Investing Insights

EMPLOYMENT WATCH  •  September 9, 2024  •  Jon Wolfenbarger

Employment Is Now Declining…So Much For A “Softish Landing”!

NEW YORK — Last week, the “JOLTS report” (Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey) showed US job openings fell to 7.67 million in July from a downwardly revised 7.91 million in June. It missed expectations by a whopping 5% and was the fourth miss in the past five months. That is the lowest level of job openings since January 2021, when the economy was recovering from the government imposed covid lockdowns. Also, layoffs rose to 1.76 million, which is the most since March 2023.

This chart shows job openings, quits and hires are all declining at a level usually only seen in recessions.

As shown in this chart, historically there’s been a strong relationship between JOLTS openings (orange line) and the S&P 500 (blue line), although there has been a major disconnect during the AI-driven rally of the past two years.

Construction Employment Is The Next Shoe To Drop 

Given the importance of housing to the economic outlook, since it is 15% to 20% of GDP and is closely tied to interest rates, the significant decline in construction-related job openings is particularly concerning.

As shown below, construction job openings (blue line) are down 46% since February to a four-year low and now at levels first seen in 2016! Construction employment (red line) is currently at record highs of 950K. But given the collapse in construction job openings and new housing starts, we expect construction employment to begin falling significantly soon.

Disappointing Jobs Report

The August jobs report showed a disappointing 142K net new jobs added in the month, below expectations of 165K. In addition, July was revised down from 114K to 89K and June was revised down from 179K to 118K, for a total negative revision of 86K for the two months. The last four jobs numbers and six of the past seven have been revised downward.

Particularly concerning for the economic outlook, the highly cyclical manufacturing sector lost 24K jobs, which is the second worst jobs report for manufacturing in three years.

Declining Full-Time Jobs And Rising Part-Time Jobs Signals Recession

The number of employed workers rose by 168K, but that was due to a rise in part-time jobs of 527K, offset by a huge 438K drop in full-time jobs. Over the past year,  part-time jobs rose by 1.05 million while full-time jobs fell by 1.02 million. Since part-time jobs pay less and do not provide benefits, it is not surprising that the number of multiple jobholders rose to all-time highs of more than 8.5 million.

As shown in this chart, full-time jobs (blue line) are down 0.8% year-over-year, while part-time jobs (red line) are up 14.4%, which is a classic recession sign.

Full-time jobs have declined year-over-year every month since February. Over the past five decades, three months in a row of full-time jobs declines have always occurred when the US is in a recession or about to enter a recession.

Another key indicator is temporary jobs. As with full-time jobs, whenever temporary jobs have declined year-over-year for three months in a row, the US has gone into a recession. Temporary jobs have declined for the past twenty-two months. 

Another fact with important economic and political implications: last month, the US added 635K jobs for foreign-born workers, while American-born workers lost 1.325 million jobs. This was tied for the biggest monthly decline in American-born workers since the covid panic of 2020. Indeed, the US has not created any new jobs for American-born workers in more than six years, while 4.7 million jobs have been added for foreign-born workers.

Employment Is Declining For First Time Since Covid, Signaling Recession

As shown below, overall employment growth is now 0.0% year-over-year. In terms of numbers, employment is actually down by 66,000 workers year-over-year. This is the first decline in employed workers since the covid recession of 2020. Whenever employment has turned negative in the past, the US has either been heading toward a recession or already in a recession.

Unemployment Rate Rise Continues To Signal Recession

The unemployment rate did tick down from 4.3% to 4.2%, but is it still 0.8% above the 2023 lows. When the unemployment rate has risen 0.5% or more, it signaled the last nine recessions with a 100% track record. 

Historically, the unemployment rate has bottomed about seven months before a recession on average, with a range of 1 to 16 months. The unemployment rate last bottomed in April 2023, 16 months ago.

One Additional Concerning Data Point

Our friends at Opening Bell Daily shared this chart using LinkedIn data that shows hiring rates in top US metros have declined for over two years. Currently, five of the top 19 metros are experiencing hiring rates below pre-covid levels.

Source: Opening Bell Daily

Cyclical Sectors Tell The Story Of Recession

The performance of the most cyclical US stock sectors — Industrials, Consumer Discretionary and Banks — as well as the highly speculative asset Bitcoin versus the S&P 500 provides another key recession warning. As shown below, with the exception of Industrials during a few months in late 2022/early 2023, all of these cyclical sectors and assets have been underperforming the S&P 500 since 2020 or 2021. This is further evidence that the AI-driven rally in the major market-cap weighted indexes like the S&P 500 and NASDAQ 100 since late 2022 has been a bear market rally.

Investment Implications

The following indicators have always signaled recessions in the past when they have weakened to the levels they are currently showing:

• full-time job declines
• part-time job increases
• temporary employment declines 
• overall employment declines
• unemployment rate rise

We believe this is why the Fed will start cutting rates this month. We believe it will be a 0.25% cut, rather than a 0.50% cut, since the unemployment rate ticked down. We also think the Fed wants to try to avoid scaring the market with a 0.50% cut.

Note that historically, when the Fed has cut rates (red line) following a significant hiking cycle such as we have seen the past couple of years, unemployment has skyrocketed (blue line) and a recession (shaded gray) has occurred, as shown below.

We do not expect this time to be different.