Q: You have written in your blog that the Recession has already started. But, last week, the employment number convinced some in the media that there is no Recession. Can you comment on that?
A: The media, including some in the economics profession, have concluded that the “economy is strong” and there won’t be a Recession, all based on a single number from Friday’s Payroll Survey. June’s headline number came in at +372K, above the consensus +265K.
First, small businesses aren’t included in the Payroll Survey, so BLS “adds” a number based on “historical experience.” And it is always a large positive number. This is the infamous “birth/death” model for small businesses. For June, that number was over +80K. Thus the number of jobs actually counted was closer to +290K. ADP, America’s largest payroll processor, has been reporting negative numbers for small businesses these past few months. ADP did not report June’s numbers as they are retooling their processes. But, no doubt, June would have been negative again, so +290K is likely high. The reason I can say that with confidence is that the BLS’ sister survey, the Household Survey, showed up as -315K in June (yes minus), and that survey has shown contraction in two of the last three months. There was not a mention in the media about the Household Survey!
Unlike the Payroll Survey, the Household Survey also reports full-time and part-time jobs. Full-time jobs fell-152K, falling now in two of the past three months. Non-agricultural wage and salary employment fell -109K, negative now for three months in a row. Also ignored by the media was the contraction in the workweek (-0.3% to 40.3 hours), and overtime sagged -3.0%, the biggest contraction of the year. The workweek and overtime always contract first before companies lay people off.
The Household Survey also has this funny tendency to lead at cycle turning points:
| Cycle Turning Point | Household Survey | Payroll Survey
| February 2002 | -166K | +91K
| December 2007 | -322K | +108K
| January 2020 | -119K | +339K
Other indicators also point to weakening employment:
· In the both the ISM June Manufacturing Survey and the Services Survey, the employment sub-indexes contracted, the Manufacturing one was in contractionary territory for the second month in a row
· Challenger’s June report showed rising layoff announcements, up 57% M/M and 59% Y/Y. Hiring announcements fell -18% M/M, negative in three of the last four months and -6.5% Y/Y.
· The latest JOLTS report (BLS’ Job Openings and Labor Turnover Survey) corroborates the Challenger report. Job openings fell -427K in June and layoffs rose +77K. This is the report that Fed Chair Jerome Powell watches closely.
· Initial Jobless Claims, too, have risen, now up +62K from their early April lows. From an historical perspective, a rise of +60K has often coincided with the start of a Recession. Continuing Claims (those on unemployment for more than one week) rose to +1.375 million in the latest report (through the week ended July 1) up from +1.305 million less than a month ago.
Nearly every measure of employment shows a weakening trend. Conclusion: In the universe of employment data, it is the Payroll Survey that looks to be the outlier.
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