Quits Rate Vs. Unemployment: A Great Macro Indicator

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The quits rate is a good long-term indicator of labor sentiment and the US economy.

A high quits rate may be good for the economy but bad for a particular sector.

Quits rates are higher than average now, indicating good labor sentiment.

Low quits rates in Financials and Real Estate may indicate some opportunity there.

Unemployment has been a bright spot recently in the US economy, decreasing from a high of 10% in October 2009 to 4.7% in May 2016. This decent progress has been resisted by rising political risks, creating high demand for safe assets. To determine whether the US is experiencing true headwinds, or just temporary setbacks, I like to look at the "quits rate". A higher than average "quits rate" indicates better sentiment in the labor market.


The unemployment decrease has been remarkably consistent, with only minor monthly fluctuations. Based on this one graph, you might conclude that the US is in great shape compared to 7 years ago. In the graph below, the gray area represents the recession in 2008:

US Unemployment Rate Chart

US Unemployment Rate data by YCharts

Quits Rate vs Unemployment

Unemployment can go down for lots of reasons. Right now lots of unemployed people have stopped looking for work entirely, driving the unemployment rate down. So a lower unemployment rate tells us little without context.

Fortunately, the "quits rate" is up from recent lows. The quits rate measures the monthly percentage of workers that quit their jobs. An ideal world could have a high quits rate, because high paying jobs are plentiful, or a low rate, because everyone is satisfied with their jobs. Because of these dual interpretations, the quits rate requires a bit more intelligence to use properly. Unemployment is easy by comparison: lower is better!

Job satisfaction is hard to measure because it is subjective. You have to look at sampled surveys of employees, grouped by industry. Most of the data you can find implies that different jobs have different satisfaction levels. I would argue this means that each job has its own average quits rate, with more satisfying jobs having lower average quits rates. I have not done extensive research on this, but it makes sense intuitively that a firefighter (with high job satisfaction) has a lower quits rate than a cashier at the movies (unless you really like movies).

Of course a firefighter might quit for health reasons, but the point remains that we must compare similar jobs when using the quits rate to determine the health of the labor market. When the quits rate among similar jobs rises above the long-term average, it can be inferred that workers are comfortable enough with the employment situation to quit their current jobs, possibly to find new ones.

Current Quits Rate Data

Currently, the data shows 4 industries with good quits rates, 4 with negative levels, and 2 with average. Green highlighted numbers are good because the quits rate is above the long-term average. Red numbers are below the long-term average. This data has been collected since December 2000 and the long-term rate is the arithmetic mean since then:

2016 Quits Rate Data by Sector

We probably need to look at more than a month of data to gain any insight. The past year shows "Trade, Transportation, and Utilities" has the most months above the average quits rate: 11 months above and 0 below.

Looking inside the "Trade, Transportation, and Utilities" supersector, we can see the industries that are driving the high quits rates, "Retail Trade" and "Transportation, warehousing, and utilities":

Looking inside the "Financial Activities" supersector we can see the industry that is driving the low quits rates: Finance and Insurance.

What does all this data mean?

The standard use of quits rate data is to judge the overall health of the economy. Because most supersectors have a higher than average quits rate, the basis of the US economy is sound. However, I postulate that higher quits rates are bad for each individual sector. Since a higher quits rate means that workers have more bargaining power, costs will go up. Whether workers are gaining a better paying job in the same sector or leaving altogether, the end result is higher labor costs for that sector. Also low quits rates can indicate job satisfaction (and an accompanying lower turnover). This means higher quits rates can be bad for one sector but good for the economy as a whole.

None of this means that we can predict stock market valuations from this data. That is determined by how buyers and sellers feel on a short-term basis. People will change how they feel over time, even if they don't want to. Change is the only constant in a marketplace. So this data can only tell us how people feel about their jobs, which may be different from their investments. Right now, the labor sentiment looks decent in the US but everyone is buying up risk-free assets like sovereign debt. Treasury notes (NYSEARCA:IEF) are up 8% this year!

The high overall quits rate indicates that you could just buy the S&P 500 (NYSEARCA:SPY) now and do fine. But I believe the lower quits rates seen in the Financials and Real Estate sectors indicate a relative advantage over other sectors. XLF is a good ETF to buy if you believe so as well; it contains both Financials and Real Estate. This September the Real Estate companies will be separated from XLF into a new ETF: XLRE. You will be able to monitor each sector separately.


No one should be blindly "buying the dips" because you never know how deep those dips will be. If you use macroeconomic indicators to determine general sentiment, you may be able to take advantage of opportunities others miss. Right now the quits rate provides much needed color to interpret labor sentiment, and its potential impact on consumer demand. These factors point to XLF and XLRE as potential sectors for investment.

If you have any comments or questions, please post them below. I will respond to as many as possible. If you have any info that proves me wrong, please list it. I am always interested in that.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The opinions expressed here are not investment advice. The investing ideas discussed may not be suitable for everyone. Investing in stocks, bonds, ETFs, mutual funds, options, futures, and other products carries particular risks that must be examined ahead of time. All investors should discuss any potential investments with a qualified financial advisor.