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The Most Important Thing to Know About Jobs Reports

One of the most discussed and most politicized pieces of economic data is the jobs report, released early in each month by the US Bureau of Labor Statistics. When the economy is accelerating and hiring is robust, politicians on both sides of the aisle fight to take credit for the successes in the labor market. Conversely, when hiring begins to decelerate, it becomes a scramble to assign blame and use the softening data points as a political cudgel. The talking heads of the media networks consistently assist in this exercise. They pick apart the numbers and apply whichever slant is the most politically convenient or advantageous, while advancing broad generalizations about the future of the US economy.

All of this misses the most important point: hiring and overall employment in the US is a lagging indicator. It offers no forward-looking utility or insight.

Think of the jobs report as one part of a physical examination at the doctor’s office; it's an important sign of how we are currently doing, but not necessarily an infallible signal of how we will fare in the future.

When cyclically evaluating the US labor market, we see that US Private Sector Employment has an impressive correlation (0.81) and cyclical match to US Real Gross Domestic Product (GDP), perhaps the most common gauge of the entirety of the US economy. But there is a catch. Employment lags behind the US economic cycle by nine months! Shifting hiring trends are being towed behind the US economy by three quarters, rather than the other way around. This month’s hiring numbers reflect growth (or the lack thereof) that has already occurred.

Unfortunately, many executives across the country make hiring or firing decisions in reaction to yesterday’s phase of the business cycle, instead of in preparation for tomorrow’s. Prudent executives are following the leading indicators, rather than the lagging ones, to prepare for what's next.

US Private Sector Employment for the most recent 12 months is up 1.8% from the prior year, but it has been slowing down since the second quarter of 2019. This deceleration is in response to a slowdown that began in the overall US economy during the second half of 2018. We expect that this hiring slowdown will persist into late 2020 but stop well short of shrinking payrolls and rising unemployment across the US.

The ongoing slowdown likely means – particularly as we're heading into a presidential election year – more headlines to the effect of “US Economy adds fewer jobs than expected during…” throughout the year ahead and plenty of sensationalizing from the mainstream media. Our recommendation is to remember this blog and share it with friends, so you can keep your heads above the "noise" during the next year.

 

Connor Lokar
Economist