All Access Week – Labor Markets

At Prometheus, we are committed to equipping our clients with the most granular, high-frequency, and actionable understanding of macro conditions in the industry. We offer our clients a range of research solutions, from big-picture macro themes to actionable trading signals. In the spirit of giving back to the community, we are excited to offer an All-Access week in our Institutional Services. Each day this week, we will unveil one product offering from our extensive Institutional Offering. If you’re interested in institutional access, please contact us at [email protected].

Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of the economy and financial markets in real time. The insights provided here are slivers of our research process that are integrated algorithmically into our systems to create rules-based portfolios.

Our primary takeaways are as follows:

• Labour market conditions have sequentially contracted. Employment and output have diverged meaningfully, setting the stage for some slowing in output.
• Even though we have some signs of cyclical slowing through unemployment and job openings, the magnitude of deceleration remains negligible.
• In the context of markets, the current deceleration in labour market dynamics does not warrant an imminent recession. Our strategies remain modestly long stocks and bonds, and short commodities.

The labour market is dominant in driving variation in overall economic activity. While business cycle pressures may originate in other areas of the economy, the labour market is the ultimate transmission mechanism for cyclical conditions to aggregate spending and income. Below, we visualize how employment growth explains most of the variance of GDP in a time-varying manner. Notably, during expansions, employment sets the baseline trend for GDP growth, while during recessions, job losses explain almost all of the contraction in activity. As we can see below, employment and output have diverged meaningfully, setting the stage for some slowing in output.

To further understand what is driving labour market growth, we decompose employment growth into its primary macro drivers, i.e., changes in the labour force and unemployment. A growing labour force supports the steady expansion of the labour market. Meanwhile, changes in unemployment largely stem from cyclical conditions. During expansions, unemployment falls, driving up employment, and during contractions, unemployment drives downturns in employment. Most of the recent declines are attributable to a reduction in the labour force.

We now zoom into both macroeconomic drivers of employment growth for a deeper understanding of the mechanics. Over long periods, the dominant driver of labor force growth is the trend in population growth, along with some variation created by demographic compositions and cultural norms around working & retirement. These variations can cause deviations from the population trend, but eventually, population growth is a mechanical limit around which the labour force operates, both on the upside and downside. As it stands, the deviation of labour force growth from the population trend remains negligible.

While labor force growth driven by population trends drives the long-term trajectory for employment growth, the job market’s cyclical variation primarily comes from changing unemployment. However, cyclical changes in unemployment are limited by unemployment rates. Once again, this dynamic is somewhat skewed. Declining unemployment is capped by unemployment falling below the natural unemployment rate or zero at the limit. Increases in unemployment have less of a hard ceiling, but practically, an extremely high unemployment rate is likely to create conditions that constrain population and labor growth. Thus, the unemployment rate largely constrains the cyclical movements of labor markets. Both these data points remain well below the contractionary zone but have shown nascent signs of weakness, recently. We visualize this below:

Now that we have examined the big-picture macro drivers of labour markets, we now turn to more detailed measures of current labour dynamics. To understand employment’s leading and lagging components, we look across employment, unemployment, job openings, and jobless claims. We begin by understanding the current composition of employment growth, broken down by sector. We show the top three contributors in blue and the top three detractors in red.

Now that we have examined the drivers of employment growth, we turn to cyclical drivers of these employment changes, i.e., unemployment. Below, we visualize the composition of unemployment changes, broken down by sector. The top three contributors are Construction, Leisure and Hospitality, Mining, Quarrying, and Oil and Gas Extraction, and the top three detractors are Education and Health Services, Professional and Business Services, and Wholesale and Retail Trade.

To further understand these cyclical conditions, we now turn to job openings, which drive job growth by expanding the opportunity set for employment. Expanding job openings indicate strong business conditions and potentiate employment growth. On the other hand, contractionary job openings are likely to result in further unemployment. The latest data suggested a further decline in job openings, primarily driven by Retail Trade, Leisure and Hospitality, and Education and Health Services.

Next, we turn to the timeliest measure of emerging pressures on cyclical employment conditions, i.e., initial jobless claims. In a weakening labor market, initial jobless claims continue until they are recorded as unemployment numbers. However, in a strong labor market, initial claims are continuously cleared via existing job openings, keeping unemployment stable. As such, compounding jobless claims rates, upwards or downwards, give us a timely insight into cyclical economic changes. Below, we visualize the drivers of these changes, decomposed by the state:

Zooming into claims- Initial & Continuing Jobless claims both surprised expectations coming at 249 & 1877, versus the expected 243 & 1854.5, respectively. Below, we show the history of these measures, along with the Continuing Claims Rate, after adjusting these measures to provide an apples-to-apples comparison. Additionally, we combine these measures into a Jobless Claims Aggregate to capture the broad trend in the data:

Additionally, we show the recent evolution of jobless claims data, over the last twelve weeks. Our tracking of Jobless Claims currently tells us that we are a way off from recessionary territory.

Further, we show these Jobless Claims measures adjusted to show our position in the labour market cycle. We remain in expansionary territory.

Next, we show jobless claims data from a more sequential perspective to understand where we are in the labour market cycle relative to the most recent cycle peak. As of our latest reading, our labor market measure shows Jobless Claims are 26%. Recessions typically begin around a reading of 18%, suggesting we are within the ballpark of recessionary territory.

Finally, we show the breadth of initial claims data relative to continuing claims rates. Initial claims continue to suggest pressures of continuing jobless claims:

Overall, labour market conditions have sequentially contracted. Furthermore, employment and output have diverged meaningfully, setting the stage for some slowing in output. However, even though we have some signs of cyclical slowing through unemployment and job openings, the magnitude of deceleration remains negligible. In the context of markets, the current deceleration in labor market dynamics does not warrant an imminent recession. Our strategies remain modestly long stocks and bonds, and short commodities. Until next time.