Strong Economy But Weak Labor Market?

Apollo Chief Economist

It is inconsistent to say that the incoming economic data is strong but the labor market is weakening.

For example, if the Atlanta Fed GDP Now estimate is 2.9%, significantly above the CBO’s 2% estimate of long-run growth, then job growth is accelerating and the unemployment rate is declining.

With the data for consumer spending, capex spending, and government spending still strong, we should soon begin to see a rebound in nonfarm payrolls and a decline in the unemployment rate.

That is also what the incoming data is showing:

1) This week, jobless claims declined to 219,000, and given this was the survey week for the September employment report, this suggests that nonfarm payrolls for September could come in at 300,000, see the first chart below.

2) The Atlanta Fed GDP Now estimate currently stands at 2.9%, and looking at the historical relationship, this implies that nonfarm payrolls in the third quarter will come in at 240,000 jobs created each month in July, August, and September, see the second chart. In other words, we could see a sharp rebound in job growth in September from the low levels we saw in July and August.

3) A new Fed paper looks at the procyclicality of quits and countercyclicality of layoffs and finds that layoffs are a leading indicator of a recession. During recessions, quits decline as layoffs increase. But this is not what the latest data for layoffs and quits to non-participation show, see the next four charts below.

4) Finally, with mortgage rates coming down and Case-Shiller at 5% we could see a rebound in the housing market, which could trigger a rebound in overall inflation, see the last chart.

With financial conditions easing further because of the 50bps Fed cut and still strong tailwinds to economic growth from the CHIPS Act, the IRA, the Infrastructure Act, strong AI spending, and strong defense spending, the bottom line is that there are no signs of the economy entering a recession. And because of these tailwinds, there are no reasons to expect a recession. On the contrary, the incoming data seen in our chart book (available here), in particular jobless claims and the Atlanta Fed GDP Now, are pointing to a reacceleration in employment growth over the coming months.

Jobless claims were 219K in the survey week for the September employment report. Looking at the historical relationship suggests September NFP could come in at 300K
Note: Sample from Jan 2000 to Aug 2024 and excludes data from March 2020 to March 2021 due to Covid behavior. Source: BLS, DOL, Haver Analytics, Apollo Chief Economist
Atlanta Fed GDP Now for Q3 2024 is at 2.9%. Looking at the historical relationship suggests Q3 average NFP could come in at 240K
Note: Sample from Q12010 to Q22024 and excludes data from Q22020 and Q32020 due to Covid behavior. Source: BLS, DOL, Haver Analytics, Apollo Chief Economist
Quits rate to non-participation is rising
Source: Ellieroth and Mchaud (2024), “Quits, Layoffs, and Labor Supply”,  Fed Working Paper, Haver Analytics, Apollo Chief Economist
Very low levels of layoffs
Source: BLS, Haver Analytics, Apollo Chief Economist
WARN data points to lower claims in coming months
Note: The Worker Adjustment and Retraining Notification (WARN) Act helps ensure 60 to 90 days advance notice in cases of qualified plant closings and mass layoffs. WARN factor is the Cleveland Fed estimate for WARN notices (https://www.clevelandfed.org/publications/working-paper/wp-2003r-advance-layoff-notices-and-aggregate-job-loss). Source: Department of Labor, Haver Analytics, Federal Reserve Bank of Cleveland, Apollo Chief Economist
Announced job cuts remain low
Source: Challenger, Gray & Christmas, Haver Analytics, Apollo Chief Economist
Rebound coming in housing inflation
Source: Haver Analytics, BLS, S&P, Apollo Chief Economist

Download high-res housing chart

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