth rate of the EPB Leading Employment Index which means the data was not a fluke but rather a predictable outcome based on the sequence of economic events. This employment report failed to change the trend in the leading employment index, as I will outline towards the end of this report, which means the slowdown in employment growth will persist. 

The consensus was expecting an NFP print of 180,000 jobs but was disappointed with an actual reading of 75,000 jobs. Last month was also revised lower from 263,000 jobs to 224,000 jobs. 

Total employment growth decelerated sharply to 1.58%. The broad deceleration in economic growth that started in January of 2018 has clearly spread into the employment market as the rate of employment growth has cooled. 

Total Employment Growth Year over Year:Source: BLS, EPB Macro Research

The following categories are for the production and non-supervisory category of employees. Construction employment growth has decelerated to a fresh cyclical low of 2.49% year over year. The longer-term chart on the right shows that this rate of construction employment growth is the weakest reading since 2012. 

Construction Employment Growth Year over Year (Production Workers):Source: BLS, EPB Macro Research

Manufacturing payrolls, a highly cyclical sector of employment, also decelerated, falling from a peak rate of 2.28% growth to 1.21% in a matter of months.

Manufacturing Employment Growth Year over Year (Production Workers):Source: BLS, EPB Macro Research

One of the better leading indicators in a report that is otherwise coincident at best is the weekly hours of various cyclical sectors of the economy such as construction and manufacturing. The average weekly hours of production level construction workers ticked higher to 39.70. 

Average Workweek Length (Production Workers - Construction):Source: BLS, EPB Macro Research

Unfortunately, while the average weekly hours ticked slightly higher this month, the growth rate in construction payrolls decelerated. If we take the number of construction payrolls and multiply the average weekly hours, we get a reading on the total aggregate hours worked in the construction sector for production-level workers. 

The growth rate in aggregate construction hours has fallen below 1%, also matching one of the lower readings this economic cycle. If less than 1% more total hours are required in the construction sector, what does that suggest about the growth in output coming from this important and cyclical sector? 

Aggregate Hours Worked (Production Workers - Construction) - Growth Rate:Source: BLS, EPB Macro Research

Moving over to the average workweek of the manufacturing sector, one of the best leading indicators from this report, we see a flat sequential reading but a sharp decline that started in April of 2018. A notable decline in the weekly hours of production level manufacturing workers suggests the weakness in global manufacturing, a highly synchronized industry on a global basis, is likely to persist. 

Average Workweek Length (Production Workers - Manufacturing):Source: BLS, EPB Macro Research

Using the same calculation as we did for construction workers, the growth rate in the aggregate amount of manufacturing hours ticked higher to 0.24% year over year. The pop in the growth rate is more than likely due to an easy base effect, highlighted by the red arrow. The trending direction in the growth rate of the aggregate amount of production-level manufacturing hours remains one of deceleration. 

Aggregate Hours Worked (Production Workers - Manufacturing) - Growth Rate:Source: BLS, EPB Macro Research

If we look at the aggregate hours worked of all production-level employees, from all sectors, the economy only required 1.10% more hours of work than the same month last year, a negative sign for total economic growth. The trend in the growth rate of aggregate hours is correlated to total output so this reading suggests we should continue to expect a deceleration in the rate of economic growth. 

Aggregate Hours Worked (Production Workers) Year over Year (%)Source: BLS, EPB Macro Research

The EPB Leading Employment Index properly identified this slowdown we are now seeing in the employment sector. This leading index is comprised of several of the most cyclical indicators from the employment report, as well as initial jobless claims, which has a proven lead over total employment growth both logically and empirically. 

The employment report caused a very small sequential increase in the leading employment index but the three-period average, what I watch more closely for the trend, has hit a new low in growth rate terms which suggests that the weakness in terms of employment growth will persist. This does not forecast the reports on a month-to-month basis but the trend in the growth rate of employment will remain lower over the next 2-3 months and potentially longer depending on the future changes to this index. 

This index does not just forecast decelerations but also accelerations in the growth rate of employment as shown in the 2016-2018 period. 

Leading Employment Index Year over Year (%):Source: BLS, DOL, EPB Macro Research

The EPB 4-Factor Coincident Growth Rate Index, which is not a leading indicator but rather a coincident gauge on the current trending growth rate, was pushed lower by this report, down to 1.61% year over year. 

EPB 4-Factor Coincident Growth Rate Index:Source: BLS, DOL, EPB Macro Research

Below I will take a deep dive into the auto sector, the focal point of this economic slowdown that I noted starting 4-5 months ago. 

If we look at average weekly hours of production level manufacturing workers + overtime hours, we see a sharp decline, highlighting the slowdown in this sector. Hours worked are reduced before employment so this decline precedes employment losses in this sector. 

Average Weekly Hours + Overtime Hours For Production Workers: Manufacturing:Source: EPB Macro Research, Macrobond

While I am not calling for a recession, that is still not in the current forecast, the year over year decline in the weekly hours + overtime hours of manufacturing workers is not inconsistent with declines seen during recessionary periods. 

Average Weekly Hours + Overtime Hours For Production Workers: Manufacturing Year over Year (%):Source: EPB Macro Research, Macrobond

If we get more granular, we can see a massive plunge in the weekly hours of production workers in the transportation sector. 

Average Weekly Hours - Transportation Production Workers:Source: EPB Macro Research, Macrobond

Digging down one more layer to the motor vehicle and parts subcomponent, adding hours and overtime hours, we can see a large portion of the plunge is attributable to the auto sector specifically. 

Average Weekly Hours - Transportation Production Workers: Motor Vehicles Hours + Overtime Hours:Source: EPB Macro Research, Macrobond

The broad-based economic slowdown continues and is becoming increasingly evident to the consensus opinion. This economic slowdown started in January of 2018, almost 18 months ago. It is somewhat amazing that it took 18 months and ~125 bps decline across the interest rate curve for the consensus opinion to warm up to the fact that economic growth is decelerating. 

Most analysts, who don't use a rate of change approach, will always miss inflection points in the economic cycle. 

This employment report continued the trend of deceleration and the update to the leading employment index suggests that this trend will continue.