JOLTS, Labor Market Conditions Index Consistent With Late 2017 Recession

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By New Deal Democrat

I continue to be unimpressed with the Job Openings and Labor Turnover Survey (JOLTS), as showing post-mid cycle deceleration for over a year. I have found what I hope is a better way to present my argument, so that you can see why the report is less than heartening.

First, here is a comparison of job openings (blue), hires (red), and quits (green, right scale). Because there is only one complete past business cycle for comparison, lots of caution is required. But in that cycle, hires and quits peaked first, while openings continued to rise before turning down in the months just prior to the onset of the Great Recession:

Though today's report for August 2016 looks very much like 2006, or even early 2007.

To better show you my concern, let's look at this same data as expressed in YoY% changes:

Figure 2

Although there's lots of noise in the squiggles, the pattern of maximum growth at mid cycle gradually declining under zero prior to the onset of the 2008 recession is evident. Here is a close-up of the years 2005-08 to show you the deceleration of quits and hires from their peaks in late 2005, and the flatness of hires before declining in the months just before the recession:

Now let's look at the same time frame up until this month's release:

You can see similar peaks of quits and hires in late 2014, and the general flatness in hires over the last year. The rates of YoY change are equivalent to those at the end of 2006.
If the same pattern as the last economic cycle were to hold for this one, JOLTS would show continued deceleration before rolling over into an actual recession about 12 months from now.

Meanwhile, the LMCI has been slightly negative virtually all this year. As shown in the graph below, this is consistent with slowdowns (as in 1985 and 1995) as well as prior to recessions:

Still, the LMCI has not declined nearly as much as it typically has prior to most of the recessions in the last 50 years. At the same time, note that the LMCI does a pretty good job forecasting the direction of the YoY change in employment (red). So the YoY trend in the monthly jobs report is likely to continue to decelerate.

While I'm not forecasting any actual negative monthly job reports in the near future, the YoY payrolls graph still shows continued deceleration. Here is a bar graph of the monthly gain in jobs for the last 3 years, minus 150,000, better to show the deceleration from the peak of nearly 2 years ago:

The 4th quarter of last year showed job increases of over 250,000 per month. It is a virtual certainty that the job reports for this quarter are going to average much less.

In summary, both the LMCI and the JOLTS reports have been adding to the accumulating evidence that we are getting late in the expansion, if we only go by these two metrics, and we follow the 2001-07 template, a recession could begin within about 12 months. Which means that this month's housing data, as well as the long leading business profit and residential investment data in the first Q3 GDP estimate will take on added importance.