Recession Indicators: Labour Measures Show Improvement

The first indicator to improve was Job Sentiment, which saw the largest monthly jump in “Jobs Plentiful” responses to the survey in its 54-year history. Similarly, “Jobs Hard to Get” responses posted their second consecutive monthly decline. With employers noting difficulty filling jobs in business surveys and posted Job Openings at 7.3 million — already above pre-COVID-19 levels and nearing their 2018 cycle peak — we expect further improvement in Job Sentiment as the reopening continues and facilitates further improvement in the labour market. Importantly, this should help support consumption as individual stimulus payments begin to wane.

The second indicator to improve is Wage Growth, a further sign of labour market normalisation. Aggregate wage measures spiked during the early part of the pandemic due to mix-shift issues as a disproportionate number of lower-earning workers were laid off (many in leisure industries), driving the average up. As social distancing guidelines are eased and many of these workers are hired back, the average wage figure has started to revert to normal and will likely see further downward pressure in the coming months. Importantly, metrics that adjust for these issues such as the Atlanta Fed’s median wage tracker remain steady and are not showing cause for concern. With underlying wage acceleration stable, the threat to corporate margins and, in turn, inflation, has not yet fully passed but is looking more favorable at present.

Jobless Claims Trending Toward More Normal Levels

The final indicator to improve is Jobless Claims, which have moved down substantially in recent weeks. During the initial wave of the pandemic, Jobless Claims soared to over 6 million, a figure that is nearly 9x the previous record. This was a 65-standard-deviation event, orders of magnitude less common than getting hit by lightning. According to the National Weather Service, an American has a one-in-15,300 chance of being hit by lightning, which is around 2x the statistical probability of a 4-standard-deviation incident (1 in 31,560). Given these dynamics, we believe a combination of art and science can deliver superior outcomes when assessing the health of the economy and gauging indicator changes. While we typically refrain from overriding the underlying model behind the dashboard, we believe incorporating human judgement and wisdom can be pivotal in unique circumstances. To that end, we have erred on the side of caution in upgrading the Jobless Claims indicator over the last few months and with initial claims now moving into the mid-500,000 range, we are well below levels associated with historically deep recessions.

Taken together, these three indicator changes paint a picture of an improving labour market, a component of the economy that initially saw a more sluggish recovery than consumption or corporate profits (and financial markets). As we look toward the coming months, we remain optimistic that the recovery should continue to unfold and be the primary driver of further upside for risk assets. While some follow the old adage “Sell in May and go away,” we note that this has not held up as well over the subsequent six months in years when the S&P 500 was positive from January through April.