The labor data does not point to recession, quite the opposite.
Reading the economy has been, to say the least, difficult over the past year or so. When one data point is up, another is down; good news has been bad news, bad news has been good news and strong economic recovery raises the specter of FOMC interest rate hikes. Through it all one thing has remained constant, labor market improvements, although even that has been a source of mixed sentiment.
The market likes to look to the labor market and non-farm payrolls data in particular for it's clues. This number comes out once a month, the data is flawed and comes with a margin of error near. To put it in perspective, and this information comes directly from the BLS, if the monthly NFP change is reported as +50,000 it really means a range between -65,000 and +165,000. Job creation is a pillar of the labor market without doubt but in today's economy and in light of other data maybe not the uber indicator the market makes it out to be.
The Kansas Cit Federal Reserve Index Of Labor Market Conditions
The thing that no one is talking about, and that I think are just as important as job creation, are the other 23 major employment gauges used by the FOMC to measure the labor force, one of their two mandates. This is why I like to keep up with the Kansas City Federal Reserves Index of Labor Market Conditions, the LMCI, for cues on the state of the labor market. This index is a diffusion index of 24 labor market indicators, including NFP job creation data. It includes many of the weekly and monthly labor data I regularly track in the daily Market Wraps as well as labor data internal to major reports such as the Philadelphia Federal Reserve Manufacturing Business Outlook Survey and National Association Of Business Economist survey.
Over the past 6 years the LMCI has been steadily rising from deeply negative levels. In recent months it reached 0 and turned positive for the first time since the 2008 economic meltdown. Historically speaking, an LMCI cross above 0 is associated with the onset of strong periods of economic growth. In the last reading, for January, the activity and momentum components both declined but remain positive and in line with long term trends.
Over the past 6 months the activity index gained +0.29% with the JOLTs quits rate making the largest positive contribution, not job creation. The quits is a measure of people who leave jobs voluntarily and is considered a sign of labor strength, the assumption being that workers are confident of finding newer better jobs than what they already have. Momentum is down slightly over the past 6 months but remains strong relative to historic levels.
Other areas of strength include job flows from unemployed to employed, initial claims, the labor force participation rate, percent of firms with jobs they can't fill, NFP and ISM Manufacturing employment index... all of which contributing to upward wage pressure and increased hourly earnings.
Upward wage pressure is evident in both the NFP report and in the 4th quarter Average hourly earnings report. The NFP showed an increase of 0.4% in January and a 2.5% increase over the past 12 months, the 4th quarters earnings report showed a marginal gain over the 3rd quarter but a 3.3% increase over the 4th quarter of 2014.
The effect of upward wage pressure, or simply the health of the labor market, is also seen in the retail sales figures. On a month to month basis sales remain tepid, but on a year over year basis are posting decent gains. January sales came in at +0.2% from December and up +3.3% over January of last year. A lot of the strength in sales is in the auto sector, up 7% year over year, but there is also evidence in the ex-autos as well, up 2.7%.
Housing sales are also up, suggesting that strength in the labor market is spilling over into other areas of the economy as well. Like the retail sales figures, the housing data tends to be spotty on a month to month basis but is showing significant gains on a trailing 12 month and year over year basis. The most recent on permits and housing starts showed a decline from the December to January period, with some downward revision to December figures, but are up 13.5% ad 1.8% from January 2015 respectively.
Bottom line, the labor market is the strongest it has been since the financial crisis and positive effects are present in the economy.
Demographic Impact On Labor Market Momentum
Consider this; the US work force is comprised of three demographic cohorts; the Baby Boomers, Generation X and the Millennials spanning an age range from 11 to 70 years old. For the purposes of this discussion I am using 20 year generational groups because I think is the best and easiest method of reference; Baby Boomers 1954 to 1964, Generation X 1965 to 1984 and Millennials 1985 to 2005. There are several different schools of thought as to when each cohort begins and ends, but many are flawed because of irregularity in time allotted to each generation.
Labor Participation Rate data broken down by age groups is very interesting in that the ages of our three demographic cohorts are roughly in line with significant age groups within the labor force. Comparing the demographic generations with the LPI give a deep insight into how the labor force is changing, and how demographic trends may be affecting the state of the labor market today.
The most recent data is for 2014, not super current but current enough for a subject with such a long term outlook. The 16-24 age group had a rate of 55.%, the rate jumps 25% to 80.00% for the 25 to 54 age group, and then falls back to just 40% for the over 55 group. These groups do not match the demographic cohorts exactly I think it easy to see how the different groups are having an affect on the size of the available workforce as the work force ages. Our youngest group goes from 0% participation on the low end to near 80% on the high end, the middle group is fully employed at 80% and the oldest group is leaving the work force and experiencing a 50% decline in participation, down to 40% from 80%.
Now lets talk about the size of the cohorts. The Baby Boomers are equal to roughly 26% of the total population, the Millennials are slightly more. In between those groups are the Gen X'ers, about 16% of population. The Baby Boomers are approaching or have already entered retirement (the last Boomers were born in 1965 making the youngest in the group 50 and the oldest 70). Generation X is currently 30 to 50 years old, the age group that makes up the largest portion of the workforce and the smallest demographic relative to total population. The Millennials are only now reaching an age where we can expect them to enter the work force en masse (The first Millennials were born in 1985 making them 31 this year, the youngest only 11).
Taking into account the size of our demographic cohorts and the ages of the cohorts relative to the LPI data it looks to me like the leading edge of the workforce, the largest demographic cohort and Greatest Generation in US history, the Baby Boomers, is leaving the work force while a much smaller age group tries to fill in the gaps, creating a vacuum within the labor market slowly being filled by the Millennials. In my view, a situation providing room for upward mobility within the existing work force, entry level opportunities for those now entering the work force, and without the need for robust new jobs creation.
It's hard to say which came first, the chicken or the egg, but I think it easy to see that demographics and the labor market are influencing each other. What really matters is that the data supports a healthy labor market, and that in turn is supporting consumer spending and the housing market. Because the economy is supported by demographic changes this growth could last for an extended period of time as the economy and labor market matures. Based on the age range of the Millennials I do not think it unreasonable to expect a period of economic recovery and expansion lasting a decade or longer. If the signal given by the LMCI holds true to history we might even see a surge in growth within the next 12 months.
My final thought; One of the many criticisms of the recovery is that quality of jobs is low, we make too many low paying entry level jobs. In my opinion this is consistent with the demographics; the cohort most in need of jobs are under 30, and about half of those are under 20. It makes no sense to create 1,000 top level jobs when what we really need is 10,000 part time and entry level ones, especially since so many businesses are reporting jobs they can't fill, or complain of a labor market with the wrong skills for the jobs available.