Most headlines emphasized the payrolls increase figure +216,000 far exceeding expectations (+175,000) in December 2023. Many views suggest the December jobs report mixed bad and good news. However, Viet Hustler's view is that the December jobs report has more bad news than good, including:
Job growth based on Non-Farm Payrolls (NFP) and household employment survey both below pre-Covid trends.
Labor force participation rate declining…
The US economy lost -1.5 million full-time jobs in just one month,
The public sector (government) accounts for too high a proportion of added jobs.
NFP employment data continuously revised downward.
So which numbers should be used to evaluate the current labor market situation?
And what is the labor market saying about recession risk?
These are the main topics discussed in this week's Macroeconomics section.
Disclaimer: Some comments below are personal opinions and not investment advice. Viet Hustler is not responsible for any financial decisions of readers based on this article.
Highlighting 5 issues in the December 2023 jobs report
(1) Job growth below pre-Covid trend
Many point out the huge difference between US jobs from the payroll survey (up +216000) and household employment survey (down -683k), but few notice that both surveys' job numbers are below pre-Covid growth trends..
Job growth needs to match population growth: but currently job growth is slowing compared to pre-Covid trends.
And the mystery behind the job decline relative to trend lies in issue 2: labor force participation rate is declining ...
(2) Labor force participation rate drops sharply in December:
The December labor force participation rate dropped sharply to 62.5%, and much lower than pre-Covid levels…
… equivalent to -676,000 people leaving the labor force in just December - this explains the job growth below trend...
And also explains the artificially low unemployment rate (~3.7%)
…because the unemployed count only those in the labor force (actively seeking work) but unable to find it.
If the number of unemployed not counted in the labor force increases, then naturally the unemployment rate will be lower than the actual situation.
As mentioned above, population growth must be accompanied by job growth to ensure economic conditions for the population.
The employment-to-population ratio is below pre-Covid trend levels, showing the labor market has not recovered and caught up with population growth rate.
If we add back those who left the labor force to the labor force (and count them as unemployed), then…
… the unemployment number would rise to 11.1 - 13.1 million people and …
… the unemployment rate would be 6.4% - 7.5% (for payroll and household surveys).
Of course, this calculation is wrong according to economic theory but seems closer to the current situation.
(3) The US economy lost -1.5 million full-time jobs in just one month.
The issue that has attracted the most attention from the American public is the difference between:
payroll job count (NFP): +216k increase … VS
job count from household survey: -683k decrease (largest drop since the Covid period)
The difference between the 2 surveys has risen to an unprecedented level since March 2023…
The main reason is that the NFP survey counts multiple payrolls for one worker….
The number of workers holding multiple jobs has risen sharply, surpassing pre-Covid levels…
Most of those with multiple jobs are part-time workers. Thus, part-time jobs increased +762,000 in December.
Notably, full-time jobs dropped sharply -1.5 million - the largest drop since after the pandemic.
(Covid was an exceptional case due to mass layoffs by businesses)
This means that: it's likely that the +216,000 payroll increase in December was mostly temporary jobs…. While full-time jobs - which contribute to income stability for people - decreased.
(4) Government jobs (public sector) account for too high a proportion
Which sectors saw job increases in 2023?
Government and healthcare sector (government-regulated) top the list!
Government sector jobs hit a new high in December 2023: surpassing the May record - first time reaching 23 million jobs)…
And federal government jobs accounted for ~25% of total job gains last month.
This is a huge problem because private sector jobs are needed to pay taxes and salaries for government employees.
Private sector jobs : public sector jobs ratio = 3:1 is too low!
This may also reflect another reality: labor demand in the private sector is decreasing compared to the public sector (government).
Labor demand in the manufacturing sector has fallen below 0% for many months in 2023...
(5) Massive downward revisions in the payroll report
Payroll employment data for 10/11 previous months (except July) in 2023 were all revised downward.
Total downward revisions for 2022-2023 reached ~-750,000 jobs, ~25% of total job gains in 2022 have vanished…
Which numbers should be used to accurately assess the labor market?
Previously, the NFP payroll report via establishment survey was always preferred, because the household survey includes unpaid jobs (like housework, volunteering…) and self-employment (self-paid)…
However, now both reports have issues:
The main issue with Household data as stated above. In addition, this data is quite volatile (fluctuates erratically) and does not indicate a trend.
The major issue with payroll data is that it counts jobs based on the number of payrolls (double-counting for workers with multiple jobs) and is continuously revised.
The tool that should be monitored is: aggregate weekly hours worked from the payroll survey (EPB Research).
This figure fairly assesses the importance of part-time work (fewer working hours) and full-time (more working hours).
It can be seen that total hours worked in the US economy is growing much more slowly than the growth in the number of payrolls - chart below.
In December, the increase in total hours worked across the entire US fell to +0.8% (y/y).
On average at the start of recessions: total hours worked growth falls to around ~0.5% (y/y), so current performance is still above average.
Below is % change in total hours worked: from the time the 10-Year - 3-month Treasury yield curve inverted (baseline) in previous and current cycles (compiled by EPB Research).
The fastest time total hours worked started to decline (~unemployment will rise) was in 2001, the longest was in 2008.
Along with the economy's total hours worked, EPB also aggregates other data into an index signaling the health of the labor market.
This index has been below the 10-year average throughout 2023:
Labor data and the possibility of economic recession
First, Viet Hustler wants to emphasize the view:
Rising unemployment is a consequence of recession rather than an indicator of recession.
The labor market is a lagging indicator (late indicator) rather than a leading indicator (early indicator) of the economy.
Only when the economy has deeply recessed (businesses can no longer hold on) does unemployment rise (due to mass layoffs).
Therefore, readers or even the Fed observing labor data to assess the recession situation will lead to distorted evaluations of the economic situation.
The indices worth paying attention to are manufacturing PMI and services PMI.
Because manufacturing PMI reflects businesses' business cycles through purchasing demand!
In which the labor data in the PMI indices will reflect businesses' near-term future demand for labor.
Very important data reported last week is ISM Services PMI.
ISM Services PMI fell to 50.6, close to the warning level of 50.
Normally, US services PMI is higher than manufacturing PMI because the US economy (and developed countries) places greater weight on the services sector (services develop superiorly).
The decline in Services PMI is a major warning about the economic slowdown as well as consumer demand.
Even more notable is that the decline in ISM Services PMI largely comes from the decline in labor demand.
The Services sector Employment PMI index has fallen to 43.3 - a level only seen in recession periods.
Current services employment PMI is lower than even the 2001 recession period after the Dotcom bubble crisis!
In addition, a red alert in the December jobs report is average duration of unemployment is starting to rise sharply…
…and this only happens when the labor market weakens, making it difficult for workers to find new jobs.
This may also be related to the current situation the number of people leaving the labor market increasing sharply, workers unable to find full-time jobs and having to do part-time jobs.
Therefore, Viet Hustler assesses that the US economy will soon weaken in the first half of 2024 and unemployment will explode in the second half.
CONCLUSION
The submerged part of the iceberg in last week's labor report has been pointed out by Viet Hustler, including:
Job growth below pre-pandemic trend: Therefore, the increase in the number of jobs, no matter how large, will be meaningless if job growth is still slower than population growth.
Sharp drop in labor force participation rate is a big question mark: what are the people leaving the labor market currently doing? And is the current unemployment rate reliable?
US economy lost -1.5 million full-time jobs in just one month! So the increase in payrolls may mostly be jobs at McDonald's…
Government jobs sector (public sector) occupies too high a proportion: this puts pressure on the private sector to pay taxes to pay salaries for government employees.
Finally, the huge revision numbers in the payroll report make instant economic assessments through the latest labor data potentially misleading.
EPB Research proposes a new tool which is total weekly hours worked accumulated from payrolls to assess the balance between full-time and part-time jobs.
However, there is a fact that: how difficult the labor market must be for people to be unable to get full-time jobs and switch to multiple part-time jobs (F.Y.I.: rising average unemployment duration reflects workers' difficulty in finding jobs).
Regarding recession risk, Viet Hustler asserts that using the labor report to assess recession risk is quite "backwards": The labor market is a lagging indicator, not a leading indicator of the economy.
However, there is a quite "timely" labor indicator to gauge the economy, which is Services sector labor PMI. And this indicator is issuing a warning about the slowdown in labor demand in the private services sector - this only happens when the economy has begun to weaken!
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