Labor Market Tightening Points to a Slowing Economy
It almost seems counter-intuitive to think that solid economic growth and low unemployment could be used as an indicator that the economy is slowing down. However, according to the Wall Street Journal, using data from the Bureau of Labor Statistics, the longer the economy stays hot causing job growth to slow as full-employment is reached, wage growth steadily balances out with productivity growth. Consider recent movements in three statistics:
To maintain full employment, roughly 95,000 jobs need to be created a month. In 2018, the 3-month average was 223,000; however, the most recent 3-month average was 151,000. While still above the 95,000 threshold, year-over-year growth is slowing.
The current employment rate has remained at 60.6% since March, up from a low 58.2% in 2010 and down from a high of 60.7% earlier this year. Considering the population is aging, it may have seen its peak.
As the economy grows and employers pay more, to stay ahead of productivity wage growth should be roughly 3.3%. Over the last 12-months growth has held steady at 3.1% indicating wage growth has flattened.
Preparation is key. While these statistics do not in-and-of themselves imply a recession is imminent, they are a glaring indicator that economic growth is slowing. It is prudent to consider them in conjunction with monitoring economist Claudia Sahm's theory that if the 3-month unemployment rate is .5% above its minimum over the previous 12 months a recession has already been triggered.