For 27 months, the US unemployment rate stayed below 4%, the longest streak since 1970. Yet that ended last month, when it ticked up to 4.0%. For someone new to the markets and the world of economics, that will probably be considered as an inconsequential change.
Yet, economists at Macrobond warn that it could signal a coming recession, as in 1949, 1953, 1957, 1970, 2001, and 2020. Goldman Sachs echoed this two weeks ago, saying the labour market was at a turning point, but did not call for a recession.
Weakness is also visible in Continuing unemployment claims, which reached 1,839,000 last week, marking the highest level since November 2021. Continuing claims reflect the number of people still receiving unemployment benefits after an initial week of aid, indicating ongoing challenges in the labour market. As seen in the chart below, we have a clear trend change.
Continuing unemployment claims
Source: US Department of Labour vis Trading Economics.
JOLTs Job openings
JOLTs Job openings and NFIB Small Business 3M compensation plans have also decreased over recent months. As seen in the chart below, fewer job openings suggest that the labour market is cooling.
Therefore, it will be more interesting than usual to watch the US NFP and unemployment figures in the months to come. In addition, at the ECB Forum in Sintra this week, Jerome Powell said “if the labour market unexpectedly weakens, that would also cause us to react.” The Fed which produces their own data series, but also has early access to data, could know something that the public does not know.
Data to watch
The first data set to watch is the ADP employment report on Wednesday at 13:15 BST. Economists predict the US economy added 100K new jobs vs. 153K previously. Jobless claims are published 15 minutes later at 13:30 BST.
Come Friday, the unemployment rate is anticipated to remain unchanged at 4%. In comparison, the US labour market is anticipated to have added 160K new jobs and average hourly earnings to rise by 3.6% annually, a sharp contraction from last month's 4.1%.
Why does it matter, and why is this time different?
A deteriorating labour market will enable the Federal Reserve to cut interest rates as expected. However, if the labour market worsens significantly, it means widespread job losses, reducing consumer spending even among those still employed. This scenario causes stock markets and cryptocurrencies to decline.
The JPY and potentially the USD, considered safe-haven currencies, could strengthen against AUD, NZD, Euro, SEK, and NOK etc. Yet not all is bad right now; unlike previous times, stock markets are near their all-time highs. Historically, stock indices drop by at least 10% before unemployment spikes. So, there may be scope for a Fed-engineered soft landing, even though that rarely happens.
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