Wednesday, 5 September 2007

What signals is Employment giving?

One of biggest arguments against a US recession is that Employment is still strong. The logic goes something like this; the US economy is driven by the US consumer, as long as the US consumer is employed and earning money, they will continue to spend and prevent the US economy from sliding into recession.

This months Market Commentary from the Contrary Investor looks at leading indicators of employment to see what signals they are giving about the outlook for US payrolls. The article provides a variety of leading indicators of employment. Below is the one I think is the most reliable leading indicator - temp employment with attached commentary. Click on the link above for the full article.

Over the past decade and one half, temp employment has both peaked and troughed ahead of the headline payroll trend. As such, it has been a very important indicator to follow. By the way, as you can see in the chart above, over the last few months, the year over year change in temp employment has gone negative. Not a good thing in terms of foreshadowing forward headline payroll employment trends. As per historical experience, negative rate of change trends in temp employment occurred just prior to the early 1990’s and 2001 recession, but not during the mid-cycle economic slowdown of the mid-1990’s. Are current temp employment numbers and trends telling us the next recession is simply not far off? We’ll just have to see what happens ahead, but for now we take this message seriously.

I take it very seriously as well. The year over year change in payroll employment has turned negative just twice in the past 25 years, both times it preceded a recession. We're not there yet but it feels as though we are at the edge of a cliff looking over. Friday's payroll report will be closely watched as will the weekly jobless claims figures for hints that employment is starting to falter.