Labor market data is often one of the last economic indicators to decline as companies often wait to determine if the environment requires that they reduce their costs. This often involves reducing the number of people they employ. There are early indicators of this forming, as well as a few other indicators, that we can monitor to see how it evolves in the future.
From a hiring perspective, payrolls are still increasing on a net basis, but the pace of growth is slowing and divergences among businesses are developing. Total nonfarm payrolls increased by 390,000 in the month of May, which was a 13-month low. The month of March was revised down by 33,000 jobs since the original release and April was revised up by 8,000, taking total payrolls gains over the last two months down 25,000 from the original estimate. The weakest component of the May payroll report was the retail industry which declined by 61,000 employees, the second decline in the last three months. This lines up with the decline in consumer spending in the last few months.
Source: U.S. Bureau of Labor Statistics.
The ADP National Employment report tracks private sector payrolls and reported a net increase of 128,000 for the month of May. That was the smallest increase since payrolls started to increase after the lockdowns of April 2020. Companies with fewer than 50 employees reported a net decrease of 91,000, the third negative month in the last four for a total net decrease of 278,000. Most of that decline has been experienced by the smallest company segment, where companies with fewer than twenty employees have reported a net decrease of 263,000 over the last four months. On the other side of the spectrum, companies with over 500 employees have reported a net increase of 1.1 million payrolls over the same period, with 989,000 of that coming from companies with over 1,000 employees.
Source: Automatic Data Processing, Inc.
Business surveys are also starting to show weakening hiring plans. The US ISM Manufacturing survey for the month of May showed Employment below 50 (49.6) for the first time since November 2020. The ISM Services PMI Employment segment was 50.2 and has been weakening since being above 55 in mid-2021.
Source: Institute for Supply Management.
Consumers are also starting to report a more challenging labor market. The May Conference Board Consumer Confidence Index reported the percentage of consumers reporting jobs “are plentiful” declined from 54.8% to 51.8% and the number reporting jobs “hard to get” increased from 10.1% to 12.5%.
Source: The Conference Board.
Several companies have been announcing plans to freeze hiring, rescind prior offers, and reduce existing staff levels. If companies follow through on these plans, it should lead to higher initial jobless claims. Weekly initial jobless claims increased from a low of 166,000 on March 19th, to 218,000 on May 14th, and dropped to 200,000 at the end of May. This will be an important indicator to monitor as it will be one of the first datasets to reflect an increase in layoffs..
Source: U.S. Department of Labor.
A decline in labor market data is often a sign that corporate data has weakened to the point where companies need to respond by reducing their cost structure, which includes lowering payrolls. This reduction in payrolls leads to a reduction in consumer data as their incomes decline, impacting their spending power. This feeds back into continued weakening of corporate data until their cost structure finds an equilibrium in-line with the new economic environment.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC
