Market Snapshot | November 2023

Hi everybody, welcome to the November market snapshot. In this month's video, I'd like to discuss the labor market in light of what was a weaker than expected October jobs report. But I want to do it in the context of how to categorize various job metrics and what story they tell about where we are in this very unique economic cycle. As we often discuss, most economic indicators can be put in one of three buckets: leading, coincident and lagging indicators. Well, knowing which metrics fall in which bucket can help with an understanding of how economic cycles progress from expansion to contraction.

[High/Low Chart for A continuing story of labor market deterioration for initial unemployment claims is displayed]

So initial unemployment claims that's reported weekly on Thursdays is considered a leading economic indicator. And in fact, the metric is one of the 10 components of the leading economic index. For short, LEI, put out monthly by the conference board. So here we show the four-week moving average of initial claims. That's a common way to look at the data given that it smooths out what admittedly can be a very volatile weekly series. Although there was a notable lift in claims in early summer, as you can see, there was an equally notable retreat since then. Now we are starting to see initial claims accelerate again, the increase is mild so far.

[High/Low Chart for A continuing story of labor market deterioration for continuing unemployment claims is displayed]

Now on the other hand, there's a metric called continuing claims. It measures people who remain on unemployment insurance. Those have had a more notable increase in the past couple of months, as you can see. So what is the signal here? While companies may be holding onto workers longer than in prior cycles, labor hoarding as it's often called, that may explain the still low level of initial claims, but rising continuing claims suggest that it's becoming a bit more difficult for laid off workers to quickly find new employment.

[High/Low Chart for A tale of two surveys for monthly change in establishment survey (nonfarm payrolls) is displayed]

Now let's move on to coincident indicators. One of which is the monthly non-farm payrolls report. That's highlighted by the October jobs report that was released on November 3rd. And following what was generally viewed as just a gangbusters September jobs report, October's report was perhaps the hangover associated with the prior month’s party. Now, there are many components of monthly jobs reports, but payrolls is typically the headline grabber and the first component to be released. Shown here, payrolls is one of the four components of the conference board's coincident economic index. And for the October report, non-farm payrolls were up 150,000. That was quite a bit weaker than the 180,000 consensus expectations and well down from September's 297,000. Now, for keen listeners who watch this kind of stuff, that 297 might sound different from what you remember. Well, originally reported payrolls for September were actually 336,000. 297,000 is the revised number. Not only were September's payrolls revised down, so were August's. And in fact, the combination of those two months, the downward revision totaled more than 100,000. Now, before moving on, I want to point out that the payrolls figure comes from the Bureau of Labor Statistics Establishment Survey. That essentially counts jobs. There's another survey the BLS conducts monthly called the Household Survey. That counts people. It's the household survey from which the unemployment rate is calculated. I think there's a lot of people that don't realize there's two different surveys here.

[High/Low Chart for A tale of two surveys for monthly change in household survey is displayed]

And as you can see here, there has developed a significant gap between the two surveys, not just in October, but for the past 18 months. Now, specific to October, household employment contracted by nearly 350,000. That was the largest monthly decline since April of 2020, of course, right in the meat of what was the worst part of the pandemic. So such a big drop is notable. And for what it's worth, the household survey tends to lead at important economic inflection points. So given the ongoing concerns about a recession, the data from that survey should continue to be keenly observed alongside the payrolls number from the establishment survey.

[High/Low Chart for Revisions no longer payrolls’ friend survey for monthly revision to nonfarm payrolls is displayed]

Now, I already mentioned revisions, but here's some more detail. As you can see, it is not uncommon to have both downward and upward revisions to prior payrolls data.

[Yellow box highlighting 2023 is displayed]

But notable is that in this calendar year, 2023 so far, every month except July has been downwardly revised. Now, that's a streak of negative revisions that has historically been associated with recessions more often than not. What’s interesting is the stock market's often dramatic reaction to the initial payrolls release, even though subsequent revisions are what ultimately reflect reality. So keep that in mind.

[High/Low Chart for Holding down more than one job for household employment is displayed]

Now, one of the things in addition that's picked up by the household survey is multiple job holders. To put that in context, first, take a look at the level of household employment per that survey.

[High/Low Chart for Holding down more than one job for multiple jobholders as % of household employment is displayed]

What you're looking at now represents folks who have taken on an additional job. Hopefully not more, but possibly more than just one additional job, often for what's considered economic reasons. Now, as you can see, there has been a notable increase in multiple job holders. Now, here's a tangent, but something very interesting. If someone responds to the household survey saying they have added a second job, it's possible that that job gets picked up by the establishment survey as an additional payroll drop, when in fact it's just a second job held by a single person. And that is a partial explanation of why there often develops a large gap between the two surveys, at least during the early stages of an economic downturn.

[High/Low Chart for Unemployment rate’s rate of change notable for unemployment rate is displayed]

Finally, let's move on to the unemployment rate. By the way, which is not only the most lagging of labor market, key labor market indicators, it's actually one of the most lagging of all economic data points. Now in October, the unemployment rate did tick up again from 3.8% to 3.9%. And that means it's now a half a percentage point higher than the low earlier this year in April of 3.4%. Now, if you look, as you can see here at a long-term chart of the unemployment rate, the uptick from 3.4 to 3.9 is not stark. It's not really even that noticeable.

[High/Low Chart for Unemployment rate’s rate of change notable for 6-month change in unemployment rate is displayed]

However, when looking at the unemployment rate six month rate of change, you do see a very different picture emerge.

[Red dotted line for current reading of 6-month change in unemployment rate is displayed]

And as you can see, this rate of change has historically only occurred in or at the start of recessions. Now, I want to further highlight the lagging nature of the unemployment rate, given how often I've heard comments about how a recession is not possible without a significant rise in unemployment. Well, that suggests that there is a belief that a rising unemployment rate helps bring on a recession when in fact it's actually the other way around. A rising unemployment rate doesn't bring on a recession. Recessions begin for lots of reasons and they ultimately cause the unemployment rate to rise significantly. It's also why, as you can see in the top field here again, that at recessions ends, the unemployment rate is not only near its high, it's often still rising. In other words, a falling unemployment rate doesn't bring on a recovery. A recovery eventually brings the unemployment rate down.

[List of Takeaways is displayed]

So let's sum it all up. Although unemployment claims remain low, the rise in continuing claims suggests it's becoming at least somewhat more difficult for people to find new jobs. Similar themes are highlighted when looking at the relative weakness in household employment and the increase in multiple job holders.

And although the unemployment rate remains low in level terms, the rate of change of its recent move up is notable. It's an example of what I often say, which is that when it comes to economic data and its relationship to where the economy is in its cycle, better or worse often matters more than good or bad. Think about that. Now, finally, although it is unpleasant to talk about recessions, it's also really difficult to time them in advance.

Remember, they are a natural part of the economic cycle. In fact, as it relates to inflation and Federal Reserve policy, top of mind this year, a recession sooner rather than later might not be a bad thing. Wanted to try to end on a slightly brighter note. Thanks for tuning in as always. We'll see you next month.

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