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The Case For Near-Term Job Market Improvement at Trader’s Narrative

This is a guest post by Tyler S. Lang:

Our economy is at a crossroads and in order to get sustainable growth we need to see positive trends in employment. The following are some leading indicators to help us monitor these trends. For the sake of brevity, I have kept the commentary to a minimum so let me know if you have any questions.

My overall conclusion is that we should see net hiring start in the second quarter. Keep in mind that the February data will probably be skewed due to the widespread snowstorms.

The List of Indicators:

  • Average Weekly Hours for Manufacturing Employees
  • Temporary Hiring & Non-farm Payrolls
  • Initial Jobless Claims
  • Small Business Hiring Plans
  • Hiring across different sizes of Employers (from ADP)
  • Underemployment (U6) minus headline Unemployment
  • Ratio of Unemployed to the Number of Job Openings
  • “Jobs are Plentiful” minus “Jobs are hard to get”

Which way are we headed?
help wanted or unemployment line

Average Weekly Hours for Manufacturing Employees:
average weekly hours for manufacturing Mar 2010

The first thing employers do when they see a pickup in demand is, of course, to ask the current employees to stick around a bit longer. The essence of this is captured in the data for average weekly hours. Unfortunately, this only goes back to 2006, so we’re not sure exactly how it behaves. Nonetheless, intuition tells us that this should be a good leading indicator for hiring.

Temporary Hiring Overlaid (White) with Nonfarm Payrolls (Green):
temporary hiring compared to nonfarm payrolls Mar 2010

If adding hours is the first thing employers do when they see a demand pickup, the second thing they do is hire temps. As we can see from this chart above, temporary hiring precedes upturns and downturns in non-farm payrolls. The sharp uptick in temporary hiring started in Q4 2009.

Initial Jobless Claims:
initial jobless claims Mar 2010

The descent in Initial Jobless Claims has stalled a bit of late but it is still tracking lower. This is weekly data, so it will probably be more affected by the snowstorms than some of the other lower frequency data.

Small Business Hiring Plans:
small business hiring plans Mar 2010

This index gauges the responses to the question: “In the next three months, do you expect to increase or decrease the total number of people working for you?” The National Federation of Independent Business (NFIB) does a survey to create their Small Business Optimism Index (SBOI), of which this index is a part. This isn’t quite outright positive, but certainly starting to move up off a small base.

change in ADP payrolls for different size employers

From large firms to small firms, hiring has converged to the zero line. The firing has stopped, hiring has yet to start.

U6 Unemployment minus Headline Unemployment:
U6 unemployment minus headline unemployment Mar 2010

U6 unemployment, also known as the true unemployment rate, equals total unemployed plus ‘Marginally attached’ plus total employed part time for economic reasons. (Marginally attached workers are persons who currently are neither working nor looking for work but indicate they are available for a job and have looked for work sometime in the recent past.) The U6 is currently at 16.5%, while headline unemployment is 9.7%, resulting in a gap of 6.8%.

The gap between this U6 figure and headline figure is important because it tells us how unemployment is shifting. In general, if the gap is growing that is not a healthy sign for the underlying labor market, and vice versa. As the labor force puts more people into part-time, this gap expands. In an ideal world, we would have this gap shrinking and headline UE moving down. Such was the benign employment and economic environment of the mid to late 90’s and early 2003 to late 2007. This piece of data moved down sharply in the most recent data, which is a good thing. It is probably a stretch to claim victory but this is at least a step in the right direction.

Number of Unemployed/Job Openings:
number of unemployed and job openings Mar 2010

Here we have the ratio of the number unemployed to the number of job openings. This gives us an idea of how many people are chasing each job opening. As this chart indicates, it is still very difficult for an unemployed person to find work and the odds of success are low. We need this ratio to rollover and, while it is a stretch to say it is certainly doing that, the latest data shows that it has least it stalled.

“Jobs are Plentiful” minus “Jobs are hard to get”:
jobs plentiful minus hard to find Mar 2010

Each month the Conference Board does a consumer confidence survey and within that survey they ask for an assessment of the labor market. They have one of three responses: Jobs are Plentiful, Jobs are Not Plentiful, or Jobs are Hart to Get. This will lag other job market indicators but will serve as confirmation down the road.

Up to this point the indicators are most leading, but this is a lagging indicator. It is a bit like the titanic because it is slow to turn but once it does, then it tends to trend in one direction for a while. It will serve as important confirmation once hiring begins.

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10 Responses to “The Case For Near-Term Job Market Improvement”  

  1. 1 hotairmail

    Excellent piece - thanks. As was the one on Lowry Research’s stuff.

    I’m one of your regular UK readers of this blog. Keep up the great work.

  2. 2 Daniel

    Great analysis Babak. Out of all of these, I really trust ADPs payroll levels the most as that indicates concrete proof of the payroll levels disbursed and it’s so easily comparable across firms of different size. Thanks for sharing! If you don’t mind us asking, what source do you use for most of these indicators? Seeking alpha contributor benefit sources? =)

  3. 3 Tyler

    Daniel - Yes, we can ‘trust’ the ADP data as being proof of what is happening. This is, however, not very helpful in telling us what is going to happen. In other words, it is more of a coincidental indicator than a leading indicator and helps to serve as confirmation or proof that the leading indicators are working. That’s a little long-winded but I agree with your point.

    As far as where the data comes from, it is all bloomberg data. i have either constructed the graphs or, in the case of the ADP chart, i downloaded the data and made the chart in excel. either way, the source is still from Bloomberg.

  4. 4 Daniel

    Whoops sorry Tyler - didn’t notice this was a guest post =) Consider my comment revised to include your name. Hmm makes sense.I just work with ADP / Ceridian quite a bit in my career so I guess I’m a little biased towards those two but thanks a lot for sharing your thoughts!

  5. 5 Tyler

    No need to apologize. Ceridian just came out with a new Pulse of Commerce Index which looks very helpful.
    Let me know if you have any suggestions on indicators to include or other ways to make this better.


  6. 6 Daniel

    Hmmm just checked out that new index you mentioned. Here’s what it said:

    “The index is based on an analysis of real-time diesel fuel consumption data from over the road trucking tracked by Ceridian Corporation. Ceridian produces the index in conjunction with UCLA Anderson School of Management and Charles River Associates ( It mirrors closely the Federal Reserve’s Industrial Production Index but is issued days before that index is released.”

    Can you actually help me understand how you would use that? Does that only pertain to trucking deliveries or includes rail as well…?

  7. 7 Tyler

    Well, here is the first thing that comes to mind. Industrial production is an input into models for developing forecasts or capital market expectations…in econometric models or survey methods or checklists. so if this index tracks industrial production and is released earlier than industrial production, then you have more timely data on how the economy is doing. That is helpful from an investor’s standpoint and potentially from a policy standpoint.
    as far as i know, this index only pertains to trucking activity, but that data is a good enough sample to give us insight into how industrial production is doing.

  8. 8 Daniel

    Much better understood now. Thanks for explaining Tyler!

  9. 9 Babak

    as you figured out, this fine post was written by Tyler, so although I’m tempted, I can’t take credit :)

    Once again, thanks Tyler, Great stuff.

  10. 10 Wayne W

    Mr. Lang
    Thx for sharing your work with us. It is greatly appreciated and we look forward to hearing more from you. Friday morning’s Feb unemp # should be interesting.

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