Last week, I touched on the Federal Reserve’s Labor Market Conditions Index (LMCI)which has shown signs of weakness as of late. To wit:
“Unfortunately for the Federal Reserve, the index has not supported the Fed’s claims that employment is growing at a rate strong enough to withstand a tightening of monetary policy. In fact, as shown in the chart below, the LMCI index (smoothed with a 12-month average) has been a leading indicator of future weakness in employment. The recent downturn in the LMCI suggests that employment gains may more muted in the months ahead.”
Not surprisingly, I received a good bit of pushback from the “always optimistic crowd” stating that the surging levels of job openings and plunging jobless claims support continued job gains in the future. Therefore, with continued economic and employment improvement the Fed has a clear path to higher rates.
This is not exactly true.
Initial Jobless Claims
Let’s start with jobless claims. To more clearly understand what the current level of jobless claims are telling us, we have to understand what jobless claims actually are.
Jobless claims are simply the number of people, by state, who are filing to receive unemployment insurance benefits for the first time.
However, in order to receive unemployment benefits an individual must have been laid off, terminated or discharged from service by their employers. Individuals who“quit” are not eligible to file claims.
The distinction of “termination” is very important at this juncture as jobless claims, as shown in the chart below, reaches very low levels.
There is a point in every economic/employment cycle where employers exhaust the ability to “cut costs” though the reduction of the labor force. When the labor forced has been reduced to its critical operational level, businesses begin to “hoard” what labor they have, maximize the existing labor force’s productivity (increase output with minimal increases in labor costs) and hire additional labor, primarily temporary, only when demand forces expansion.
This issue of “labor hoarding” explains much of the sharp drop in initial weekly jobless claims. As companies literally “run out” of employees to layoff or discharge, the number of individuals filing for initial claims decline. This is shown in the chart below which shows the 4-month average of layoff and discharges versus the 4-week average of initial jobless claims.
However, the mistake is assuming that just because initial claims are declining, the economy, and specifically full-time employment, is markedly improving. As shown in the LMCI index above, it is more likely a sign of peak employment instead.
Another indicator that is likely being misconstrued is the surging levels of “job openings.” Just because a business has a job opening, it does NOT mean that they are in any hurry to “fill it.”
This disparity can be easily shown by the lack of “new hires” as it relates to current“openings.”
What is missed in the euphoria of surging job openings has been the lack of a “surge” in new hires. Currently, the difference between those hired and the number of openings is not only at low levels but a record low for the data of nearly (-750,000).
Importantly, as shown in the chart above, historically low levels of “Hires Less Openings”have been more coincident with peaks in employment growth rather than a continuation of it. Furthermore, if the number of openings were actually indicative of a “tighter”labor market, wages would likewise be soaring. They are not.
What this data does suggest is that employers can be much more choosy about whom they hire and how much they are willing to pay. Currently, employers can post jobs for the “perfect Unicorn” – employees with the perfect set of skills, education and experience and willing to work for very little. Of course, Unicorns are very rarely actually found.
So, while there may indeed be a job opening available, there is no rush to fill or overpay for the position. Since Unicorns are mythical creatures, the reality is that many of these job openings will NEVER be filled and will eventually vanish as the next economic downturn takes hold.
Good News/Bad News
While massive binges in stock buybacks and accounting gimmicks have continued to blur the actual profitability of businesses, the decline in jobless claims suggests that there is little room for further reductions in body counts. However, that does not mean that businesses must begin rapidly increasing employment and wages.
The “good news” is that for those that are currently employed – job safety is high. Businesses are indeed hiring, but prefer to hire from the “currently employed” labor pool rather than the unemployed masses.
The “bad news” is that for those unemployed, full-time employment remains elusive, and wages remain suppressed due to the high competition for available work.
The current detachment between the financial markets and the real economy continues. The Federal Reserve’s continued accommodative stance continues to support asset prices despite a decline in profit margins, an increase in deflationary pressures and a weak economic backdrop.
So, while jobless claims and job openings may be touted as signs of an improving job market, the data suggests that we have likely seen the peak for this current economic cycle.