Maybe Employment Really Does Push the Economy....

by: David Andrew Taylor

To begin with, I don't believe one bit that employment pushes the economy. I believe just the opposite, that the economy pushes employment. But, there are some interesting nuances that I find compelling. First, let's look at the comparison chart.

Here's a chart that show the rate of growth of Personal Consumption Expenditures [PCE] and the rate of growth of employment.

click to enlarge

PCE vs Employment 1960-present

In this chart, the red line is PCE and the blue line is employment. Actually, instead of employment, it's a little different. This chart is the rate of growth in unemployment, inverted. I wanted to show how employment coincides with PCE. The correlation is strong, to say the least.

One thing I find compelling about this chart is the lag in the PCE lately, even though employment is on the rise. Take a look at another aspect of this chart. Every time the PCE [red line] moves well above the blue employment line, it's followed by a deep dive to the downside. Coincidentally, that's about the time that interest rates push higher as well.

We are very likely to see an increase in the PCE. Most likely, however, it's possible that the rate of increase keeps below the employment line. This would prevent the Fed from having to put the brakes on the economy. But, I think it's a little premature to be thinking in lines with that. Nonetheless, the chart does suggest that there is potential for increased growth here in the U.S. Today's retail sales certainly helps to add to that thinking.