Charts of the Week: The Renormalizing Labor Market - In Pictures
After last week’s payroll report, job growth over the last 6 months has slipped to just below historical averages. We’ve been here before without a recession, as recently as 2018, but labor market softness can be concerning. It’s rare that I find charts interesting enough to present without attaching market probabilities, but the three below qualify. As much as investors want to focus on the similarities between various cycles (inverted yield curves, profit contraction, a Fed cut), this cycle has been glaringly different than most. And nowhere has that been truer than the labor markets.
The oddity around the labor supply – increasing despite demographic headwinds – is partly a function of the pandemic’s massive labor force exodus versus history. Even after the recent increase in supply, the percent of the population, “not in the labor force” is still above pre-pandemic levels. This is a key reason behind the rising unemployment rate, despite job growth (so far) staying in positive territory.
Labor supply isn’t the only shift that looks to be in the process of re-normalizing. Data from ADP shows that a disproportionate amount of labor softness comes from smaller companies, with larger companies increasingly adding jobs over the last few months. But how much of this concerning slowdown is an unwind of the massive increase in small business employment seen during the pandemic? The same could be said for the increasing number of part-time jobs versus full-time jobs.
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The pandemic saw part-time employment fall to some of the lowest levels ever historically, with the recent rise – also seen outside recessions – just a reversion to the average. In the data, this time is quite different. Softness in the labor markets, while concerning, may very well be part of the process of getting back to normalized trends.
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Regarding the pandemic's massive labor force exodus, if one wanted to adjust for extraordinary circumstances as is common in corporate earnings, would that provide information to explain labor markets? The massive job losses in 2020 were not attributable to economic policy, nor were the millions of jobs gains post-pandemic. Trying to understand the labor markets outside of that period, the unemployment rate in February 2020 was 3.5%. It reached 3.5% again in July 2022. So what were labor markets doing before and after that? The average gain in NFP the 3 years prior to February 2020 was 180k/month. The average gain in NFP the two years after was ~230k/month. But the prime age workforce (18-55) shrank by ~200k in the 3 years prior to the pandemic as opposed to increasing by ~2.1MM in the period two years after. Is 22% less job growth in a shrinking workforce better than higher job growth but millions more workers? The 50k more jobs per month over 2 years is 1.2MM more jobs, but if you increase the workforce by 2.1MM you have a 900k more in the workforce than jobs created.