by Thomas Young
With first quarter GDP data weak and the Federal Reserve seeing improved labor market conditions, tomorrow’s jobs report could be the most important report this year – at least up to this point.
The market is anticipating 210K net new jobs, representing a 10% improvement from the 192K seen in March 2014. A +200K number would also reduce concerns that the economy is on the downward portion of the growth curve (i.e. accelerating instead of decelerating).
What are the five signals to look for in tomorrow’s employment report?
First, watch for strength in the average hourly earnings figure. Over the past five years, the average hourly earnings figure has been stuck at around 2%, over 40% less than where wage growth was in 2009.
In March, the year over year growth figure weakened to 2.1% from 2.2% in February. Will the number surprise on the upside, possibly move above 2.3? If it does, it is probably a sign of a good summer on its way for American workers. Of course, it’s also a sign of pending inflation.
Second, watch for signs of improvement in the “employed part-time for economic reasons.” This number, above even perhaps the top-line employment growth number, will provide a telling sign of labor market momentum in that it gives markets an indication of whether the businesses are hiring full-time or part-time workers.
Here’s a look at how part-time work has grown across the business cycle. The year label for each color is the year in which peak employment was reached. The percentage change vertical axis is the percentage change in the “employed part-time for economic reasons” number.
The percentage change number is measured relative to the year in which the economy peaked (for instance, the 2008 line represents the gain in part-time employment since February 2008). The “number of months” horizontal axis is the number of months since a peak in economic activity was reached.
The figure shows 2008 as certainly the worst year on record for jumps in part-time employment. What’s interesting is that the 2008 number jumped from 47% in February to 51% in March – a bad signal (blue line). March’s 51% number means that the labor market has 51% more part-time workers today than there were in February 2008.
Should this figure improve, as expected, to somewhere below 50%, it’s likely a sign the economy is not only not declining, but gaining momentum. A blowout improvement of around 5% would be a highly likely sign the economy is due for some serious momentum gains this spring and summer.
Third, look for signs in the industry numbers.
Here’s what employment has done by industry through the first three months of 2014.
On top is Retail Trade at 315K net new jobs so far this year. Retail Trade is followed by Professional and Business Services at 187K, Natural Resources, Mining, and Construction at 104K, Leisure and Hospitality at 83K, and Education and Health Services at 81K.
On the other end are the Federal Government at -32K, Information at -9K, State Government at 1K, and Financial Activities at 9K.
The industries most likely to provide a leading indicator of economic activity this spring and summer are Construction, Manufacturing, and Financial Activities.
These three provide the best indication because Construction is a leading indicator of business and residential investment, Manufacturing provides an idea of how strong the new American manufacturing renaissance is, and Financial Activity is a sign the financial world actually believes in an economy gaining momentum.
Fourth, labor force participation. In 2014 so far, the Y/Y growth in labor force participation has dropped from 3.3% to 1.3%. The incredible 2% decline is a positive momentum sign, akin to what was experienced from 2004 to 2006. Further improvement will certainly be a sign that the growth phase of the recovery is here.
Fifth, the tried and true classic – the unemployment rate, but watch for the details by education category. The following is how the unemployment has changed since 2009 for the four education categories and the overall unemployment rate.
The best improving unemployment has been surprisingly for individuals with less than a high school diploma, down about 39%. The next best improving group is for individuals with a high school diploma, down about 35%.
The least best-improving group of individuals are individuals with less than a bachelor’s degree, but some college, down only 25%. This group of individuals are those with student debt, poorly chosen majors, and less than optimal job prospects.
Should the unemployment rate for this group show signs of improvement at a quicker pace that the other three, it is likely a sign the U.S. economy is back on solid footing for the remainder of this year.
In summary, watch for signs of wage inflation. Second, look for evidence of momentum on the part-time employment issue. Third, watch for momentum indications from the Construction, Manufacturing, and Financial Activities industries.
Fourth, look for further improvement in the labor force numbers. Fifth, watch for signs that the employment picture is improving quicker for individuals with some college, although no bachelor’s degree.
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