Macro Monday 19~Nonfarm Payrolls

6 de nov. de 2023

Macro Monday 19

Total Non-Farm Payrolls: Pre-Recession Observations

What is Non-Farm Payroll?
The nonfarm payroll measures the number of workers in the U.S. includes 80% of US workers. The figures exclude farm workers (Nonfarm) and workers in several other job classifications such as military and non-profit employees.

Data on nonfarm payrolls is collected by the Bureau of Labor Statistics (BLS) and it is included in the monthly Employment Situation report (the “Employment Report”) which includes two surveys, the Household Survey, and the Establishment Survey. Nonfarm Payroll is included in the latter the Establishment Survey.

The Establishment Survey gathers data from approximately 122,000 nonfarm businesses and government agencies for some 666,000 work sites and about one-third of all payroll workers. Anyone on the payroll of a surveyed business during that reference week, including part-time workers and those on paid leave, is included in the count used to produce an estimate of total U.S. nonfarm payrolls

The Full Employment Report is released by the BLS on the first Friday of each month at 8:30 AM ET and reflects the previous month's data.

The Chart

▫️ The Chart highlights the last four recessions (red shaded areas)

▫️ The aim of the chart is to identify what Non-Farm Payroll movement occurred prior to each recession (in the blue shaded areas) so that we create a gauge that identifies the early warning signals of such recessions.

▫️ From reviewing the data (illustrated in the data chart), prior to each recession there was a either a confirmed decline in Non-Farm Payrolls prior to recession or an increase of less than 0.0300 mln in Non-Farm Payrolls prior to recession (a tapering off or sideways move). This was evident prior to all four recessions reviewed.

Main Findings:

1. The four most recent recessions all seen a decline in Non-Farm Payrolls prior to recession or an increase of less than 0.030 mln in Non-Farm Payrolls prior to recession (the “Signal”). Advance notice of recession was 1 to 12 months depending on recession (final column)

2. Currently we do not have a decline or an increase of less than 0.030 mln in Non-Farm Payrolls thus suggesting we do not have an advance recession warning triggering at present.

3. From a review of the data chart we are now aware that a pre-recession signal can trigger and provide us with 1 months advance notice or 12 months advance notice. In the event the parameters of number 1 above are met to provide a Signal, we can then add this chart/metric as a recession warning chart.

Breakdown of Each Recession Signal
(signal defined in 1 above):

▫️ The 1990 recession gave us a 1 month advance warning of recession.
▫️ The 2000 recession provided 2 advance warnings (2 & 3 in the chart), one signal gave us a 9 month heads up and the other a 3 month advance notice.
▫️ Similarly, the GFC 2007 recession provided 2 advance warnings (4 & 5 in the chart), one gave us 5 month advance warning, and the second was the signal the recession had started.
▫️ COVID-19 provided a 12 month advance warning with a decline registered from Jan – Feb in 2019.
Side Note: Interestingly this has some alignment with last week’s chart on Durable goods. In Feb 2019 one year before the COVID-19 Crash the Durable Goods Moving Average provided an advanced sell/recession signal, and whilst the S&P500 did rally c.13.5% after the signal over the subsequent 12 months, the S&P500 ultimately fell 23% thereafter in a matter of months taking back all those gains and more. Durable Goods is also included in the Establishment Survey so maybe it should come as no surprise that we have synchronicity between both charts on the COVID Crash. The Durable goods chart is also not presently signaling a recession similar to this Nonfarm payroll chart. Both charts appear to demonstrate some resiliency in the employment market (echoing Jerome Powell's sentiment that Employment is tight).

False Signals

▫️ Unfortunately there are a number of false signals throughout the chart whereby a decline in payrolls or an increase of less than 0.0300 mln is observed with no follow up recession however most of these false signals are either 1 month in duration or happened in the direct follow up years after the recession slump (when a recession is no longer of concern). Regardless, for this reason the Non-Farm Payrolls Recession Signal cannot be utilized as a standalone indicator, we need other charts and data to help identify the risk of recession.

▫️ Other data should be utilized in conjunction with Non-Farm Payrolls such as the following closely aligned charts all of which are show concerning pre-recession patterns in one way or another;

1. Total Non-Farm Layoffs and Discharges
2. Total Nonfarm Job Openings
3. US Continuing Jobless Claims

1. Total Non-Farm Layoffs and Discharges is signaling a similar trend to the 2007 Great Financial Crisis were there was an initial increase of c.450k (up to the first peak) and eventually a total increase of c.885k from lows to peak recession high.
- At present we are trending upwards and had an initial peak of c.507k (it could be the only peak or the initial peak, time will tell).




2. Total Nonfarm Job Openings is signaling a significant decline in job openings much larger than the prior two instances where job opening declines led to recession.
- A quick glance at the chart and you can see that we have exceeded the typically level required for recession and exceeded the typical timeframe (using GFC and COVID as reference points).



3. US Continuing Jobless Claims -Prior to the last 8 recessions the average increase in cont. claims was a 424k increase over an average timeframe of 11 months.
- Since Sept 2022 Cont. Claims have increased from c.1.3m to 1.818m (an increase of c.518k over a 13.5 month period). We are above both pre-recession averages number of increase and time.



In summary:

▫️ Last week’s Durable Goods Chart and this week’s Nonfarm payrolls chart are not triggering a recession warning at present. Both charts appear to emphasize a resilient labor market.

▫️ In stark contrast all three of the additional charts I provided above are incredibly concerning on the recession probability front. In particular Cont. claims , the most concerning of the bunch, is surpassing all pre-recession averages, highlighting that people are finding it harder to recover from a job loss and find a new job. This chart alone would suggest that the labor market is beginning to significantly soften.

▫️ Over the past week we have also had an update to the Purchaser Managers Index which declined further into contractionary territory from 49.0 to 46.7 (est. 49.0). Another signal towards a softening labor market.

▫️ It would be remiss of me not mention that I have seen a Month Over Month (MoM) Chart of the Nonfarm payrolls doing the rounds and it appears to illustrate a softening and slowing of labor conditions (will share in the comments). Such a trend could translate to a gradual tapering and/or decline on our monthly Nonfarm chart over time.

When you consider all of the above, you would have to expect a market decline is around the corner but also expect some continued lag before we see it due to those few charts that are not even showing the pre-recession signals, never mind an actual recession signal. The charts holding out are Durable Goods, Nonfarm Payrolls and ill throw in Major Market Index XMI as a complimentary chart that has not lost its support as of yet. We are also aware that the Dow Theory has confirmed a bear market and has been expecting a market rally before bear trend continuation (the sell into rally). All the same these moving parts can change and pivot so we have to keep an open mind but its hard not to lean very cautiously as it stands. We can keep an eye on these final charts that remain defiant as they may be the final strongholds and provide us with the final warnings in the event of....

As always folks stay nimble out there

PUKA