While there is much to celebrate about U.S. job growth during the current 10-year expansion, headline figures obscure a structural shift to seasonal employment that has distorted data from the U.S. Bureau of Labor Statistics (BLS), which does not delineate between full and part-time positions. It has also created the set-up for (what would be) an untimely contraction in nonfarm payroll data in the next two monthly reports.
Since 2012, the number of U.S. seasonal workers has grown by 49% (from 529k) to 790k in 2019, according to Challenger, Gray & Christmas, Inc., which shows the top-10 employers’ accounting for 94% (or 745k) of total seasonal hires. The shift among these national employers to season hiring programs – that begin in October/November and run 3-4 months in length – helps explain outsized job gains at year-end and the (sometimes) soft payroll data during the first few months of the calendar year. Meanwhile, U.S. jobless claims have steadily fallen from an average of 375k in 2012 to 218k in 2019, a decline that neatly mirrors the rise in seasonal hires, who are not entitled to received unemployment benefits in most U.S. States. As a result, the traditional relationship between jobless claim and nonfarm payroll data has broken down, leading many Wall Street analysts to overstate forecasts. Both of these distortions were evident in monthly data for February of last year, when BLS reported nonfarm payroll gains of +56k, which was well-below the Wall Street consensus of +160k. More recently, BLS lowered the same figure, as part of its annual benchmark revision process, to show gains of just +1k for the month of February last year.
While we can only speculate, what seems clear is that the broader shift into season employment has improved the overall appearance of BLS nonfarm payroll data, and the ‘lumpiness’ of seasonal hires has accentuated the risk of a negative nonfarm payroll print in the February and March reports. After all, job gains in the last twelve-months have averaged +171k/mo., which is -17% below the +205k/mo. figure reported in the run-up to last February’s job gains of +1k/mo., so a negative print this Friday is within the realm of reasonability. That is a concern because nonfarm payroll data is widely-understood to be a strong forward indicator of recession. This relationship was demonstrated in January 2008, when nonfarm payrolls contracted precisely one-month after the official end of the business cycle and 11-months before the National Bureau of Economic Research (NBER) publicly reported the recession. The link is also intuitive. When there are fewer workers receiving checks from employers, the immediate response is declining consumer spend (equal to 2/3 of the U.S. economy) and missed payments on home and auto debt obligations.
What’s more, an analysis of the initial BLS employment data – the ‘first-prints’ released to the markets – during the last two downturns shows the ‘Bull-Market’ peak has fallen within 113-days of the first reported contraction in nonfarm-payrolls that was not immediately revised upwards and followed by a positive reading in the next month. While the sample size is admittedly small, the relationship suggests the predictive power of nonfarm payrolls extends from recessions to ‘Bear-Markets,’ a more meaningful data point to investors, who are looking to avoid losses, rather than identify economic contractions. To that end, had you accurately predicted the March 2001 recession, you still would have suffered losses in the S&P 500 Index for a year, because the ‘Bear Market’ started in March 2000.
Taken together, investors should prepare for the very real possibility that U.S. nonfarm payroll data will go negative in short order, because weak prints have the capacity to cause the kind of widescale reassessment among investors that has, historically, accompanied a market tipping point. We can expect the market response to be swift too, given the outsized presence of Quant Funds that now command 29% of daily trading volumes, up from 14% in 2010. But, of course, the same historical precedent tells us the U.S. equity markets will grind higher until the current 112-month long streak of U.S. job gains closes-out. The message here is that that end-point may very well arrive in the next month.
Charlie Smith
Founder & Portfolio Manager at Mast-Head, an investment firm based in New York.
Source: U.S. Bureau of Labor Statistics.
Per Exhibit A, the S&P 500 Index reached its Bull-Market zenith within 113 days of the first BLS report containing negative nonfarm data that was not immediately reversed and followed by a positive monthly print. For example the S&P 500 Index peaked on March 24, 2000 and (105 days later) on July 7, BLS reported job gains of +206k/mo. for June alongside a downward revision for May that lowered monthly payrolls gains from +231k/mo. to -165k/mo., alongside a corresponding increase in the unemployment rate that rose from 3.9% to 4.0%. During the last downturn, the S&P 500 Index reached its high-point on October 11, 2007 and (113 days later) BLS reported, on February 1, 2008, a contraction in payrolls (of -17k/mo.) for January. This figure was revised upward in the following month, but only after the downward trend was confirmed by a February payroll figure of -163k/mo.