Is US Employment Data Flirting With An Economic Warning Sign?

Depending on the employment indicator, the US economic outlook is upbeat or worrisome. Focusing on yesterday’s ADP Employment Report for November leans toward the latter.

US companies added a thin 67,000 jobs last month, according to ADP’s estimate, the weakest gain since May. Monthly data is noisy and so it’s best to use the one-year change for a more reliable measure of the trend. But there’s a worrying slide afoot here as well: job growth ticked down to a 1.5% year-over-year gain, the slowest since 2011.

“The job market is losing its shine,” says Mark Zandi, chief economist of Moody’s Analytics, which co-produces the data with ADP. “Manufacturers, commodity producers, and retailers are shedding jobs. Job openings are declining and if job growth slows any further unemployment will increase.”

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Granted, a 1.5% annual expansion in the labor market is still a moderately healthy pace, but it’s the downward trend that’s problematic. No one knows how the labor market will fare in the months ahead, but the forces of gravity appear to be accelerating and so the upcoming numbers will be increasingly critical for evaluating the near-term economic outlook.

That starts with tomorrow’s November data on payrolls from the Labor Department. The main question: Will Friday’s report align with the softer profile in the ADP numbers? No, according to the consensus point forecast via Economists are expecting that private employment growth will pick up to 170,000. Note, however, that translating that relatively upbeat change into an annual pace implies that the government’s data will show that the one-year increase held steady at 1.5%, which ties with October’s gain as the slowest since 2011.

Keep in mind that the potential for a lower-than-expected gain in Friday’s report can’t be ruled out. For perspective, consider the forecast for the monthly change in tomorrow’s update by regressing the Labor Department’s data against the ADP numbers. Using this simple model as a guide (at the 95% confidence level) implies that Friday’s results will show that employers added a weak 67,000 workers. There’s a lot of noise in this type of analysis, but it’s clear that the potential for another weak report can’t be dismissed.

The optimistic view is that jobless claims remain low – close to the lowest print in 50 years. This leading indicator continues to anticipate that the labor market’s expansion will remain healthy for the foreseeable future.

A broad set of economic data also suggests that US recession risk remains low. But as the October update of the Chicago Fed National Activity shows, the recent slowdown in economic activity is creating stronger headwinds. In turn, the economy is increasingly vulnerable to new shocks–a condition that will apply unless growth picks up.

But a re-acceleration in the macro trend appears unlikely as long as the ongoing US-China trade war continues to slowly but persistently take a toll on business sentiment, which in turn is starting pinch the real economy, albeit on the margins so far. Fortunately, consumer confidence remains upbeat, which may counteract any negative outlook in the business world. The University of Michigan’s survey of consumers found that the view on Main Street remained solidly positive last month.

Nonetheless, if gravity continues to pull down the pace of hiring, 2020 could be challenging. It’s unclear where exactly the tipping point lies for the one-year trend for private employment for declaring that a recession is fate. But what is obvious that a persistent slide in the one-year growth rate for job growth always precedes a new downturn. There’s still enough ambiguity on this front to leave room for debate, but a surprisingly weak number in Friday’s release could be a warning sign that the hour is late.

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By James Picerno

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