Does Today's Big Employment Miss Signal Recession Ahead?

Fri, Oct 2, 2015 - 11:23am

Given the recent dreadful US jobs report, as Marc Chandler stated, it would seem that Matthew Kerkhoff’s statement in today’s interview (see above) that the US economy is “doing just fine” was way off the mark. Certainly, given today’s big miss, the US economy must be in serious trouble, right?

In agreement with Raymond James’ Chief Investment Strategist Jeff Saut (see interview here), Kerkhoff says that a Dow Theory sell signal has now been raised on the market so, technically speaking, that is a bad thing. However, like Jeff, Matt is choosing to downplay the recent signal in light of other major risk-indicators that aren’t yet flashing “Get out of the market and sell everything!”

Without a major contraction in US economic data and employment still continuing to expand, Saut and Kerkhoff maintain, like others, that a bear market in US stocks the likes of what we saw after the tech bubble or during the Great Financial Crisis is less likely to occur.

But that brings us back to today’s jobs number which fell far short of expectations. Is this a sign of a major rollover or just one bad report in a generally positive trend? To help answer that question, we provide a few of the US employment charts and data series we follow at Financial Sense and PFS Group for assessing this risk because, as always, one data point does not make a trend.

Note: Our contention in early 2013 that the bull market would continue and stock prices would likely head higher (see here) was based on many of these same charts below. Though some have moderated, the majority are still holding steady or not yet flashing any major warning signs.

Employment Data Still Moving in the Right Direction

Perhaps one of the best leading indicators for the economy out there is jobless claims. It is reported every week so we are continually treated with a real-time leading indicator for the economy. It is well known that the stock market itself is a leading indicator and so both jobless claims and the stock market tend to track each other. Watching for divergences in both series can help one navigate when we may be reaching an economic turning point.

Shown below is the 1-month moving average for jobless claims (red line, inverted) with the S&P 500 (black line). As you can see, the stock market’s recent 10% correction has meaningfully diverged from the real-time jobless claims picture, which is still holding at healthy levels.


Source: Bloomberg

Here is another look at jobless claims going back almost 50 years. As you can see, jobless claims tend to spike higher before or during US recessions. We have yet to see a spike in this data series.


Source: Bloomberg

Another employment indicator that has had a great track record of catching bull and bear market swings is temporary payroll levels. Peaks in temporary payrolls often coincide with bull market tops while troughs in payrolls coincide with bear market bottoms. Like jobless claims, the market’s recent 10% correction is not being confirmed by temporary payrolls and has yet to show signs of a major reversal.

Leading Economic Indicators Not Rolling Over

While general employment indicators are holding steady, leading employment indicators are continuing to move upwards. Shown below are two indicators, US Job Openings and the Conference Board Employment Trends Index (overlaid with Nonfarm Payrolls - in black), that both suggest a US recession is not imminent and payrolls continue to expand after today’s big miss.

Here is a look at the Conference Board’s Leading Economic Index (LEI) in relationship to US recessions and the S&P 500. Notice that it tends to peak out and rollover well in advance of US recessions and either coincides or leads a major peak in stocks. Currently, the Conference Board’s LEI is holding steady at its highs and has yet to rollover. (Note: it did see a slight dip in 2011 and moderated through much of 2012. The key is to watch for a clear and sustained reversal.)

Is everything rosy? Certainly not. There are always places to look for problems and many sites thrive on providing such data on a daily basis. That said, given the facts shown by the charts above, we continue to believe the overall employment picture and story told by leading economic indicators are still generally positive and do not provide evidence that the US is about to slip into a recession or that we are yet facing a major top in the stock market. Until those facts change and a broader deterioration is seen, we approach the current market with a cautiously bullish stance ready to respond appropriately.

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