Time to worry about the US jobs market?

Yvan Berthoux - 27 February 2020

While US labour market statistics remain superficially impressive, there is gathering evidence that the bloom is off the rose. We saw that with a non-farm jobs gains of slightly over 2 million in 2019 (2.096M), the US experienced its weakest pace of job creation since 2011, suggestive of fading momentum for 2020. In addition, average weekly hours for private-sector employees has slipped by 0.2 hours in the past year, which explains part of the recent weakness in weekly earnings growth. Is there a message in here for prospective economic growth?

Figure 1: 

Data source: Eikon Reuters, FRED

In figure 1, we present the annual percentage growth rate of non-farm payrolls (left frame) alongside the annual growth rates for average weekly hours and weekly earnings (right frame). A popular labour market indicator that has been weakened more dramatically in the past 18 months is found in the Job Openings and Labour Turnover Survey (JOLTS), which measures the level of unfilled vacancies, month by month. Economists have found it useful as a leading indicator of activity. Figure 2 (left frame) shows that job openings declined by over 14 per cent over the past year, its worst performance since late 2009, and has historically shown a strong co-movement with the business cycle. In addition, even though some business survey readings have slightly recovered in the US in the past two months, the ISM manufacturing employment was still very weak in January at 46.6. Figure 2 (right frame) shows that the manufacturing PMI employment has historically been a good 3-month leading indicator of the non-manufacturing PMI employment index. Was there a softening employment surprise sitting in the pipeline even before the outbreak of Covid-19?? 

Figure 2: 

Data source: Eikon Reuters, FRED

A better way to digest the job openings data is to plot a scatter against the unemployment rate, which is a relationship known as the Beveridge Curve. As we observe in figure 3, according to the Beveridge curve, a high unemployment rate tends to be associated with a paucity of job openings; for instance, the unemployment rate reached a high of 10 percent during the Great Financial Crisis and the number of unfilled vacancies slumped to 2.422m. 

At the start of 2018, the US hit the convexity point where the stock of job openings exploded. quantity of unfilled jobs begins to explode for the same level of unemployment rate. Between December 2017 and March 2019, the number of unfilled jobs in the US soared by nearly 1.4m while the jobless rate remained steady at around 3.8 to 4 per cent. Figure 3 shows that the recent drop in job openings in returned us to the convexity point where further weakness in JOLTs would imply a rising unemployment rate. 

Deterioration in the US labour market would come at a very bad time as it would imply that household consumption, which has been the engine of growth in the past 18 months, would start to falter and the spectre of recession would return. 

Figure 3: 

Data source: Eikon Reuters, FRED


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