Wednesday, November 2, 2016

LMCI - Measuring the Real Strength of the American Labor Market

Updated January 2017

While the mainstream media focuses on the headline U-3 monthly unemployment statistic, there is another little-reported labor market indicator that the Federal Reserve uses to measure the strength of the U.S. employment picture.

The Labor Market Conditions Index (LMCI) was introduced in May of 2014 and is a multi-faceted indicator that takes into account 19 labor market statistics, providing us with a much fuller picture of the strength of the U.S. labor market and giving us a better idea of whether the jobs market is expanding or contracting.  To do this, the LMCI uses the following indicators:

As you can see, the LMCI covers a very wide spectrum of labor market statistics including unemployment and underemployment, length of workweeks, wages, hiring, layoffs, quits and job vacancies.  As I mentioned previously, this index will provide us a much clearer and more accurate picture of the strength of the jobs market than the isolated indicators that are generally reported by the media.  

If you look at the last column  in the table, you will note the correlation between the LMCI and each labor market indicator.  Since a value of +1 or -1 indicates a perfect correlation between the LMCI and the indicator, you can see that there are some indicators that are more influential than others including the unemployment rate, the insured unemployment rate, the private payroll employment, the composite help-wanted index and the Conference Board's survey reporting on whether jobs are plentiful or hard to get.  Here is a graphic showing the impact of these key indicators on the annual changes in the LMCI:

The creators of this new job market health indicator looked at data going back to 1976 to create a history of the LMCI.  Here is a table showing how the LMCI changed during the economic contractions and expansions going back to 1980:

On average, over the three decade period between 1980 and 2009, economic contractions saw the  average monthly LMCI decrease by 20 points and economic expansions saw the average monthly LMCI increase by 4 points. 

Now, let's look at the history of the monthly changes in the LMCI going back to 1976:

You can very clearly see how the LMCI turns negative, often just prior to the official beginning of a recession.  This  is quite clearly the case in March 1990, May 2000 and again in June 2007.

Let's focus on the data from just before the beginning of the Great Recession until September 2016:

The LMCI turned negative in January 2016 (-1.0) and, with the exception of July 2016 when it rose to 0.8, it has remained negative ever since, hitting a post-Great Recession low of -2.2 in September 2016 and is currently sitting at -0.3 (December 2016).  This strongly suggests that, even though the headline unemployment number looks relatively healthy, behind the scenes, there is some fairly significant negative pressure building in the United States job market.  In fact, calculations by Advisor Perspectives show that the cumulative value of the LMCI peaked anywhere from three months to seventeen months prior to the five recessions (averaging nine months) that have occurred since 1976.  We are now thirteen months past the most recent peak in the cumulative LMCI.

While the creators of the LMCI note that the entire history of the indictor may revise each month as new data becomes available or is revised, it certainly appears from the current Labor Market Conditions Index that the American labor market is far less healthy than what the Federal Reserve would have us believe and that we are far closer to the next economic contraction than we may hope. 

1 comment:

  1. From the first chart it doesn't look like there will be a recession. Recessions are preceded by a major plunge in LMCI without any trip back to positive.

    Here it moved to positive territory in July 2016. So there is still some more time to recession. It is coming but not right now.

    I do think a Fed rate hike will bring about a recession in the US. Things are tight.