When I look at nonfarm payrolls, I try to disregard the headline figure and look at the year-over-year percent change in unadjusted total payrolls. This allows me to remove any seasonal effects from the series without making any of the hard assumptions required by “fancier” seasonal adjustment methodologies. The November report that came out Friday puts us at 1.42% year-over-year growth, up from 1.38% in the previous month. The exponential three-month moving average, which serves to smooth out some of the month-to-month volatility in the series, sits now at 1.41%, down slightly from 1.43% last month. This moving average is plotted as a green line in the chart below. The purple line in the chart is a measure of the six-month trend in year-over-year payrolls growth. This measure will be positive (negative) if in the previous six months year-over-year payrolls growth has been accelerating (decelerating) and near zero if it has been relatively steady. Currently, the six-month trend reads 0.19%, which is remarkably close to zero. In fact, over the past six months year-over-year payrolls growth has been range-bound between 1.3% and 1.5%. Analyzing the entire sample, which goes all the way back to the 1930s, we found that the following two conditions almost always coincide with economic recessions:
- Three-month moving average < 1.50%
- Six-month trend < 0.50%
In fact, if I plotted these two conditions in the chart below, the line would overlap almost perfectly with the grey shaded areas, which indicate recession dates as defined by the National Bureau of Economic Research (NBER). These two “recessionary” conditions are being observed today, but before we sound the alarm, let me offer two points. First, since the 2007-2009 recession, when year-over-year payrolls growth took a dive under -5% (a sixty-year low), this measure has failed to breach the critical 1.50% level by a meaningful margin for any significant length of time. It is therefore debatable whether being below 1.50% payrolls growth with no visible uptrend should be interpreted as a contractionary signal, given that we have yet to see a true recovery in payrolls (at least by historical standards) since the last recession.
Second, if we look at the average year-over-year payrolls growth rate during periods of positive growth (black dotted lines in the chart), we notice a long-term downtrend. We started with growth rates ranging from 3-4% in the 50s and 60s, then downshifted to 2-3% in the 70s and 80s and 1-2% in the 90s and 00s. Could it be that in this “new normal” 1.50% year-over-year payrolls growth is not a contractionary level but rather our new cruising speed?
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