Thursday, June 30, 2016

Temporary Workers - The Canary in the American Employment Picture

The job report for the month of May 2016 showed the poorest performance since September 2010, creating a measly 38,000 jobs as shown on this graph from FRED:

The month-over-month increase suggests that the jobs market is in far worse shape than analysts expected.  That said, there is another employment metric that looks even worse as shown on this graph from FRED:

While, at first glance, the growth in the number of temporary workers may appear to be quite healthy, in fact, the pattern that is developing would suggest otherwise.

Let's look at the pattern that occurred just before the 2001 recession:

Notice that the number of temporary workers hired levelled off  and began to decline Now, about 12 months before the 2001 recession officially took hold.

Now, let's look at the pattern that occurred just before the 2008 recession:

Again, we see that the number of temporary workers hired levelled off and began to decline nearly 24 months before the Great Recession officially took hold.

Now, let's look at the pattern that is currently developing:

Since October 2015, the number of temporary workers hired has levelled off and has begun to decline, dropping from a peak of 2.944 million in December 2015 to its current level of 2.88 million (May 2016), a loss of 64,000 temporary jobs.  This is very similar to the early stages of the patterns that developed prior to the 2001 and 2008 recessions.  When we put all of this data together and add a dose of common sense, we can see that the hiring of temporary workers acts as a leading indicator, telling us where the economy is headed.  This is largely because, when companies see that the economy (at least from their perspective) is starting to look weak, the first workers to be eliminated are temporary workers.  Let's look at two key  factors that are influencing current temporary worker hiring practices:

Other than the anomaly in July 2014, new orders have been dropping since the second quarter of 2014.

Corporate profits have been dropping since the third quarter of 2014 and have been stagnant since the fourth quarter of 2011.

Janet Yellen's recent speech at the World Affairs Council of Philadelphia contained the following comment on the "muddy" job data for May 2016:

"I will turn to this past Friday's labor market report in a moment, but let me begin with some background: The economy added 2.7 million jobs last year, an average of about 230,000 a month. In the first three months of this year, payrolls were growing only modestly slower, at a little less than a 200,000 monthly pace. The unemployment rate had fallen to 5 percent, down from a peak of 10 percent in 2009. In addition, the Bureau of Labor Statistics' measure of the job openings rate was at a record high in March, and the quits rate--the share of employees voluntarily leaving their jobs--has moved up and in March stood close to its pre-recession levels.  The increase in the quits rate is a sign that workers are feeling more confident about the job market and are likely receiving more job offers.

So the overall labor market situation has been quite positive. In that context, this past Friday's labor market report was disappointing. Payroll gains were reported to have been much smaller in April and May than earlier in the year, averaging only about 80,000 per month.  And while the unemployment rate was reported to have fallen further in May, that decline occurred not because more people had jobs but because fewer people reported that they were actively seeking work. A broader measure of labor market slack that includes workers marginally attached to the workforce and those working part-time who would prefer full-time work was unchanged. An encouraging aspect of the report, however, was that average hourly earnings for all employees in the nonfarm private sector increased 2-1/2 percent over the past 12 months--a bit faster than in recent years and a welcome indication that wage growth may finally be picking up.

Although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report. Other timely indicators from the labor market have been more positive. For example, the number of people filing new claims for unemployment insurance--which can be a good early indicator of changes in labor market conditions--remains quite low, and the public's perceptions of the health of the labor market, as reported in various consumer surveys, remain positive. That said, the monthly labor market report is an important economic indicator, and so we will need to watch labor market developments carefully." (my bold)

Ben Bernanke and the  rest of the FOMC totally missed predicting the impending Great Recession, expecting that there would be a soft landing as a result of the imploding housing market.  The current Fed Chair also totally missed on her prediction as shown in this excerpt from the December 2006 FOMC meeting:

"In summary, I continue to view a soft landing with moderating inflation as my best-guess forecast, conditional on maintaining the current stance of policy."

I have said it before and I'll say it again; central bankers never see recessions coming.  Why would we expect the Federal Reserve to perform any differently now, particularly in light of the obvious weaknesses in the American job market?  Apparently, common sense is simply not that common when it comes to central banking.