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An MTG Chartbook on the US Labor MarketAustin Kimson, Chief Economist, Macro Trends GroupMarch 11, 2024

22024-03-06 Labor Market Overview v2DBSKey takeaways• The all-important headline payroll number for February came in notably above expectations: +275K vs. expectations for +200K. If the general trend toward 200K/month of stable employment growth is accurate, it would be the labor market’s version of a serene deceleration toward a soft landing.• That’s where the good news ends. The upside surprise was attributable in part to a sharp downward revision (of over one-third the initial estimate) to January’s “blowout” payroll growth number plus a downward revision to December’s growth number. This pattern of systematic initial overstatements is one of several warning signals we’re seeing in the labor market data.• More generally, we’re seeing a range of warning signs, including the diverging directions of employment as indicated by the establishment survey (payrolls) vs. the household survey (persons employed)—the gap is now equivalent to over 3.2M jobs. Employment growth as reported by households is now contracting, and full-time employment has been in steep decline over the last three months.– Unemployment claims are subdued—one indication that the deterioration is happening via frozen hiring rather than layoffs—but the speed at which the unemployment rate is worsening is on pace to trigger the “Sahm rule” (a threshold for signaling recession) by mid-year. Measured by underemployment (U6), that threshold has already been breached.– Some of the most forward-looking indicators, like small business hiring plans, are already indicating that the unemployment rate will move sharply higher by the fall.– We will fully concede that we’re uncertain how much the postpandemic labor market may have broken historical signals of labor market problems. Conversely, we also assert that ostensibly stable payroll growth (in spite of other deterioration) could just as easily be a broken historical signal of labor market health.• Our overarching point is that there are highly mixed signals coming from the labor market, and most of them (except the most widely followed “top-line” figure) are signaling caution for the US economy even if their timing is also circumspect.Source: Bain Macro Trends Group analysis, March 8, 2024

32024-03-06 Labor Market Overview v2DBSHeadline payroll growth continues its serene upward path, but household reporting (conceptually the same thing) has experienced no growth since last JuneSince June 2022, an unusual gap has opened between employment as reported by payrolls and employment as reported by householdsAs of most recent data, this is a nontrivial 3.2M gap in reported employment*Employment (payrolls)Employment (reported by households, rebased to payrolls)* Size of gap uses employed data (household survey) scaled to payroll data (establishment survey)Source: BLS, from Macrobond; Bain Macro Trends Group analysis, March 8, 2024

42024-03-06 Labor Market Overview v2DBSIf nonfarm payroll growth settles at ~200K/month, it would be the labor market’s contribution to a serene soft landingSource: BLS, from Macrobond; Bain Macro Trends Group analysis, March 8, 2024One-year moving average

52024-03-06 Labor Market Overview v2DBSA caution for payroll initial estimates is that the bias of error (first release vs. final estimate) has become negative on a rolling one-year basisSource: BLS, from Macrobond; Bain Macro Trends Group analysis, March 8, 2024Consistent negative revision has been a subtle indicator of approaching/ongoing downturn

62024-03-06 Labor Market Overview v2DBSAs reported by households, one-year moving average of employment growth has sharply dropped into contractionSource: BLS, from Macrobond; Bain Macro Trends Group analysis, March 8, 2024

72024-03-06 Labor Market Overview v2DBSFull-time employment sharply declined in December—now lower for 3 consecutive months; all employment growth over last 12 months was from part-time employmentSource: BLS, from Macrobond; Bain Macro Trends Group analysis, March 8, 2024

82024-03-06 Labor Market Overview v2DBSLoss of full-time jobs explains why aggregate weekly hours (i.e., total labor input) are falling below levels consistent with continued expansionSource: BLS, from Macrobond; Bain Macro Trends Group analysis, March 8, 2024

92024-03-06 Labor Market Overview v2DBSTemporary help services is a strong cyclical indicator of labor market conditions; it’s currently in steep decline and down to levels last seen in June 2014Source: BLS, from Macrobond; Bain Macro Trends Group analysis, March 8, 2024Temporary help services employment is steeply contracting at a pace only seen during other recessionsPerhaps some of this decline is merely postpandemic unwind, but number of employed has fallen to 2014 levelsJune2014Spring‘08Spring‘01

102024-03-06 Labor Market Overview v2DBSThough above prepandemic levels, job openings data is signaling a warning for the state of the labor marketJob openings are falling below where they “should” be in a steadily growing economySource: BLS, from Macrobond; Bain Macro Trends Group analysis, March 6, 2024Two quarters of GDP contraction followed this pointJob openings is a “liquidity” measure, so the number of openings should generally trend higher over time as the size of the economy and the size of the labor force increase

112024-03-06 Labor Market Overview v2DBSLayoffs-to-quits ratio is an “internal measure” of labor market balance; steady deterioration from June 2021 matches the pattern seen beginning in January 2006Stable then risingStable then risingMonths from starting pointStarting January 2006Starting June 2021September 2008Source: BLS, from Macrobond; Bain Macro Trends Group analysis, March 6, 2024There was a financial market catalyst that caused the sudden jump, but the point is that today’s labor market may not be robust to shocks

122024-03-06 Labor Market Overview v2DBSInitial unemployment claims are no longer worse than 2019 baseline, and continuing claims are no longer worse—both are “at par” with baselineNote: Nonseasonally adjusted data matched to same 52-week period from 2019 baseline (prepandemic timeframe that most closely matches pattern of 2023-2024)Source: Department of Labor, from Macrobond; Bain Macro Trends Group analysis, March 7, 2024Better than 2019 (fewer claims)Worse than 2019 (more claims)Better than 2019 (fewer claims)Worse than 2019 (more claims)Previous 52 weeks Previous 52 weeksFor now, signs of weakening labor market appear to be driven by decreased hiring + attrition, not layoffs……but the open question is whether this is stabilizing or if this is a lagging indicator of 2023 fiscal stimulus?

132024-03-06 Labor Market Overview v2DBSUnemployment rate is clearly rising; current trend of volatile but rising unemployment implies Sahm rule could be triggered as early as June 2024This is a notably consistent trend of deterioration in spite ofmonth-to-month volatility; implies ~4% unemployment rate by June, which would hit the “Sahm rule”**Sahm rule indicating a recession has started is calculated as the three-month moving average of unemployment 50bps above the lowest trailing twelve-month valueSource: BLS, from Macrobond; Bain Macro Trends Group analysis, March 8, 2024

142024-03-06 Labor Market Overview v2DBSFor the broader un/underemployment rate (U-6), modified Sahm rule for recession threshold has already been triggeredSource: BLS, from Macrobond; Bain Macro Trends Group analysis, March 8, 2024Sahm rule threshold

152024-03-06 Labor Market Overview v2DBSChallenger Gray-announced hiring/layoffs are sending another soft warning sign from larger businesses that the labor market is continuing to deteriorateSource: Challenger, Gray & Christmas, from Macrobond; Bain Macro Trends Group analysis, March 8, 2024

162024-03-06 Labor Market Overview v2DBSSmall business hiring plans are also sending a warning that unemployment rate may move materially higher by mid-year 2024Source: NFIB, BLS, from Macrobond; Bain Macro Trends Group analysis, March 8, 2024NFIB Hiring Plans(3-month moving average,lagged 6 months)Unemployment Rate

172024-03-06 Labor Market Overview v2DBSThis chartbook was originally published on the Bain Macro Strategy Platform as part of our ongoing coverage of the US and other Americas economies. Subscribers can access additional coverage on this region here.To subscribe or learn more, email MacroStrategyPlatformSupport@Bain.com.NOTE: This work has been based on secondary market research, analysis of financial information available or provided to Bain, and a range of interviews with customers, competitors and industry experts. Bain has not independently verified this information and makes no representation or warranty, express or implied, that such information is accurate or complete.Projected market and financial information, analyses and conclusions contained herein are based (unless sourced otherwise) on the information described above and Bain & Company’s judgment and should not be construed as definitive forecasts or guarantees of future performance or results.Neither Bain & Company nor any of the subsidiaries or their respective officers, directors, shareholders, employees or agents accept any responsibility or liability in respect of this document.This document is being provided on a strictly confidential basis. No part of this document may be copied or distributed without the prior approval Bain & Company.Bain’s Macro Strategy Platform