A Reality Check For 2 Employment Indicators

by: James Picerno

If the US was slipping into a recession, would the evidence be conspicuous in the labor market data? History says that's a good bet. In fact, it's inconceivable that the country could go into a macro hissy fit without a sharp downturn in jobs creation. Anything's possible, of course, but bolts of unprecedented behavior from the blue are a rare breed in economics. That's good news these days because the trend still looks encouraging on this front. To be precise, the so-called establishment survey from the Labor Department continues to hold up, providing a relatively steady year-over-year growth rate of just under 2%. The household survey, by contrast, looks relatively wobbly, although this series is now looking a bit stronger too.

Consider the long-term history for both data sets. Everything's obvious in hindsight and so it's never quite clear what the truth is in real time. But history tells us that if we're staring into the face of a new recession, we're likely to witness a persistent deceleration in employment growth that dips into negative territory at some point during the downturn.

Let's take a closer look at recent history, which shows that the household data (red line) has stumbled. But the establishment reports have been relatively stable, raising doubt about the veracity of the implied warning in the household numbers. Note too that the household trend has turned higher recently. Is this a sign that the labor market will steer clear of trouble in the near term? If two estimates of the labor market are trending positive, it's that much harder to expect the worst for the broad macro trend.

Ditto when a broad review of indicators tells you something similar, which was true when I ran the numbers a few weeks ago. Actually, I crunch the data on a weekly basis and the latest report is unchanged from the monthly review that I publish on these pages.

The message is that warning of high recession risk without a convincing set of numbers to support the analysis is the economic equivalent of crying wolf. For some reason, that's a popular sport in the land of macro. If this was medicine or aerospace engineering, that type of behavior would be rejected for what it is: unsubstantiated guesswork. But economics is different, which may be why they call it the dismal science. If you're looking for a smoking gun in the data, you can always find it or at least someone who thinks they see it.

There's always another recession coming, of course, and one could be close now... or not. But if you think you see a wolf, it's a good idea to have a convincing case. That's not be confused with a cherry-picked data set that appears to be slipping over the edge. You can always find such warnings, even in the best of economic times. A more convincing case that macro darkness is fate, by contrast, is a higher standard. The question comes down to whether you'd prefer to be early or right? It'd be nice to be both, at the same time. Alas, if you spend any time reviewing the history of the business cycle and the efforts at dissecting the trend in real time, it's clear that we're likely to have access to one or the other. Pick your poison.